What Is the Financial Stability Oversight Council (FSOC)?
In 2010, the Dodd-Frank Act established the FSOC to safeguard the US economy against the actions of big banks that caused the Great Recession. Many Americans were angry when the US government bailed out the financial sector in 2008. The FSOC works to keep these big institutions responsible. The head of the Financial Stability Oversight Council is the US Treasury Secretary. According to the Dodd-Frank Act, the FSOC has the responsibility to detect any possible risks that could harm the stability of the United States economy and share their discoveries in an annual report made available to the public.
Basics
Established in 2010 through the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Financial Stability Oversight Council (FSOC) plays a pivotal role in safeguarding the US financial sector against potential risks associated with major banks and financial holding companies, which had a significant impact on the economy during the Great Recession.
After the 2007 financial crisis, people became increasingly dissatisfied with the bailout of financial services. This led to a strong belief that banking and finance institutions should be held accountable, and the idea that any institution is "too big to fail" should be rejected. In July 2010, President Barack Obama signed the Dodd-Frank Act into law, leading the way for FSOC's formation. A year later, FSOC released its inaugural report, setting the stage for its ongoing mission to ensure financial stability in the United States.
What Is the Financial Stability Oversight Council (FSOC)?
In line with the Dodd-Frank Act, the FSOC serves three primary objectives:
- Identifying potential risks to the financial stability of the United States originating from significant financial distress, failure, or ongoing operations of major interconnected bank holding companies or nonbank financial firms. Additionally, it looks into risks emerging outside the financial services marketplace.
- Fostering market discipline by eradicating any expectations among shareholders, creditors, and counterparties of these firms that the US government will protect them from losses in the event of failure.
- Responding promptly to emerging threats that could destabilize the US financial system.
The Council is composed of 10 voting members and five non-voting members. The position of FSOC's chair is occupied by the US Treasury Secretary.
Voting members also include the chair of the Securities and Exchange Commission, the chair of the Federal Deposit Insurance Corporation, the Director of the Federal Housing Finance Agency, the Director of the Consumer Financial Protection Bureau, and other experts in insurance and financial regulation within the US government. Operating in an advisory capacity, non-voting members include a state insurance commissioner designated by the state insurance commissioners, a state banking securities commissioner, and other relevant figures.
FSOC's additional responsibilities encompass reinforcing the discipline of financial markets and communicating that no institution is "too big to fail." The government will not intervene to prevent losses to the financial sector or shield such entities from experiencing losses.
Financial Stability Oversight Council (FSOC) Report Overview
In adherence to the Dodd-Frank Act, the FSOC is obligated to publish a comprehensive annual report presenting its discoveries to Congress. The report encompasses potential threats to the US economy, significant financial market and regulatory developments, and recommendations aimed at bolstering the integrity, efficiency, competitiveness, and stability of US financial markets.
The FSOC's 2020 annual report, submitted on December 16, 2022, highlights the resilience of the financial system in the face of significant headwinds over the past year. In addition, the Council identified certain vulnerabilities related to the nonfinancial corporate credit sector, as well as the commercial and residential real estate sectors. The Council recommends supervisors and financial institutions continue to monitor credit risks and exposures to these sectors.
Conclusion
Established through the Dodd-Frank Act in 2010, the FSOC safeguards the US economy from the actions of large banks that caused the Great Recession. Its main objectives include identifying risks, promoting market discipline, and responding to emerging threats. The Council, led by the US Treasury Secretary, issues annual reports to Congress, offering insights and recommendations for enhancing financial markets' stability and integrity. The latest report, released on December 16, 2022, highlights the financial system's resilience amid challenges and identifies vulnerabilities in corporate credit and real estate sectors, urging continued monitoring by supervisors and financial institutions.