WALL STREET TRADE ASSOCIATION HEDGES IN STANCE ON MARKET-STABILITY REGULATOR’S POWERS

Posted March 17, 2009

WASHINGTON, D.C. – The Securities Industry and Financial Markets Association (SIFMA) hedged on the prospect of the creation of a financial markets stability regulator in testimony to the US House Financial Services Committee, saying that while such a regulator should have a more direct role in the oversight of systemically important financial institutions, that regulator should not play a day-to-day role in oversight of insurance companies and hedge funds.

“Although the financial markets stability regulator's role would be distinct from that of the functional regulators, it should have a more direct role in the oversight of systemically important financial organizations, including the power to conduct examinations, take prompt corrective action and appoint or act as the receiver or conservator of such systemically important groups,” suggests Tim Ryan, President and CEO of SIFMA, in his testimony. “We believe that all systemically important financial institutions that are not currently subject to federal functional regulation, such as insurance companies and hedge funds, should be subject to such regulation. But we do not believe the financial markets stability regulator should play that day-to-day role for those entities.”

SIFMA supports some of Federal Reserve Chairman Ben Bernanke’s statements about the role of a financial stability regulator, according to Ryan. “We agree that the mission should include monitoring systemic risks across firms and markets, rather than only at the level of individual firms or sectors; assessing the potential for practices or products to increase systemic risk; and identifying regulatory gaps that have systemic impact,” he says. “One of the lessons learned from recent experience is that sectors of the market, such as the mortgage brokerage industry, can be systemically important, even though no single institution in that sector is a significant player.”

When determining what qualifies as a systemic risk due to which a firm or sector should come under the purview of a financial stability regulator, the threshold should be the risk of a system-wide financial crisis, according to Ryan. “While there is no single, commonly-accepted definition of systemic risk, we think of ‘systemic risk’ as the risk of a system-wide financial crisis characterized by a significant risk of the contemporaneous failure of a substantial number of financial institutions or of financial institutions or a financial market controlling a significant amount of financial resources that could result in a severe contraction of credit in the US or have other serious adverse effects on economic conditions or financial stability,” he says.