Tags: FSOC | Lew | financial | threats

FSOC Issues Annual Report

By    |   Thursday, 15 May 2014 07:44 AM

The Financial Stability Oversight Council (FSOC) held what it calls an "Open Meeting" on May 7 to issue its annual report for 2014 and take care of some housekeeping matters. To say this is an "open" meeting would be misleading, if anyone believed it. What this means is that the event is held before cameras.

However, the real decisions have been made behind closed doors, and the remarks have mostly been scripted. As always, the meeting was chaired by Treasury Secretary Jack Lew. When Lew would say that a member of the FSOC would "discuss" something, it usually meant he or she would read from a prepared text, and when he asked if there were any questions and comments, there weren't any, because none had been scripted.

While there are 10 voting members of the FSOC, the real leadership comes, as it has throughout the management of the ongoing 2008 episode of the permanent financial crisis, from the Treasury, with the supposedly independent Federal Reserve walking two steps behind, and the power of the other regulators dropping precipitously after that.

Both Lew and Fed Chairman Janet Yellen made substantive remarks that are worthy of attention.

Lew began his "observations" by saying that, "Five and a half years ago, the economy was struck by a devastating financial crisis, . . . " as though some meteor fell from outer space. To this day there is no acknowledgement from the leaders of the Fed or Treasury that their misguided policies caused the crisis. Rather, they assume the posture of saviors who averted a second Great Depression and will do better the next time because of the tools provided to them by Dodd-Frank. He gave the administration view of an improving economy that has demonstrated great resiliency, but the crisis showed protections for investors to be "antiquated and inadequate."

Yellen added reassuring remarks regarding the improvement of the banking system since 2008, then cited remaining challenges related to wholesale funding and money market funds.

Thus the report identifies "potential threats" to the financial stability of the U.S. economy, as well as ways to mitigate these threats, and Lew made brief remarks about seven of the nine threats identified. This writer would suggest that the list could use some editing, because some of the threats obviously require serious attention, perhaps more than the administration and FSOC will give, whereas others are mere ideas that tend to distract attention from the most serious threats:
  • Risk of Reliance Upon Short-Term Wholesale Funding
  • Developments in Financial Products, Services and Business Practices
  • Risk-Taking Incentives of Large, Complex, Interconnected Financial Institutions
  • Reliance upon Reference Rates as a Vulnerability
  • Financial System Vulnerability to Interest Rate Volatility
  • Operational Risks
  • Foreign Economic and Financial Developments
  • Data Gaps and Data Quality
In conclusion, for fans of bad political theater, the video is short, and the speeches are laden with administration political spin. The report itself is worth a look, because the staff has laced it with some information that could provide clues and dots that will connect to the next crisis episode.

However, the quality is diluted, because some of the listed threats, such as Operational Risk, cover everything financial institutions do and are constants, although they change, and the annual reports note these changes. The reference to Libor begs the question as to why the same concerns seem to linger year after year, and the international community is always "moving to reform," yet nothing seems to happen, despite the acknowledgement that the integrity of the financial markets is at stake.

(Archived video can be found here. A copy of the annual report can be found here.)

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The Financial Stability Oversight Council (FSOC) held what it calls an "Open Meeting" on May 7 to issue its annual report for 2014 and take care of some housekeeping matters.
FSOC, Lew, financial, threats
Thursday, 15 May 2014 07:44 AM
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