A comparative analysis of the EU ESRB and the US FSOC

Abstract

In the aftermath of the global financial crisis (GFC), there was enough political will towards the creation of a stronger institutional set up for dealing with systemic risk via macroprudential supervision. In the United States (US) this political will was translated into the creation of the Financial Stability Oversight Council (FSOC), whilst in the European Union (EU) the European Systemic Risk Board (ESRB) was created. This paper argues that at the time of its inception, the FSOC could be considered a more robust institution compared to the ESRB, as it had hard law powers due to the fact that it could designate Nonbank Financial Companies (NFC) as Systemically Important Financial Institutions (SIFI); whereas the ESRB has largely an advisory role directly through warning and recommendations and indirectly via the comply or explain mechanism and the name and shame approach. However, following changes to both institutions in 2019, the FSOC’s ability to promote financial stability and to mitigate systemic risk was undermined by federal political influence through the 2019 revised interpretative guidance. On the other hand, the ESRB’s amendments were minor and did not impact the Board’s ability to promote financial stability in the Union. This suggests that the FSOC is a highly politicised institution, fact which has the ability to undermine its efficacy and American financial stability.