Systemic Risk and the Role of the Federal Reserve

Systemic Risk and the Role of the Federal Reserve

Summary of Recommendations

Give the Federal Reserve lead responsibility for monitoring the stability of the financial system. The Fed should consult with other regulators and report to Congress at regular intervals on emerging risks, regulatory gaps, perverse incentives, and market forces that threaten to destabilize the system. It should recommend remedies, both statutory and administrative.

Give the Federal Reserve a means of controlling excessive leverage throughout the financial system. The Fed would then have another tool, in addition to monetary policy, for controlling major asset price bubbles whose bursting could destabilize the financial system and cripple the real economy.

Discourage growth of large financial institutions: (1) by increasing capital requirement steeply as institutions grow; (2) by creating authority to expedite the resolution of failing financial institutions (paid for by fees that rise with size).

Do not designate systemically important institutions (institutions deemed too big to fail) or give them their own regulator.  This will create a new class of GSE-like protected institutions.

Do not give major new regulatory responsibility to the Federal Reserve. Allow the Fed to focus on monetary policy, the payments system, and its role as lender of last resort. Protect the Fed's independence, especially with respect to monetary policy-making.

Consolidate prudential regulation of financial institutions-to increase efficiency and eliminate regulatory arbitrage. This could be done in stages. Stage one would consolidate bank regulation in a single independent agency, which would also have responsibility for regulating Financial Holding Companies (including those that do not own banks). This independent agency could report to a Board or Council of agencies, but should not be part of the Treasury or the Federal Reserve.  Stage two might eventually pull other functional regulators under the same agency.

Pew is no longer active in this line of work, but for more information, visit the main Pew Financial Reform page.

Composite image of modern city network communication concept

Learn the Basics of Broadband from Our Limited Series

Sign up for our four-week email course on Broadband Basics

Quick View

How does broadband internet reach our homes, phones, and tablets? What kind of infrastructure connects us all together? What are the major barriers to broadband access for American communities?

Pills illustration
Pills illustration

What Is Antibiotic Resistance—and How Can We Fight It?

Sign up for our four-week email series The Race Against Resistance.

Quick View

Antibiotic-resistant bacteria, also known as “superbugs,” are a major threat to modern medicine. But how does resistance work, and what can we do to slow the spread? Read personal stories, expert accounts, and more for the answers to those questions in our four-week email series: Slowing Superbugs.