The council offers a useful alternative mechanism to standard approaches to regulation. Moreover, we argue that the council’s discretion is better cabined by its structure-which features diverse membership, voting, review, and political safeguards-than by insistence on “hard look” judicial review or a cost-benefit requirement for individual designation decisions. We term this approach “regulation by threat” and suggest that it is appropriate when risks are hard to identify, the perils of mistake are great, and the downsides of misdiagnosis extreme. Second, it holds financial regulators to account by threatening to intrude on their regulatory turf if they fail to address systemic risk on their own. First, it deters nonbank firms from seeking out systemically risky strategies or activities. FSOC’s broad discretion to impose costly sanctions on designated firms instead advances two quite different goals. FSOC designation does not, and cannot, precisely identify firms that could pose a systemic risk to the financial system. This Article defends the FSOC designation scheme, arguing that its critics misunderstand the mechanisms by which it helps to reduce systemic risk outside the banking sector. And with Donald Trump’s 2016 presidential victory, FSOC’s designation authority is now in danger of being radically altered or terminated completely. Although the Financial Stability Oversight Council (FSOC) has exercised this authority only four times, it has occasioned controversy in court, in Congress, and among commentators. The Dodd-Frank Act responded to this reality by empowering a council of financial regulators to designate individual nonbank financial institutions as systemically risky. A central lesson of the global financial crisis is that banks are not the only financial firms that can endanger the broader financial system.
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