In the wake of the financial crisis, a consensus is emerging that a federal entity should be given the mission of assessing systemic risk to the U.S. banking system. There is less agreement, however, about which entity should fill that role.
House Financial Services Committee Chairman Barney Frank, D-Mass., initially favored entrusting the mission to the Federal Reserve since, at the beginning of the crisis, the Fed was one of the few regulators retaining an iconic status. Critics argued that this new role for the Fed would distract it from its core mission of managing monetary policy, which, as it turns out, is not as easy (nor as successful) as once appeared.
Other members of Congress flirted with the idea of creating an independent federal agency to be charged with monitoring systemic risk. Their model was Britain's Financial Services Authority — until people realized that the FSA had not done so well on sounding the alarm.
Now comes the proposal by Federal Deposit Insurance Corp. Chairman Sheila Bair (reported in American Banker on May 7, "Council for Systemic Oversight Gains Steam") that systemic risk should be assessed by a council of existing regulators. Securities and Exchange Commission Chairman Mary Schapiro quickly seconded the idea. It is admirable in that it avoids adding another seat at an already crowded table.
However, in order to weigh whether a council might work, consider the rather poor track record of many interagency task forces. Such task forces — usually comprising the Fed, Treasury, Comptroller, FDIC and other agencies — are fairly common and, unfortunately, do not have the best record. One regrettable example is the Basel II work group that took years to forge a common U.S. policy position.
It's easy to imagine that a systemic-risk council could easily get bogged down in the internecine warfare that is endemic in the upper echelons of federal policymaking.
Here's an idea to ensure that Ms. Bair's council proposal avoids the squabbling: Put the council in the White House, within the Executive Office of the President.
In the EOP the systemic-risk mission could logically be seated at the National Economic Council. Since the NEC was created by President Clinton in 1993, it has been a poor stepchild in comparison to its older, better established sibling the National Security Council. The systemic-risk issue could be a whole new raison d'être for the NEC.
The whole purpose of the NEC, like the NSC, is to serve as the president's principal arm for coordinating policies among government agencies. And it also ensures that the president's priorities are effectively communicated to the agencies.
For many years, the NEC has struggled. Robert Rubin, its first director, necessarily kept the NEC's profile low since it was new and seen as a threat to existing power arrangements. After Rubin, the NEC never achieved quite the same level of authority that the NSC has on foreign policy. And the NEC has a fraction of the staff the NSC has.
The solution to the staff and resource issue is to use the Office of the U.S. Trade Representative as a model. It fits within the EOP and is among the most highly regarded government entities. It has a smallish staff (fewer than 100) and functions as a referee among federal agencies on trade matters.
So a small office dedicated to systemic risk should be established using the trade office model and reporting to the NEC director. Today's NEC director, the formidable Larry Summers, might welcome this daunting opportunity.
Only the president and his all-powerful staff would be able swiftly to resolve the inevitable conflicts. And only the White House staff can ensure that regulatory agencies devote the attention and resources this issue deserves. The recent financial crisis should teach us that systemic financial risk is an issue important enough to be raised to the White House level.