Washington, D.C. — Today, Rep. Jesús “Chuy” García (D-IL) and Rep. Katie Porter (D-CA) introduced the Systemic Risk Mitigation Act. The bill is designed to strengthen the stability of our financial system through the current economic crisis and into the future by improving the oversight and regulation of the shadow banking industry.
During the 2007-2008 financial crisis, shadow banks, such as investment bank Lehman Brothers and insurance company American International Group, lacked adequate supervision and regulation relative to the risk they posed to the broader financial system, which exacerbated the crisis. The present crisis has demonstrated that vulnerabilities in the shadow banking sector persist, as the Federal Reserve and other regulators have had to use extraordinary measures to backstop this segment of the financial system. The Systemic Risk Mitigation Act seeks to rectify this by strengthening the regulatory framework that shadow banks face. Most notably the bill would:
- Automatically designate shadow banks above a certain size and riskiness as “systemically important,” subjecting them to strong capital and liquidity rules, annual stress tests, living wills requirements, and other crucial safeguards
- Provide a process for dedesignation of firms that are found not to meet the standard of systemic importance
- Strengthen the Financial Stability Oversight Council (FSOC) by giving the council rule-making authority to address systemically risky activities across the financial system
- Provide the FSOC and the Office of Financial Research with more resources and increase their transparency
- Create a Climate Risk Subcommittee of the FSOC to assess the risk posed by climate factors to the stability of the U.S. financial system.
The Systemic Risk Mitigation Act builds upon ideas first outlined in a July 2019 Center for American Progress report entitled “Strengthening the Regulation and Oversight of Shadow Banks” by Gregg Gelzinis.
Following the introduction of the bill, Gregg Gelzinis, senior policy analyst for Economic Policy at the Center for American Progress, issued the following statement:
The U.S. financial system was overly fragile heading into this period of pandemic-induced stress in part because of the weak regulatory framework in place for the shadow banking sector. The Trump administration has severely undermined the tools and agencies established to address the systemic risks that emerge outside of the traditional banking system. Congress must act to ensure that large, complex, and interconnected shadow banks and their risky activities don’t threaten the real economy.”
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