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2019 Annual Report 2019 Annual Report 2019 Annual FINANCIAL STABILITY OVERSIGHT COUNCIL 2019 ANNUAL REPORT 2019 ANNUAL2019 REPORT 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 Consumer Financial Protection Bureau; • 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 Oversight 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 unanimously approved by the voting members of the Council on December 4, 2019. 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) • Consumer Financial Protection Bureau (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 2019 FSOC // Annual Report Contents 1 Member Statement ...................................................... 1 2 Executive Summary ..................................................... 3 3 Annual Report Recommendations ............................... 9 3.1 Cybersecurity .................................................................................... 9 3.2 Ongoing Structural Vulnerabilities ..................................................... 10 3.3 Alternative Reference Rates ............................................................. 13 3.4 Managing Vulnerabilities amid Prolonged Credit Expansion ............... 14 3.5 Nonbank Mortgage Origination and Servicing ................................... 14 3.6 Financial Innovation ......................................................................... 14 3.7 Housing Finance ...............................................................................15 3.8 Regulatory Efficiency and Effectiveness ............................................16 4 Financial Developments ............................................. 17 4.1 U.S. Treasury Markets ..................................................................... 17 4.2 Sovereign Debt Markets ................................................................... 18 4.3 Corporate Credit .............................................................................. 29 Box A: Nonfinancial Corporate Credit .............................................................. 34 4.4 Household Credit ............................................................................. 36 4.5 Real Estate Markets ........................................................................ 38 Box B: Nonbank Mortgage Origination and Servicing ...................................... 42 4.6 Foreign Exchange ............................................................................ 48 4.7 Equities ........................................................................................... 50 4.8 Commodities ................................................................................... 51 4.9 Wholesale Funding Markets ............................................................. 52 4.10 Derivatives Markets ......................................................................... 57 4.11 Bank Holding Companies and Depository Institutions ........................ 67 4.12 Nonbank Financial Companies ......................................................... 83 4.13 Investment Funds ............................................................................ 88 4.14 New Financial Products and Services ............................................... 96 Contents iii 5 Regulatory Developments and Council Activities ..... 99 5.1 Safety and Soundness ..................................................................... 99 5.2 Financial Infrastructure, Markets, and Oversight ..............................105 5.3 Mortgages and Consumer Protection ..............................................110 5.4 Data Scope, Quality, and Accessibility ............................................. 111 5.5 Council Activities ............................................................................ 112 6 Potential Emerging Threats and Vulnerabilities ......115 6.1 Cybersecurity: Vulnerabilities to Attacks on Financial Services ......... 115 6.2 Ongoing Structural Vulnerabilities .................................................... 115 6.3 Alternative Reference Rates ............................................................120 6.4 Managing Vulnerabilities amid Prolonged Credit Expansion ..............121 6.5 Nonbank Mortgage Origination and Servicing ..................................121 6.6 Financial Innovation ........................................................................122 6.7 Global Economic and Financial Developments .................................122 Box C: The Continued Transition to Alternative Reference Rates .......................124 Box D: The Treasury Market Practices Group – Clearing and Settlement Work ....127 7 Abbreviations ........................................................... 129 8 Glossary .................................................................... 133 9 List of Charts ............................................................141 iv 2019 FSOC // Annual Report 1 Member Statement The Honorable Nancy Pelosi The Honorable Michael R. Pence Speaker of the House President of the Senate United States House of Representatives United States Senate The Honorable Kevin McCarthy The Honorable Mitch McConnell Republican Leader Majority Leader United States House of Representatives 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 U.S. financial system, including those described in the Council’s annual report; the Council and its member agencies should continue to implement
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