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UK Regulator’s Transparency Should Be a Model for U.S. FSOC

By Aaron Klein, Justin Schardin

Friday, July 10, 2015

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Earlier this week, the United Kingdom’s systemic risk regulator, the Financial Policy Committee (FPC), did something its U.S. counterpart has not yet done—provided a detailed record of closed-door meetings, and the ground did not shake.

FPC released the record of its June 24 meeting and a follow-up June 29 meeting, demonstrating that a committee of regulators can release detailed minutes of their closed-door deliberations and discussions to the public without undue risk. These minutes should serve as a model for the Financial Stability Oversight Council (FSOC), the FPC’s rough equivalent in the United States.

The FPC’s minutes do not reveal which attendee said what, but instead provide detailed substance on what committee members are thinking about important systemic risk issues. In its June meeting, the FPC recorded 68 specific comments on a range of topics. For example, the FPC made clear that “the risks in relation to Greece … had increased,” and that UK banks remained heavily exposed to highly indebted euro-area economies. The record also listed four specific directives and recommendations the FPC made, including implementing the UK’s leverage ratio framework and setting a countercyclical capital buffer rate.

The June minutes further noted the FPC’s concerns about the risk of cyberattacks—as was evident just this week with the surprise suspension of operations of the New York Stock Exchange earlier this week, which appears to have not to be the result of a cyberattack—and fragile market liquidity. This builds on the FPC’s March meeting record, which noted growing concerns about shocks to the market: “The Committee remained concerned that investment allocations and pricing of some securities presumed that asset sales would be possible in an environment of continuous market liquidity, whereas liquidity in some markets appeared to have become more fragile.” The minutes went on to list specific areas where the FPC asked the Bank of England and the UK’s business conduct regulator to work together to address these concerns.

The FPC’s approach to releasing its minutes is the opposite of FSOC’s, which provides full detail on who attended its meetings but little idea of a meeting’s content. For example, when FSOC discussed central counterparty risk at its March 11 meeting, the minutes were specific on which people spoke and the subjects they described, but gave little sense of what they thought. Participants are variously noted as having “provided additional perspectives on work underway” and “described the engagement on the part of regulators to help ensure appropriate management of risks.” And there was this uninformative nugget: FSOC members reportedly “asked questions and had a discussion” on the subject. These descriptions are barely useful to public observers who are left wondering what policymakers are really concerned about. The absence of information encourages a kind of Kremlinology speculation on what key policymakers are thinking and doing about potential threats to financial stability.

FSOC’s situation is similar to the one that faced the Federal Reserve’s Federal Open Market Committee (FOMC) 20 years ago when it refused to tell markets what changes it had made with interest rates. Speculation on the size of the briefcase carried by the Fed chair into meetings used to move markets. Today, the FOMC releases detailed statements and minutes—the latest from its June 16-17 meetings—which have been helpful for market participants and the public. That is why we at the Bipartisan Policy Center (BPC) recommended changes to FSOC’s transparency, including using the FOMC as a model for releasing public minutes, in our 2014 report on systemic risk.

BPC is not alone in calling for enhanced FSOC transparency. In a series of reports, the Government Accountability Office (GAO) made recommendations on how FSOC could accomplish this goal. In its 2012 report, GAO wrote that the lack of detail in FSOC’s minutes “makes it difficult to assess FSOC’s performance” and “limits the public’s understanding of its activities.” GAO contrasted the Council’s decision not to keep detailed records of its deliberations or discussions with the FOMC, which publishes greater detail in its minutes on a three-week delay and keeps transcripts of its meetings that it releases on a five-year delay. GAO recommended that FSOC “keep detailed records … of its closed door sessions” and make them publicly available after enough time to “avoid the release of market-sensitive information or information that would limit deliberations.”

FSOC deserves some credit for improving its overall transparency. The Council adopted a formal transparency policy in May 2014 and approved amendments to its process for designating nonbanks as systemically important financial institutions (SIFIs) in February 2015. These steps have been positive but should be built upon, particularly regarding the minutes of FSOC’s closed-door meetings.

FSOC’s minutes have improved marginally as well. However, as GAO noted, FSOC has said that its discussions often involve confidential or sensitive information that will remain sensitive for long periods. Yet both the FPC and the FOMC discuss highly confidential information and both still release minutes that are much more informative to the public and to markets than what FSOC releases. Those minutes do not appear to have stopped the FPC and the FOMC members from speaking freely, and they don’t seem to have had an unduly negative impact on markets. In fact, what they have in common is that they do not stress who spoke, but rather what was said.

FSOC should restructure its minutes to mirror that of the FPC and the FOMC to focus on the useful content of the conversation, rather than listing off the name of the speaker with no content. Taking further steps to improve its transparency and adopting the recommendations of GAO, BPC, and others to provide more detailed minutes will enhance FSOC’s transparency and accountability and put it on par with its counterparts. If the British can do it, why can’t we?