By Gregg Gelzinis, Center for American Progress
The Trump administration is quietly choking off funding to financial stability programs that were established after the 2007-08 financial crisis. These funding cuts, which do not involve congressional appropriations, only make the U.S. financial system more vulnerable to future financial sector risks and will cost taxpayers in the long run.
The financial crisis made it clear that the financial regulatory regime in the United States lacked an adequate systemic risk mandate, as well as the resources necessary to fulfill that financial stability role. No regulatory body was tasked with assessing and mitigating the evolving risks that build up in financial institutions and financial markets across the financial system. Enacted in 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act created two entities to help tackle this regulatory gap: the Financial Stability Oversight Council (FSOC) and the Office of Financial Research (OFR).
Financial Stability Oversight Council
The FSOC was established to bring together the heads of the eight distinct federal financial regulatory agencies, as well as the secretary of the U.S. Treasury and an independent member with insurance expertise, to analyze and mitigate potential threats to financial stability. Additionally, the FSOC includes five nonvoting members—three representing state financial regulators—as well as the director of the Federal Insurance Office and the director of the OFR, who play an advisory role. The FSOC has a staff housed at the Department of the Treasury to support its statutory obligations, which include:
- Subjecting systemically important nonbank financial institutions to enhanced regulations and oversight by the Federal Reserve Board
- Facilitating information sharing and coordination between the regulatory agencies
- Monitoring emerging threats to financial stability
- Recommending heightened regulatory standards in response to those emerging threats or in response to existing gaps in regulation that pose financial stability risks
- Breaking up financial institutions that pose a grave threat to financial stability
The FSOC determines its budget annually by a majority vote, and the approved budget is funded through the Financial Research Fund—not through congressional appropriations. The Financial Research Fund is funded through assessments charged on banks with more than $50 billion in assets and systemically important nonbank financial companies supervised by the Federal Reserve Board. On September 29, 2017, Treasury Secretary and FSOC Chairman Steven Mnuchin presided over a meeting of the FSOC in which the fiscal year 2018 budget was approved. The approved budget cuts the FSOC’s funding by 15 percent. Perhaps more importantly, the budget reduces the target staffing of the FSOC from 36 full-time employees during the Obama administration to only 18—a 50 percent cut.
Office of Financial Research
The OFR was also created by the Dodd-Frank Act to serve, in part, as the FSOC’s data-driven research arm. The OFR has the much-needed authority to collect data from financial sector institutions and is designed to perform long-term applied research on financial stability risks; the evolving organization and activities of financial institutions and markets; and other initiatives as directed by the FSOC. Over the past several years, the OFR has published high-quality research on a range of topics pertaining to financial institutions, markets, and regulation. The OFR has also created comprehensive financial sector monitoring tools that analyze financial institutions and markets data either quarterly, as is the case with the Financial System Vulnerabilities Monitor, or daily, as is the case with the Financial Stress Index. Additionally, data standardization is an important priority for the OFR. One of the main projects within this issue area is the push for a Legal Entity Identifier—a data standard that will enable financial market participants and policymakers to map the complex web of financial sector interconnections. When policymakers and market participants better understand the risks and interconnections of the financial sector, they’re able to better manage those risks and exposures—making the financial system more transparent and resilient.
The OFR is also funded through the Financial Research Fund, meaning no congressional appropriation is required. The director of the OFR—a U.S. Senate-confirmed position with a six-year term—determines the OFR’s annual budget in consultation with the chair of the FSOC. In May, the Treasury Department released OFR’s budget for FY 2018. The budget cuts the OFR’s funding by 25 percent. The severe budget cut translates to a downsizing of OFR’s staff from 223 to 139—a 38 percent staff reduction.
The threat of financial regulation funding cuts
In addition to undermining the OFR’s ability to support the FSOC’s mission, these cuts may also have a ripple effect across financial regulation broadly, as the OFR has worked with individual financial regulators on improving data standards. For example, the OFR and U.S. Commodity Futures Trading Commission (CFTC) signed a memorandum of understanding to work together on improving the quality of data the CFTC collects on the derivatives market. The OFR has also been intently focused on cyber security issues. Given the recent Equifax and U.S. Securities and Exchange Commission hacks, cutting its funding makes the budget decision even more troubling.
Unfortunately, these short-sighted budget decisions follow an emerging pattern of Secretary Mnuchin’s disregard for systemic risk oversight. In September, he was the driving force behind the FSOC’s decision to deregulate American International Group (AIG)—a significant policy mistake and a decision with questionable legality. He has also failed to continue important systemic risk inquiries that began in the Obama administration, such as the investigation into the financial stability risks posed by hedge funds.
In the grand scheme of total federal spending, the FSOC and OFR cuts are small numbers—but they represent significant cuts to these crucial post-crisis programs. The cuts do not save taxpayers a dime in direct spending and, in fact, make them more vulnerable to future financial crises and bailouts. These programs are a form of systemic risk insurance, which are paid for by the financial sector, and the Trump administration’s efforts to slash such protections make absolutely no sense.