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2017 Annual Report Washington, D.C FINANCIAL STABILITY OVERSIGHT COUNCIL OVERSIGHT STABILITY FINANCIAL 2017 ANNUAL REPORT 2017 ANNUAL REPORT ANNUAL 2017 FINANCIAL STABILITY OVERSIGHT COUNCIL 1500 PENNSYLVANIA AVENUE, NW | WASHINGTON, D.C. 20220 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. Financial Stability Oversighti Council i 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 14, 2017. Except as otherwise indicated, data cited in this report are as of October 31, 2017. 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 (CFPB) • 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) ii 2017 FSOC // Annual Report Contents 1 Member Statement ...................................................... 1 2 Executive Summary ..................................................... 3 3 Annual Report Recommendations ............................... 7 3.1 Cybersecurity .........................................................................................7 3.2 Asset Management Products and Activities ...........................................10 3.3 Capital, Liquidity, and Resolution ..........................................................10 3.4 Central Counterparties ..........................................................................11 3.5 Wholesale Funding Markets ..................................................................12 3.6 Reforms Related to Reference Rates .....................................................12 3.7 Data Quality, Collection, and Sharing .....................................................13 3.8 Housing Finance Reform .......................................................................15 3.9 Managing Vulnerabilities in an Environment of Low, but Rising, Interest Rates ...................................................................................................16 3.10 Changes in Financial Market Structure and Implications for Financial Stability ................................................................................................16 3.11 Financial Innovation .............................................................................17 3.12 Regulatory Efficiency and Effectiveness ...............................................17 4 Financial Developments ............................................. 19 4.1 U.S. Treasuries .....................................................................................19 4.2 Sovereign Debt Markets........................................................................21 Box A: European Banking Sector Developments ..........................................24 4.3 Corporate Credit ...................................................................................30 4.4 Household Credit ..................................................................................33 4.5 Real Estate Markets .............................................................................36 Box B: Valuations in Commercial Real Estate Markets ................................. 43 4.6 Foreign Exchange ................................................................................ 45 4.7 Equities ................................................................................................47 4.8 Commodities ....................................................................................... 48 Contents iii 4.9 Wholesale Funding Markets ..................................................................49 4.10 Derivatives Markets ............................................................................ 54 4.11 Bank Holding Companies and Depository Institutions .......................... 66 4.12 Nonbank Financial Companies .............................................................81 4.13 Investment Funds ................................................................................87 Box C: Market Response to Money Market Mutual Fund Reforms ............... 88 4.14 New Financial Products and Services...................................................98 5 Regulatory Developments and Council Activities ... 101 5.1 Safety and Soundness ........................................................................101 5.2 Financial Infrastructure, Markets, and Oversight..................................108 Box D: Stress Testing of Derivatives Central Counterparties .......................110 5.3 Mortgages and Consumer Protection .................................................. 114 5.4 Data Scope, Quality, and Accessibility ................................................. 115 5.5 Council Activities ................................................................................120 6 Potential Emerging Threats and Vulnerabilities ..... 123 6.1 Ongoing Structural Vulnerabilities .......................................................123 6.2 Cybersecurity: Vulnerabilities to Attacks on Financial Services ...........127 6.3 Asset Management Products and Activities ........................................128 6.4 Managing Vulnerabilities in an Environment of Low, but Rising, Interest Rates .................................................................................................128 6.5 Changes to Financial Market Structure and Implications for Financial Stability .............................................................................................129 6.6 Global Economic and Financial Developments .....................................130 Box E: Closing Data Gaps in the U.S. Treasury Market ...............................131 Abbreviations ............................................................... 135 Glossary ........................................................................ 145 List of Charts ................................................................ 155 iv 2017 FSOC // Annual Report 1 Member Statement The Honorable Paul D. Ryan The Honorable Michael R. Pence Speaker of the House President of the Senate United States
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