It is widely believed that the U.S. financial system needs a "systemic risk" regulator to help prevent future financial crises. The debate is centered not on whether we should have such a regulator, but on which agency should be anointed and what powers it should have.

I was skeptical about a systemic risk regulator when it was first proposed because the proposal was for the Federal Reserve Board to be the regulator. I believe that would be unwise for two reasons.

First and foremost, I do not believe any single agency has the wisdom and experience to perform the job. Second, I see an overwhelming need for a strong and politically independent Federal Reserve System, and I believe it would not be in the Fed's best interests to undertake this assignment.

The chances of something going awry in the system are simply too great for the Fed to risk its reputation and political independence in this fashion.

Currently there are at least four government agencies (the Fed, the Treasury Department, the Federal Deposit Insurance Corp. and the Securities and Exchange Commission) on which we rely to maintain order and stability in the financial system.

Each approaches the task from a different perspective, and each has different strengths and weaknesses. We need to bring these agencies together and get them more acutely focused on potential systemic risks.

I believe a Systemic Risk Council, composed of at least these four agencies and possibly others, is the best approach. The council would meet monthly to consider the condition of the financial system and any potential threats to it.

The council would have dedicated staff members — probably numbering in the hundreds — tasked with gathering and analyzing data and trends around the world and making recommendations for possible regulatory or legislative actions. The council would not be a regulator, but it would have broad authority to collect data from government agencies and to require them to gather and provide information from the firms they oversee.

This council would have the authority to block or overturn any regulations it believes could threaten the stability of the financial system. For example, the Basel II capital regulation, which is highly pro-cyclical and was originally intended to allow reductions in large-bank capital levels, would be subject to review by the council.

It could also review the deposit insurance assessment system, which currently charges minimal premiums in good times and drains capital from the banking system in difficult times. The council could be given the authority to approve the FDIC's use of extraordinary powers during times of financial emergency in lieu of the current system, which vests that authority in the Treasury in consultation with the president.

The SEC currently has oversight authority with respect to the Financial Accounting Standards Board, which promulgates accounting rules.

This oversight authority could be transferred from the SEC to the council to ensure that accounting standards are not adopted without consideration of the potential systemic effects on the financial system.

For example, accounting rules allowed the creation of off-balance-sheet special-purpose vehicles that resulted in increased leverage and risks in the financial system.

Now that we are in the middle of a financial crisis, the FASB is proposing to put those vehicles back on the books of banks, which would reduce their capital ratios and their ability to lend. These and other accounting rules are far too important to be left to accountants without proper government oversight.

The chairman of the Fed could be chairman of the council, but I do not favor this approach, because I do not believe the council should be dominated by one agency. Another possibility is a rotating chairmanship, similar to the one at the Federal Financial Institutions Examination Council, but I do not favor this idea, either, because it would result in a weakened council, lacking in stature.

I believe the best approach would be for the chairman of the council to be a presidential appointee confirmed by the Senate for a six-year term. This would give the council the profile and stature it would need to do its job properly.

A Systemic Risk Council structured along these lines would enhance significantly the oversight of the financial system and help avoid crises like the one we experienced in the 1980s and the one we are mired in today. It would bring to bear the diverse experiences and resources of the independent regulatory agencies without suffocating or further politicizing our financial system.

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