Commissioner Aguilar Speaks on Systemic Risk

April 16, 2010

SEC Commissioner Luis Aguilar spoke at the ABA Systemic Risk Panel in New York on the topic of systemic risk, including the definition of systemic risk, the relationship between primary regulators and any systemic regulator, and the danger of regulatory discretion becoming a substitute for regulatory reform.

He stated that there is a general understanding that systemic risk is risk that has widespread impact.  However, he stated that there seems to be little agreement of the types of events, or the nature of activities, that could actually cause the kind of market meltdown that a systemic risk regulator would be tasked with monitoring and preventing.

He noted that there are competing ideas regarding the focus of systemic risk regulation.  Some experts think that the regulation of systemic risk should be primarily focused on preserving the viability of institutions that are "too big to fail" because of their size, interconnectedness, or risk concentration. Another view is that systemic risk regulation should focus on ensuring the continuation of systemically important market functions, and on investor protections. This can be accomplished by regulation that affirmatively prevents institutions from growing too big to fail in the first place.  In his view, systemic risk regulation should focus on the continuation of market functions, and not necessarily on the preservation of institutions.

He next reviewed the current systemic risk regulation regime being contemplated by Congress.  It proposes a council or similar body that monitors and oversees systemic risk.  In his view, there must be consideration of its ramifications for the entire regulatory system. First, for example, there will be inherent tensions and conflicts that arise when one regulator has combined responsibility over monetary policy, a vested interest in the safety and soundness of particular institutions, and powers to address systemic risk. There is a danger that any organization with a focus on a particular industry and very broad powers could favor that sector to the potential detriment of others.

Click to access his speech.


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