Too Big for Administrative Law? FSOC Designations and the Fog of 'Systemic Risk'

Abstract

The Dodd-Frank Act empowers the Financial Stability Oversight Council to designate nonbank financial companies as systemically important, and thus subject them to enhanced prudential supervision and regulation by the Federal Reserve, if the FSOC finds that the company “could” pose a “threat” to U.S. financial stability. Questions of systemic financial risk require profoundly difficult predictive judgments, based on hypothetical judgments and worst-case scenarios, as evidenced not just by the 2007–2008 financial crisis that precipitated the law, but also by the broader intellectual and philosophical questions raised by the specter of low-probability, high-impact events — or, as they’re often called, “Black Swans.” This paper traces the evolution of that statutory and regulatory framework, beginning with the 2007–2008 financial crisis and requiring the FSOC to push the limits of arbitrary-and- capricious agency action — and, most likely, to exceed these limits. This preliminary draft was prepared for discussion at a conference on current issues in financial regulation, hosted by the Center for Study of the Administrative State, at George Mason University's Antonin Scalia Law School on December 9, 2016.