COMMITTEE HEARS IDEAS FOR CENTRAL FINANCIAL RISK REGULATOR

At the hearing, entitled “Where Were the Watchdogs: Systemic Risk and the Breakdown of Financial Governance,” the second in a series on the structure of the nation’s financial regulatory system, testimony focused on the current system’s inability to identify and manage risks that occur across different types of institutions, markets, and activities and that broadly threaten the financial system. Witnesses also discussed the best path forward.

“As we concentrate our efforts toward recovering from the greatest financial crisis since the Great Depression, we cannot ignore the fact that there is no one government agency or market participant responsible for monitoring systemic risks to the integrity of our entire financial system,” Lieberman said. “There is no one agency or body asking questions and engineering solutions to prevent systemic risks from becoming systemic financial failures. Our current watch dogs failed because each has just a piece of the system to oversee. What we need is a watchdog with a universal perspective, a complete picture of the variety of institutions and activities that pose the greatest risks to our economy.”

Collins said: “Oversight gaps in our existing financial regulatory system, risky financial instruments with little or no regulatory oversight, and a lack of attention to systemic risk have undermined confidence in our financial markets. While there are many regulators in our current system, not one of them has the ability to evaluate risk across the entire system. The drastic and expensive bailouts financed by the American taxpayer might not have occurred had there been a monitor charged with evaluating risk to the financial system as a whole. What was needed then, and is needed now, is a systemic-risk monitor that could have recognized the house of cards being constructed in our financial markets and acted quickly to prevent or mitigate the impacts of a collapse.”

The Committee has undertaken its series of hearings on the breakdown of the financial regulatory system under its governmental affairs jurisdiction, which includes the “organization and reorganization of the executive branch of the Government,” as well as the study of “the efficiency, economy, and effectiveness of all agencies and departments of the Government.”
Many experts support creation of a central risk regulator that would monitor risks to the entire financial system, whether through creation of a new agency or assigning this responsibility to an existing agency or collection of agencies.

Lieberman said the Committee would eventually make recommendations to the Senate Banking Committee as to the most effective organizational structure for regulation and oversight of the nation’s financial system.

“Through effective institutions and sensible regulation I do believe we can improve the ability of our financial system to prevent and withstand severe shocks, reduce vulnerability to extreme crises, and limit the damage to our economy when a crisis occurs,” Lieberman said.

Hearing witnesses were Dr. Robert Litan, of the Kauffman Foundation, Damon Silvers, a member of the TARP Congressional Oversight Panel, and Robert Pozen, Chairman of MFS Management, a well respected financial manager.