Putting the 'Financial Stability' in Financial Stability Oversight Council

Abstract

For all the ink that has been spilled on the topic of financial regulation since the financial crisis of 2007-2008, there has been little examination of the competing normative goals of financial regulation. Should the financial system be treated as an end in itself, such that the efficiency of that system is the primary goal? Or should financial regulation instead treat the financial system as a means to the end of broader economic growth? This Article argues for the latter approach, and stakes out the controversial normative position that financial stability, rather than efficiency, should be the paramount focus of financial regulation. Having fixed upon this normative foundation, this Article is in a position to evaluate Dodd-Frank’s creation of the Financial Stability Oversight Council (“FSOC”), a body intended to bring the United States’ financial regulators together for the purpose of identifying and responding to threats to financial stability. This Article argues that there are significant flaws in the FSOC’s structure and mandate that will limit its ability to discharge this vital task. Whilst the FSOC is currently the subject of legislative reform proposals, these proposals seek to hobble the FSOC’s powers – this Article argues that reform should instead swing in the other direction. What is needed is an effective and independent regulator with the resources and mandate to take a proactive, long-term and creative approach to the promotion of financial stability. This Article therefore explores potential reforms to the United States financial regulatory architecture – ranging from the incremental to the more drastic – designed to improve commitment to financial stability.