[Congressional Record (Bound Edition), Volume 155 (2009), Part 20]
[Senate]
[Pages 27019-27021]
[From the U.S. Government Publishing Office, www.gpo.gov]




                         SYSTEMIC RISK COUNCIL

  Mr. WARNER. Mr. President, I rise to address an issue I know this 
body will be dealing with in much greater detail in the coming weeks 
and months; that is, financial reregulation.
  On Monday, I am introducing legislation to establish a systemic risk 
council. I have worked with Chairman Dodd on this issue and his staff, 
and I am very grateful that his discussion draft--although I have not 
seen the specific language--is expected to include a strong systemic 
oversight council which I have been advocating.
  I appreciate Chairman Dodd's leadership on this issue and look 
forward to working with him and the administration on making it a 
reality.
  As I have articulated previously on the floor and in an opinion piece 
published in the Washington Post, we need to establish a framework for 
addressing systemic risk in our financial system. Systemic risk is not 
the only area we need to address but is an area where the current 
system has unequivocally failed.
  Systemic risk is actually a number of risks united by the possibility 
that, if left uncontrolled, they could have consequences for the entire 
markets or the entire economy. We saw examples of that a year ago.
  Most often, systemic risk comes from the failure of an important 
financial institution. But because that is not the only source, we 
should not expect to control systemic risks with a rigid, one-size-
fits-all approach.
  In order to do this, we need a body that can look across our 
financial system at all sources of risk, that can spot gaps or 
opportunities for firms to avoid regulation, and that will not be 
consumed by other day-to-day responsibilities or protecting its own 
regulatory turf.
  Some have proposed that the Federal Reserve serve as the systemic 
risk regulator. But its monetary policy responsibilities present 
potential conflicts, and it has proven incapable of properly regulating 
large institutions.
  The Federal Reserve claims to be the systemic risk regulator at the 
moment, but it has obviously failed to take on that task, and we need 
to be careful in balancing its responsibilities and authorities in the 
coming years.
  That is why, if we want to ensure that monetary policy and systemic 
risk are each managed in the best possible manner, we must recognize 
that institutional structures and responsibilities do matter. Doubling 
down on a structure of the past that has not performed well outside of 
its core function is not how we should confront the challenges of the 
future.
  Our Founding Fathers opposed concentrations of power and favored a 
system of checks and balances. We have resisted creating an all-
powerful central bank, and a council would allow for such a system of 
checks and balances.
  The Federal Reserve is, of course, not the only agency that has not 
performed well in the crisis over the last year or so. The current 
system has failed to provide proper checks and balances and has 
replaced healthy competition where efficient and innovative firms 
flourish with a system where a handful of firms are too large to fail, 
can threaten the safety of the entire system, and enjoy an implicit--or 
maybe even more explicit now--government guarantee that destroys any 
notion of market competition.
  This failure points to another task we must take on in financial 
regulatory modernization. We must end the notion of too big to fail. 
That is why I believe we should establish a strong systemic risk 
oversight council, and I will be introducing legislation, as I 
mentioned, to do that.
  A systemic risk council is not a silver bullet but avoids the 
pitfalls of entrusting systemic risk responsibility with one single 
agency that has other missions, and those other missions could serve as 
a source of conflict of interest.
  A council could see across the horizon and have all the information 
and expertise flow up into it. It addresses our stovepipe problems and 
avoids the conflicts that come from also conducting monetary policy and 
helps to stave off regulatory capture.
  The systemic risk oversight council I propose would consist of the 
Treasury Secretary, of course, the Chairman of the Federal Reserve--
they would play a valuable role--and the heads of the major financial 
regulatory agencies, two independent members, including the chair of 
the council.
  This chair of the council would be independently appointed by the 
President. It would be charged with the responsibility for working to 
improve our understanding and control of systemic risks. This builds on 
the model of the President's working group on financial markets. An 
independent chair, appointed by the President and approved by Congress 
and supported by a permanent staff, has proven to be relatively 
effective and ends up resembling the National Transportation Safety 
Board or the National Security Council.
  Critics of this approach have said you cannot convene a committee to 
put out a fire. But we do convene committees to prepare for and respond 
to large-scale crises time and again across our whole system. 
Experience has taught us boards and councils can work in a wide range 
of contexts, provided they have the right responsibilities, powers, and 
membership. Even the Federal Reserve and the Federal Deposit Insurance 
Corporation are run by boards.
  In addition, I believe we should leave the real emergency powers with 
the regulators. The Federal Reserve should retain its 13(3) authority, 
though it should be tightened up. Bank regulators should retain prompt 
and corrective action authority, and the FDIC should retain its 
resolution powers. As a matter of fact, Senator Corker and I have 
introduced legislation already that expands the FDIC's resolution 
powers to include bank holding companies.
  In a crisis, however, the council should coordinate all of these 
regulators and their actions, as police, fire, and emergency response 
all coordinate in local emergencies. But the systemic risk council 
cannot just be a debating

[[Page 27020]]

society, and so it would have real resources and power.
  First, in addition to gathering and analyzing data, the council could 
help to determine how to regulate new products and markets in order to 
minimize regulatory gaps. Those regulatory gaps often end up with 
regulatory arbitrage, as we have seen recently. It would first identify 
gaps in the system and then have the appropriate regulators work 
together to fill these gaps.
  With these tools, we will eliminate the huge blind spots our 
regulators had last fall when new and unregulated markets tail-spun out 
of control. We will eliminate the ability of firms to avoid regulation 
or find the weakest regulator by ensuring consistent treatment of 
activities across the financial markets.
  Second, in order to address the too-big-to-fail issue, the council 
will work to prevent firms from becoming too large to fail. It would do 
this in three specific ways.
  First, it would have the authority to identify large firms that could 
pose systemic risk if they failed but did not currently have an end-to-
end prudential regulator and would assign them a Federal regulator. 
This could include hedge funds, insurance companies or other nonbank 
financial companies. Making sure those companies that have no 
regulatory oversight, if they fall into this category of too big to 
fail, have some kind of oversight is terribly important.
  Second, the council would establish systemwide prudential standards 
for large firms, including counterparty exposure limits, increased 
capital requirements, reduced leverage and strengthened risk management 
requirements, all to make sure that while we would not set arbitrary 
caps on size, we would make sure, as a firm gets too large or takes on 
too much excessive risk, that there are additional requirements, such 
as additional capital and others I outlined.
  Finally, it would work with the council to ensure that any firm could 
fail safely--we saw in the past that there was no plan on how we would 
unwind a Lehman or an AIG--by working with the financial regulators, 
the day-to-day prudential regulators, to develop clear, written plans 
for the unwinding or failure of a financial company. In a sense, we 
would be asking some of these too-big-to-fail institutions to 
preapprove or put forward their own funeral plans or dissolution plans 
so we would know how we go through this process, should that 
unfortunate event take place. These plans would be made in advance of 
trouble and could not rely on the type of government intervention we 
were forced into last fall.
  As I have said, the systemic risk council is not a silver bullet. 
Many systemic risks already lie squarely within the responsibility of 
our day-to-day financial regulators. We need to make sure our current 
regulators have clear missions, including managing risks within their 
institutions and regulated markets, and we must ensure these regulators 
do their job.
  But that is only half of the answer because other systemic risks lay 
outside of the day-to-day prudential regulators' job description, in 
between the cracks of our existing regulatory system. The Systemic Risk 
Council's responsibilities would be clear and focused. Systemic risk 
would be its only job, and it would help fill in the cracks and prevent 
problems from becoming unmanageably large or complex.
  What I am proposing today boils down to a simple, consistent, and I 
believe common sense idea: If we want to do something constructive 
about systemic risk, we should create a mechanism that can ensure our 
regulators do their jobs, avoid conflicts of interest, and fully 
leverage our existing regulatory resources to promote the proactive 
identification and control of systemic risks. By having this council, 
made up of the heads of the day-to-day prudential regulators--the Fed, 
the Treasury, independent members, and this independent chair appointed 
by the President--I believe we create this mechanism.
  We need to make sure we never again put the American taxpayer into 
the kind of financial duress we had take place last year. I believe the 
Systemic Risk Council approach, working as one piece of an overall 
financial modernization and reregulation, will lead us in that 
direction.
  Mr. DORGAN. Mr. President, would the Senator yield for a question?
  Mr. WARNER. I would yield for a question.
  Mr. DORGAN. I want to talk about jobs today, but the Senator piqued 
my interest by talking about too big to fail. Some believe--and I am 
one of those who believe--that too big to fail means you are too big. 
As you know, in Great Britain this week they decided to begin taking 
apart institutions that are too big to fail. And I know there are other 
approaches here in trying to deal with systemic risk and a variety of 
approaches to try to address the issue, but has the Senator had 
thoughts about whether too big to fail is just flatout too big?
  Mr. WARNER. I am very familiar with what happened in the UK, with the 
situation with the Bank of Scotland, which had received governmental 
assistance--somewhat similar to the banks that had received our TARP 
financing. They came in and said: We are going to start to break up 
this institution. Former Fed Chair Paul Volcker has suggested that 
certain banks should perhaps be prohibited from taking on excessive 
risk activities, in a sense going back almost to a Glass-Steagall 
approach. Those are both areas that I believe warrant further 
consideration.
  Our approach here has been to say that while it is hard, in this 
interconnected financial system we have where institutions crisscross 
all across the world, to put an arbitrary size cap on it, what we can 
do, by putting this type of Systemic Risk Council in place, we can put 
barriers and a price of getting too large by having added capital 
requirements; by having this designation that you have to show us a 
dissolution plan and that the Systemic Risk Council would weigh in; by 
assuring that if you take on too much risk activities on your own 
trading desk, there is a higher price to pay for that.
  There are these other examples, as you mentioned, that we will be 
debating through this whole process. I know the Senator has raised this 
issue at times on the floor as well, and I will solicit his advice and 
comments. And perhaps we need to go even beyond that in looking at, as 
I think you appropriately pointed out, at the end of the day, does too 
big to fail mean just too big? It is a hard place to draw a line. But I 
thank the Senator for his question, and I yield my time.
  Mr. DORGAN. The Senator from Virginia is very thoughtful on these 
issues. I know the workshops he has been putting on are very helpful. 
As we try to work through these with respect to resolution and other 
authorities, it is very important for us to try to use the best ideas 
that exist in this Chamber to put together an approach that would 
prevent ever again what happened last year and the year before.
  So I have some thoughts about the use of the Fed with respect to 
systemic risk and other things, and I will speak about them later. But 
my interest was piqued by the Senator's discussion on the floor because 
I think this is very important. If we don't find ways to put the 
foundation back under this economic system of ours, people aren't going 
to have confidence going forward. Part of financial reform is to 
establish that confidence, and I think the work the Senator from 
Virginia has been doing is extraordinary work.
  My hope is that at the end stage we can probably come closer to the 
side of, if you are too big to fail, you are probably too big, because 
too big to fail is almost, by definition, no-fault capitalism. But 
between here and there, there are a lot of interesting and useful ideas 
that are being developed, and the Senator from Virginia is in the 
middle of them, and I appreciate his work.
  Mr. WARNER. I thank the Senator from North Dakota for his comments, 
and I look forward to working with him. I think this is clearly an area 
where we will find common cause with our colleagues on the other side 
of the aisle. Never again should the American taxpayer have to pick up 
the burden from institutions that have been financially irresponsible 
and then from

[[Page 27021]]

those financial irresponsibilities that pose a systemic risk where we 
the taxpayers are left basically holding the bag.
  So I thank the Senator for his comments, and I look forward to 
working with him on this very important issue.
  The PRESIDING OFFICER (Mr. Kaufman). The Senator from North Dakota.

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