In a recent op-ed in the Wall Street Journal, Peter Wallison expressed his concerns about the recent efforts by the Federal Reserve and FSOC to regulate the shadow banking system. According to Wallison, the Federal Reserve’s efforts go beyond regulating entities that function in the same way that regulated banks do, to encompass the capital and securities markets. He cited a report by the international Financial Stability Board (FSB), made up of central bankers and bank regulators including the U.S. Treasury and Federal Reserve, that found that “ systemic risks are created in the shadow-banking system through ‘a complex chain of transactions, in which leverage and maturity transformation occur in stages.’” Wallison cautioned that the “complex chain of transactions” identified in the FSB report were normal transactions in the securities and capital markets that the Federal Reserve hoped to regulate as “shadow banking."
Dodd-Frank gives the Federal Reserve and FSOC the authority to regulate those non-bank financial institutions designated as SIFIs. However, Wallison asserted that Dodd-Frank did not give the Federal Reserve “ authority to regulate financial firms that by themselves are not systemic but become systemic because they participate in a ‘complex chain of transactions.’” Instead, he hypothesized that the Federal Reserve and FSOC were using the authority given by the G-20 to the FSB to regulate shadow banking as authority for their action in the United States. However, he noted that the expansion of regulatory power must originate in Congress. Wallison warned that “if Congress fails to insist on a recognition of its authority, the Federal Reserve and the Financial Stability Oversight Council will be free to take control of and regulate sectors of the economy that even the drafters of the far-reaching Dodd-Frank law saw fit not to include.”