In the wake of the recent financial crisis, many commentators have called for systemic risk or "macroprudential" regulation to help avoid future crises. The Obama Administration's financial regulatory reform proposal of 2009 included many of the proposed elements, giving many—but not all—of these responsibilities to the Board of Governors of the Federal Reserve System (Fed). Using the Administration's plan as a starting point, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act ( H.R. 4173 ), which was signed into law on July 21, 2010, as P.L. 111-203 . The Dodd-Frank Act was a broad-based reform package that included provisions affecting almost every part of the financial system. This report discusses only those provisions related to systemic risk or the Federal Reserve, found mostly in Titles I and XI of the act. This report first discusses systemic risk issues, relating them to events in the recent crisis. It then identifies the Fed's existing powers and responsibilities for systemic risk regulation at the time of the crisis. Finally, it discusses parts of the Dodd-Frank Act involving the Fed and systemic risk, including the creation of a Financial Stability Oversight Council; regulation of systemically significant firms; resolution authority; modifications to the Fed's emergency lending authority and new disclosure requirements; the Consumer Financial Protection Bureau; the regulation of payment, clearing, and settlement systems and activities; and limits on proprietary trading. All financial market participants face risk—without it, financial intermediation would not occur. Some risks, such as the failure of a specific firm or change in a specific interest rate, can be addressed through diversification, insurance, or financial instruments such as derivatives. One definition of systemic risk is risk that can potentially cause instability for large parts of the financial system. Often, systemic risk will be caused by risks that individual firms cannot protect themselves against; some economists distinguish these types of risks as a subset of systemic risks called systematic risks. Systemic risk can come from within or outside of the financial system. An example of systemic risk that came from outside of the financial system were fears (that largely proved unfounded in hindsight) that the September 11, 2001, terrorist attacks on the nation's financial center would lead to widespread disruption to financial flows because of the destruction of physical infrastructure and death of highly specialized industry professionals. Systemic risk within the financial system is often characterized as contagion , meaning that problems with certain firms or parts of the system spill over to other firms and parts of the system. The financial crisis that intensified in September 2008 featured many examples of systemic risk, including runs on financial institutions and illiquidity of asset classes, that will be discussed below. Many of these examples were highly unusual and had not been experienced as acutely by industry participants or financial regulators in the past. Whether firms or regulators were carelessly unprepared for what occurred, or whether these incidents truly could not be reasonably predicted, prevented, or avoided is subject to debate. Some experts, both within the regulatory community and outside of it, have argued that part of the reason regulators failed to prevent the crisis is that regulators were given a mandate to prevent microprudential risk, but no regulator had a mandate to prevent macroprudential risk. (Whether this is actually the case will be discussed below.) Microprudential regulation focuses on identifying risks to an individual firm and requiring firms to protect against those risks, whereas macroprudential regulation focuses on preventing or safeguarding against systemic risks. A scenario can be imagined where microprudential regulators focus on the risks of a firm's actions to itself, but overlook risks posed by those same actions to the system as a whole. Proponents argue that financial regulatory reform should feature a new mandate to regulate systemic risk. At least two arguments have been made against a systemic risk regulator. One argument holds that regulators already had the authority to respond to the systemic risk episodes that occurred in the crisis. Thus, the failure was not the result of a lack of regulator authority but poor use of existing authority. Conversely, it has been argued that those systemic risk episodes could not have been prevented precisely because they were systemic risk episodes—by their nature, the problems that arose were unlikely to be foreseen or neutralized. Either argument produces the conclusion that even with a systemic risk regulator in place, the crisis would not have been avoided. From this logic flows the same conclusion: the creation of a systemic risk regulator would be ineffective at best and harmful to necessary risk-taking behavior at worst because a systemic risk regulator, by design, has incentives to be overly cautious. Specific examples in the following section will help elucidate the perceived need for systemic risk regulation, while the subsequent section explains what regulators could and could not do in each area before the Dodd-Frank Act. Policymakers can manage systemic risk only if the sources of systemic risk can be identified and regulated. A systemic risk regulator's authority to act could be made very broad and open ended to cover all contingencies, or it could be made more narrow to limit discretion and curb "mission creep," increasing the likelihood that once a risk is identified, additional legislative action would be needed to respond to it. This choice has implications for the balance of power between the legislative and executive branches. This section reviews sources of systemic risk that arose during the recent crisis, with the caveat that future crises are unlikely to follow a similar path as past crises. The examples selected below are the types of specific activities that could potentially be regulated for systemic risk. Firms are said to be liquid when they are able to meet current obligations or short-term demand for funds. A firm is said to be solvent but illiquid when its assets exceed its liabilities, but it is unable to liquidate assets rapidly enough to meet current obligations. Markets are said to be liquid when a large volume of financial securities can be traded without price distortions because there is a ready and willing supply of buyers and sellers. Liquid markets are a sign of normalcy—most of the time, investors can take liquidity for granted. Banking and many other types of financial intermediation often involve borrowing on a short-term basis and using the funds to lend or invest on a long-term basis. This creates a mismatch, where a financial institution's assets tend to be less liquid than its liabilities. Under normal financial conditions, an institution's short-term liquidity needs are relatively predictable, allowing it to easily sell or borrow against its long-term assets to meet those needs. In a liquidity crunch of the type that characterized the episode beginning in August 2007 and other historical financial panics, investors are no longer willing to buy a firm's assets (at least not at prices the firm would consider reasonable) or lend it new funds against those assets. In these circumstances, if creditors attempt to withdraw their deposits or call in their loans all at once, an institution will fail even if the value of the institution's assets exceeds its liabilities. This scenario is referred to as a run. Historically, depositors have caused runs on banks, and mainstream economic thought credits the creation of Federal Deposit Insurance Corporation (FDIC) deposit insurance for largely eliminating the threat of depositor runs (because depositors have less incentive to withdraw funds if those funds are guaranteed by the government). In the recent crisis, runs occurred on non-banks when lenders refused to roll over loans as they matured. Money market mutual funds were another part of the "shadow banking" system that was revealed to be susceptible to runs during the crisis. When Lehman Brothers failed, the Reserve Fund, a money market fund holding Lehman Brothers commercial paper, "broke the buck" (the value of its assets fell below par), and this prompted widespread withdrawal requests that could not be met. This set off a run throughout the money market industry, including a run against funds that did not hold Lehman debt. Like any investment fund where funds can be withdrawn on demand, a run is possible when the assets of the fund cannot be immediately liquidated to meet unusually high redemption requests. Money market mutual funds are seen as more susceptible to runs than other types of investment funds because funds can be withdrawn on demand; some funds hold assets, such as commercial paper, that cannot be resold to meet redemption requests; and money market funds are marketed as a safe alternative to bank accounts, with some featuring bank-like options such as check-writing. Runs are subject to contagion. Runs may begin at troubled institutions, but sometimes spread to healthy institutions because of the liquidity mismatch. Because an institution's liquidity is finite, all depositors or creditors have an incentive to withdraw their funds first if they believe that the firm will soon run out of funds, especially in the absence of a governmental guarantee. The sudden withdrawal of funds can cause losses for remaining creditors at an otherwise healthy institution and can ultimately lead to the firm's failure. Runs can also be set off by an otherwise healthy institution's "counterparty" exposure to an unhealthy institution. Financial firms do not operate in isolation—they depend on each other as sources of credit, liquidity, and risk-sharing, and to buy and sell securities. Through these transactions, they become counterparties to each other, with the failure of one counterparty potentially imposing losses on the other. The crisis saw a widespread breakdown in counterparty trust that greatly reduced these transactions, straining the basic functioning of the financial system. Creditors and depositors may not be able to clearly gauge counterparty exposure, but because of the first-mover advantage in a run, may decide to err on the side of caution and withdraw funds. Institutions face a tradeoff between the desire to hold liquidity to avoid the sorts of problems described above and the cost of holding that liquidity, which typically means earning less than through alternative uses of the funds. One way regulators reduce the likelihood of liquidity problems is by requiring that financial firms hold sufficient liquid reserves to meet unforeseen circumstances.