Sheila Bair: A Government Agency Worth Saving

Members of the Financial Stability Oversight Council—including the U.S. Treasury Secretary and the heads of eight major federal regulatory agencies—look to the OFR for important research and analysis. Congress charged the council and the OFR with identifying and responding to threats of financial instability while promoting market discipline.

In many respects, the OFR has been successful. Its outstanding team of data scientists, public officials and experts from academia and industry have monitored areas of system fragility. It has helped collect data that underpins the Secured Overnight Financing Rate, a globally used interest rate benchmark. Its money-market fund, short-term funding and hedge fund monitors have contributed to market risk assessments.

But the OFR has also contributed to collective regulatory failures by failing to foresee and warn regulators of coming disruptions. Over the past 10 years, the regulators that it informs have been ill-prepared to deal with various disruptions in the Treasury and repo markets, as well as the regional bank failures of 2023. These events triggered massive injections of liquidity by the Federal Reserve as well as an expensive bailout of uninsured deposits. Instead of anticipating and preventing these disruptions, the government’s response has been to intervene, diluting market discipline and making markets more unstable.

Conventional wisdom suggests that crises are unpredictable or that firms miss weaknesses in financial markets due to deficient data and analytics. But the world of finance isn’t so black and white. After some crises, these misconceptions are used to excuse poor judgment or policy errors—even if there were early signals of instability. When clear pressures build in financial markets, the challenge for the U.S. is twofold: first, to have a financial intelligence apparatus that can identify the coming crisis; second, to have regulators who can respond accordingly.

The financial system is evolving more rapidly than regulators can readily track. Innovation in the financial sector lies behind spectacular U.S. growth and technological leadership, but change brings risks. To assess both the opportunities and risks, the council and the OFR need to be laser-focused on crisis detection and prevention, data and analytics, and governance.

The OFR should take the lead on crisis detection and prevention by assembling teams of top market participants, academics and public officials to track how risks evolve over time, similar to Wall Street-style strategy groups. The OFR must also prepare the council and its members for rapid responses by talking through possible crisis scenarios, doing test exercises and establishing an emergency notification system.

Balanced investigations should delve into private equity, currency and monetary imbalances, sovereign debt and future funding needs, private credit, and hidden risks in crypto-currencies. We don’t need hand-wringing. We need data analysis, and, if warranted, recommendations for concrete actions.

Data and analytics are essential to make well-informed decisions. The OFR need not use its more controversial powers, such as subpoenaing private sector data, to achieve its goals. Instead, it should promote better coordination and information-sharing among regulators. The OFR needs unfettered access to data from other government agencies to be most effective.

Congress should hold the council and the OFR accountable for their mission to detect, minimize and prevent crises, but it should also strengthen their ability to act. The council should be given more authority to force collective action when individual regulators fail to respond to clear threats. Meanwhile, Congress should strengthen the OFR’s status by giving its director voting power on the council.

In the years leading up to 2008-09, available data and an interagency working group provided clear warnings of a coming financial crisis. But regulators stayed in their respective silos, and disagreements among them impeded interagency action until the crisis hit. Since that failure, episodes of financial instability—including a 9% inflation spike—have continued to limit U.S. growth.

Treasury Secretary Scott Bessent has said he wants to use the council to make financial regulation more coordinated, efficient and focused on material risks. To do so, he needs good data and analysis that presents a holistic view of the financial system and its vulnerabilities. As a seasoned market professional, he understands how value is created in the private sector by instilling strong management and aligning a business to its core mission. He can do the same by restructuring the OFR—a much better path than shutting it down.

The Senate parliamentarian on June 19 thwarted Senate Republicans’ first attempt to defund the OFR, ruling it didn’t comply with the Byrd Rule, which prohibits using the reconciliation process for measures not primarily focused on the budget. Some Republicans have promised to rewrite the provision to fit budget rules. If these lawmakers have their way, the “big, beautiful bill” would effectively shut down a critical tool for financial regulators to detect coming market instabilities.

A globally recognized authority on financial regulation and economic policy, Sheila Bair led the FDIC through the 2008 financial crisis and has since continued to shape the future of finance through leadership roles in government, academia, and the private sector. Named to Time’s “Top 100” and Forbes’ “Most Powerful Women” lists, she is a trusted voice on stability, reform, and consumer protection in the global economy. To bring Sheila Bair’s insight and leadership to your next event, contact WWSG.