Financial Regulation: Systemic Risk, February 1, 2022: “The U.S. financial system has experienced two major episodes of financial instability in the 21stcentury (as well as a few minor incidents)—the 2007-2009 financial crisis and instability surrounding the onset of the COVID-19 pandemic in the spring of 2020. In both cases, the federal government and the Federal Reserve responded by extending, on an overwhelming scale, financial assistance to financial markets and institutions to restore stability. Although the government generally recouped principal and interest on this assistance after markets stabilized, trillions of taxpayer dollars were pledged. Systemic risk is financial market risk that poses a threat to financial stability. After the financial crisis, systemic risk regulation was a major focus of regulatory reform, notably in the 2010 Dodd-Frank Act (P.L. 111-203). These reforms can be categorized as attempting to improve the monitoring of systemic risk, contain systemic risk (with a focus on issues that had caused systemic risk during the crisis), and alter the standing authority under which agencies could provide assistance during a crisis. To better monitor emerging threats to financial stability, the Dodd-Frank Act created the Financial Stability Oversight Council (FSOC), headed by the Treasury Secretary and composed of all the federal financial regulators and a few other financial officials. FSOC can make nonbinding recommendations to its member agencies and Congress on how to address emerging threats. It can also designate nonbank financial firms as systemically important financial institutions (SIFIs). To address the “too big to fail” issue, large banks and SIFIs are subject to enhanced prudential regulation (heightened safety and soundness standards) by the Federal Reserve…”