2018 FSOC Annual Report (revised June 2019)

2018

ANNUAL REPORT

FINANCIAL STABILITY OVERSIGHT COUNCIL

Financial Stability Oversight Council

The Financial Stability Oversight Council (Council) was established by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and is charged with three primary purposes:

1. To identify risks to the financial stability of the United States that could arise from the material financial distress or failure, or ongoing activities, of large, interconnected bank holding companies or nonbank financial companies, or that could arise outside the financial services marketplace.

2. To promote market discipline, by eliminating expectations on the part of shareholders, creditors, and counterparties of such companies that the U.S. government will shield them from losses in the event of failure.

3. To respond to emerging threats to the stability of the U.S. financial system.

Pursuant to the Dodd-Frank Act, the Council consists of ten voting members and five nonvoting members and brings together the expertise of federal financial regulators, state regulators, and an insurance expert appointed by the President.

The voting members are:

? the Secretary of the Treasury, who serves as the Chairperson of the Council; ? the Chairman of the Board of Governors of the Federal Reserve System; ? the Comptroller of the Currency; ? the Director of the Bureau of Consumer Financial Protection; ? the Chairman of the Securities and Exchange Commission; ? the Chairperson of the Federal Deposit Insurance Corporation; ? the Chairperson of the Commodity Futures Trading Commission; ? the Director of the Federal Housing Finance Agency; ? the Chairman of the National Credit Union Administration; and ? an independent member having insurance expertise who is appointed by the President

and confirmed by the Senate for a six-year term.

The nonvoting members, who serve in an advisory capacity, are:

? the Director of the Office of Financial Research; ? the Director of the Federal Insurance Office; ? a state insurance commissioner designated by the state insurance commissioners; ? a state banking supervisor designated by the state banking supervisors; and ? a state securities commissioner (or officer performing like functions) designated by the

state securities commissioners.

The state insurance commissioner, state banking supervisor, and state securities commissioner serve two-year terms.

F i n a n c i a l S t a b i l i t y O v e r s i g h t C o u n c i l

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Statutory Requirements for the Annual Report Section 112(a)(2)(N) of the Dodd-Frank Act requires that the annual report address the following:

i. the activities of the Council; ii. significant financial market and regulatory developments, including

insurance and accounting regulations and standards, along with an assessment of those developments on the stability of the financial system; iii. potential emerging threats to the financial stability of the United States; iv. all determinations made under Section 113 or Title VIII, and the basis for such determinations; v. all recommendations made under Section 119 and the result of such recommendations; and vi. recommendations-- I. to enhance the integrity, efficiency, competitiveness, and stability

of United States financial markets; II. to promote market discipline; and III. to maintain investor confidence.

Approval of the Annual Report This annual report was approved unanimously by the voting members of the Council on December 19, 2018.

Abbreviations for Council Member Agencies and Member Agency Offices ? Department of the Treasury (Treasury) ? Board of Governors of the Federal Reserve System (Federal Reserve) ? Office of the Comptroller of the Currency (OCC) ? Bureau of Consumer Financial Protection (BCFP) ? Securities and Exchange Commission (SEC) ? Federal Deposit Insurance Corporation (FDIC) ? Commodity Futures Trading Commission (CFTC) ? Federal Housing Finance Agency (FHFA) ? National Credit Union Administration (NCUA) ? Office of Financial Research (OFR) ? Federal Insurance Office (FIO)

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Contents

1 Member Statement....................................................... 1 2 Executive Summary...................................................... 3 3 Annual Report Recommendations................................ 7

3.1.Cybersecurity......................................................................................7 3.2. Central Counterparties.........................................................................8 3.3. Reference Rates..................................................................................8 3.4. Capital, Liquidity, and Resolution..........................................................9 3.5. Wholesale Funding Markets.................................................................9 3.6. Financial Innovation ..........................................................................10 3.7. Data Quality, Collection, and Sharing..................................................10 3.8. Managing Vulnerabilities amid Prolonged

Credit Expansion ...............................................................................11 3.9. Housing Finance Reform....................................................................11 3.10. Changes in Financial Market Structure..............................................12 3.11. Asset Management Products and Activities........................................12 3.12. Regulatory Efficiency and Effectiveness............................................13

4 Financial Developments.............................................. 15

4.1. U.S. Treasuries..................................................................................15 4.2. Sovereign Debt Markets.....................................................................17 4.3. Corporate Credit ...............................................................................25 4.4. Household Credit...............................................................................28 4.5. Real Estate Markets..........................................................................30 4.6. Foreign Exchange..............................................................................39 4.7.Equities ............................................................................................41 4.modities.....................................................................................42 4.9. Wholesale Funding Markets.............................................................. 43 4.10. Derivatives Markets...........................................................................47 Box A:.A New Way to Measure Risk in the Interest Rate Swaps Market...........50

Contents

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4.11. Bank Holding Companies and Depository Institutions..........................57 4.12. Nonbank Financial Companies...........................................................72 4.13. Investment Funds..............................................................................78 4.14. New Financial Products and Services ................................................87 Box B: The Council's Digital Assets Working Group.......................................89

5 Regulatory Developments and Council Activities...... 93

5.1. Safety and Soundness.......................................................................93 5.2. Financial Infrastructure, Markets, and Oversight ................................98 5.3. Mortgages, Consumer Protection, and Community

Reinvestment Act.............................................................................101 5.4. Data Scope, Quality, and Accessibility..............................................102 5.5. Council Activities.............................................................................103

6 Potential Emerging Threats and Vulnerabilities...... 107

6.1. Cybersecurity: Vulnerabilities to Attacks on Financial Services..........107 6.2. Ongoing Structural Vulnerabilities.....................................................107 Box C:.The Transition to Alternative Reference Rates..........................................109 6.3. Managing Vulnerabilities amid Prolonged Credit Expansion............... 112 6.4. Changes in Financial Market Structure and Implications

for Financial Stability....................................................................... 112 Box D:.U.S. Equity Volatility Event on February 5, 2018......................................114 6.5. Asset Management Products and Activities...................................... 115 6.6. Global Economic and Financial Developments.................................. 115 Box E:. Risks Associated with United Kingdom Exit from the

European Union............................................................................... 117

Abbreviations..................................................................119 Glossary......................................................................... 127 List of Charts ................................................................ 137

This publication was revised on June 20, 2019, to add text in Section 6.4 that was originally omitted due to a production error.

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1 Member Statement

The Honorable Paul D. Ryan Speaker of the House United States House of Representatives

The Honorable Nancy Pelosi Democratic Leader United States House of Representatives

The Honorable Michael R. Pence President of the Senate United States Senate

The Honorable Mitch McConnell Majority Leader United States Senate

The Honorable Charles E. Schumer Democratic Leader United States Senate

In accordance with Section 112(b)(2) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, for the reasons outlined in the annual report, I believe that additional actions, as described below, should be taken to ensure financial stability and to mitigate systemic risk that would negatively affect the economy: the issues and recommendations set forth in the Council's annual report should be fully addressed; the Council should continue to build its systems and processes for monitoring and responding to emerging threats to the stability of the United States financial system, including those described in the Council's annual report; the Council and its member agencies should continue to implement the laws they administer, including those established by, and amended by, the Dodd-Frank Act, through efficient and effective measures; and the Council and its member agencies should exercise their respective authorities for oversight of financial firms and markets so that the private sector employs sound financial riskmanagement practices to mitigate potential risks to the financial stability of the United States.

Steven T. Mnuchin Secretary of the Treasury Chairperson, Financial Stability Oversight Council

Joseph Otting Comptroller of the Currency Office of the Comptroller of the Currency

Jay Clayton Chairman Securities and Exchange Commission

J. Christopher Giancarlo Chairman Commodity Futures Trading Commission

J. Mark McWatters Chairman National Credit Union Administration

Jerome H. Powell Chairman Board of Governors of the Federal Reserve System

Kathleen Kraninger Director Bureau of Consumer Financial Protection

Jelena McWilliams Chairman Federal Deposit Insurance Corporation

Melvin L. Watt Director Federal Housing Finance Agency

Thomas E. Workman. Independent Member Having Insurance Expertise Financial Stability Oversight Council

Member Statement

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