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questions about ensuring financial stability September 15, 2012

Posted by Bradley in : financial regulation , trackback

The GAO raises a number of questions about the effectiveness and accountability of the Financial Stability Oversight Council (FSOC) and Office of Financial Research (OFR) in a report published this week. The report makes a number of observations about transparency gaps in this structure. Financial stability is a context in which the relationship between transparency and policy seems to me to be complicated. The GAO would like to see more transparency, noting in its conslusions:

both FSOC and OFR could be more transparent. For example, FSOC’s minutes contain limited details about the council’s discussion and the amount of detail included in the minutes has declined over time. While some information discussed must remain confidential given potential market sensitivities, legal restrictions on sharing certain information, and the need for members to deliberate, striving to be as transparent as possible given the potential impact of some of its decisions on institutions and markets is important for FSOC. FSOC’s and OFR’s limited transparency has caused some former government officials, industry representatives, and academics to question whether they are making progress. Continued efforts to increase transparency will allow the public and Congress to better understand FSOC’s and OFR’s decision making, activities, and progress.

The report does suggest that the US arrangements for financial stability may be less skewed towards the views of central bankers than those in the EU:

although the United Kingdom (UK) and the European Union (EU) have established or are in the process of establishing councils to oversee systemic risk, in the UK and the EU the central bank has more members or more votes than other entities on these councils. In contrast, in the United States, the central bank—the Federal Reserve—has one member on FSOC and one vote among the 10 voting members. FSOC policy staff and staff at member agencies noted that the diverse perspectives of FSOC members enrich FSOC deliberations.

Whether or not bodies with responsibilities for financial stability would be better served by more or fewer central bankers is an interesting question. But it’s worth noticing in this context that some central bankers are thinking in complicated ways about regulation – and not just focusing on banks. I’m thinking about Andy Haldane in particular (for example this recent speech about the downsides to complexity in financial regulation – titled The Dog and the Frisbee).


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