WASHINGTON - Following the failure of European leaders to build decisive consensus on managing the growing European sovereign debt crisis, U.S. Senator Mark Kirk (R-IL) wrote to Treasury Secretary Geithner about the ‘systemic risk’ this crisis poses to U.S. banks and other financial institutions.
Under the 2010 Wall Street Reform and Consumer Protection Act, a new ‘Financial Stability Oversight Council’ must review and mitigate ‘systemic risks’ that could threaten U.S. banks or other financial institutions. Sen. Kirk, a junior member of the Senate Banking Committee, called on Secretary Geithner, the Chairman of the new Council, to conduct a “thorough analysis of the risk posed to U.S. financial institutions by the European sovereign debt crisis”.
According to the non-partisan Congressional Research Service, the European countries in crisis (Greece, Portugal, Spain, Ireland and Italy) directly owe U.S. banks $180.9 billion and are exposed to a further $586.6 billion in indirect risks posed by this crisis. Senator Kirk wrote, “events are moving so quickly that real-time, dynamic oversight of the European sovereign debt crisis needs to be a FSOC priority right now”. The letter also referenced Fitch Ratings warning that the U.S. banking industry faces “serious risk” and the Federal Reserve Bank of San Francisco warning that, “a European sovereign debt default may well sink the United States back into recession.”
The full text of the letter appears below:
December 12, 2011
The Honorable Timothy F. Geithner
Secretary
Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, D.C. 20220
Dear Secretary Geithner:
The Financial Stability Oversight Council (FSOC) was established to monitor emerging threats to the stability of the financial system and identify risks in U.S. financial institutions. Additionally, the Office of Financial Research (OFR) was created to assist the Council in collecting the necessary data to assess systemic risk. I believe the European sovereign debt crisis could now pose a systemic risk to the U.S. financial system and warrants enhanced monitoring by FSOC. I request a thorough analysis of the risk posed to U.S. financial institutions by the European sovereign debt crisis.
In recent months, U.S. financial markets experienced significant volatility. Many shocks in equities and bond valuations were related to developments in the Euro-zone. We have already witnessed one firm, MF Global Inc., file for bankruptcy as a result of over-exposure to European sovereign debt. Fitch Ratings warned that the U.S. banking industry faces “serious risk” from the European sovereign debt crisis. The Federal Reserve Bank of San Francisco tells us, “a European sovereign debt default may well sink the United States back into recession.”
With multiple signals that the crisis in the Euro-zone does indeed present a risk to the U.S. economy and financial sector, what monitoring and research is FSOC undertaking or requiring covered financial institutions to conduct to assess this systemic risk? Certainly, the Bank for International Settlements and the Depository Trust & Clearing Corporation provide data that can be compiled to show U.S. financial exposure on a static basis. However, events are moving so quickly that real-time, dynamic oversight of the European sovereign debt crisis needs to be a FSOC priority right now.
In 2011, FSOC reported on concentration limits on large financial companies, secured creditor haircuts and the Volcker Rule. The S&P Credit Watch warning against European sovereign debt has the potential to eclipse the risks of the other subjects examined by the Council. This is the type of research and analysis that I believe FSOC must undertake and make publicly available.
Sincerely,
Mark Kirk
United States Senator
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