The future of systemic risk supervision

It is still hard to predict the future of macro-prudential supervision in practice

Nobody quite knows the way forward on the detail of macro-prudential supervision. The US Senate is grappling with how to create a systemic risk supervisor and trying to pick a tune out of a disharmonious chorus of opinion from politicians, industry representatives and the patchwork of America's many regulators. There are no precedents for how a new body should be composed, or what its relationships and powers will be with regard to those big firms deemed 'too interconnected to fail', the existing micro-prudential supervisors and regulators, and the central banking elements responsible for monetary policy and financial stability already in place.

There are those who fear empire building at the Federal Reserve, which seems to stymie any attempts by the Treasury to place responsibility in the Fed's lap. Depending on your view, you could say the Fed is the only body experienced enough in developing monetary policy and financial stability, regulating large institutions, and arbitrating banking crises. Or you could say it is the greatest state architect in promoting lending bubbles, financial instability, and helplessly watching the collapse of the financial system.

It looks as though a compromise of creating a systemic risk committee comprised of existing regulators and authorities might emerge. The big seat at the end of table is now the focus, with the Fed and Treasury as contenders. They are closely followed by the other regulators, aiming to make sure they are fairly represented in a body that seems likely to involve itself in oversight of insurance and securities firms as much as banks. Still, the US should take comfort in the fact that it is closer to a systemic risk solution than the UK, which has had its plans thrown into uncertainty by the looming general election set for next year.

The opposition Conservatives, enjoying their biggest poll lead since the financial crisis began, have already called for the dissolution of the Financial Services Authority (FSA), which the incumbent Labour government created in 2000 as the UK's financial regulator. Under the current government it has seen its mandate as micro-prudential supervisor extended with macro-prudential responsibilities, allowing only a limited role for the Bank of England. But should the government change next year, the FSA would cease to exist, and the Bank would assume responsibility across setting interest rates, monetary policy, day-to-day financial supervision and systemic risk oversight - an ambition the Fed can only dream of.

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David Benyon, staff writer