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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2 0 1 8 F S O C / / Annual Report

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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