That is because oversight is shared by several different entities, and the power to implement macroprudential tools is constrained. Another challenge is the diverse structure of the U.S. financial system, in which non-banks and capital markets play a substantial role in credit intermediation. Although the Financial Stability Oversight Council (FSOC) could conceivably play a greater role here, whether it will be able to do so effectively remains uncertain. Another issue that needs attention is the ability to resolve large, complex financial firms that operate on a global basis. The framework of requiring such firms to hold a large buffer of debt that could be converted into equity at the time of non-viability is an important step forward. But, the task of operationalizing this on a global basis in a way that is fully credible to these firms’ customers and counterparties has not been completed. Achieving clarity about the roles and responsibilities of home and host country authorities is still a work in progress. The Federal Reserve’s lack of authority to lend to a major securities dealer that gets into difficulty is another outstanding issue. The Dodd-Frank Act narrowed the Federal Reserve’s authority under Section 13(3) of the Federal Reserve Act. No longer can the Federal Reserve lend to an individual securities firm or non-bank financial intermediary. Such authority may not be as necessary now that the Federal Deposit Insurance Corporation (FDIC) has the power to lend under Title II of the Dodd-Frank Act and firms are required to have sufficient resources to support their resolution plans.
Market-making serves an important function, and it is important that trading desks can intervene and buy during flash crashes or sell during flash surges. Permitting this could provide greater liquidity and stability to financial markets. I would also exempt smaller banking institutions from the Volcker rule since they rarely, if ever, engage in proprietary trading. Do no harm Many speculate that Congress will make changes to the Dodd-Frank Act. If the scope is confined mainly to small bank relief and adjusting how the Volcker rule is applied, I have no objection. But, because the Dodd-Frank Act addresses many of the key lessons of the crisis, I think it appropriate that changes be made carefully—with a paring knife, rather than with a meat cleaver. Here, I would underscore the importance of preserving higher capital and liquidity requirements for systemically important banks; Title VII, which mandates the central clearing of standardized OTC derivatives; and Title VIII, which gives the Federal Reserve an oversight role for financial market utilities that are systemically important, and which helps promote more uniform risk management standards. While Title II gives the FDIC the authority to resolve a large, complex financial firm by converting its debt into equity and establishing a new holding company, I do not think this is necessarily the only way to have a viable resolution regime. However, if Title II were to be eliminated, then the Bankruptcy Code would need to be bolstered.