FINANCIAL STABILITY OVERSIGHT COUNCIL 2020 ANNUAL REPORT 2020 ANNUAL 2020 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 Chair 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 Chairman of the Federal Deposit Insurance Corporation; • the Chairman 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 3, 2020. 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 2020 FSOC // Annual Report Contents 1 Member Statement ...................................................... 1 2 Executive Summary ..................................................... 3 3 Financial Developments ..............................................11 3.1 Household Finance ...........................................................................11 3.2 Nonfinancial Business Finance ..........................................................15 Box A: Nonfinancial Corporate Credit: Financial Market Fragilities and the COVID-19 Pandemic ....................................................................19 3.3 Government Finance .........................................................................24 Box B: U.S. Treasury Market Liquidity at the Onset of the COVID-19 Pandemic 27 Box C: Finances of State and Local Authorities and the COVID-19 Pandemic 33 3.4 Financial Markets ............................................................................35 Box D: Recent Stress in Short-Term Wholesale Funding Markets ............................................................. 43 Box E: Potential Risks in Commercial Real Estate ........................................74 3.5 Financial Institutions ........................................................................ 77 3.6 Financial Market Structure, Operational Challenges, and Financial Innovation .................................................................. 118 3.7 Global Economic and Financial Developments .................................128 4 Council Activities and Regulatory Developments ....141 4.1 Select Policy Responses to Support the Economy ............................141 4.2 Council Activities ............................................................................143 4.3 Safety and Soundness ....................................................................145 4.4 Financial Infrastructure, Markets, and Oversight ..............................154 4.5 Mortgages and Consumer Protection .............................................160 4.6 Data Scope, Quality, and Accessibility .............................................163 Contents iii 5 Potential Emerging Threats, Vulnerabilities and Council Recommendations ...................................... 167 5.1 Nonfinancial Business: Corporate Credit .........................................167 5.2 Financial Markets ...........................................................................168 Box F: Council Statement on Activities-Based Review of Secondary Mortgage Market Activities ............................................171 5.3 Financial Institutions .......................................................................173 5.4 Financial Market Structure, Operational Challenges, and Financial Innovation ......................................................................................175 5.5 Global Economic and Financial Developments .................................184 Box G: “Low-For-Long” Interest Rates and Implications for Financial Stability ...........................................................................186 6 Abbreviations ........................................................... 189 7 Glossary .................................................................... 193 8 List of Charts ............................................................ 203 iv 2020 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 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 risk management practices to mitigate potential risks to the financial stability of the United States. Steven T. Mnuchin Jerome H. Powell Secretary of the Treasury Chairman Chairperson, Financial Stability Oversight Council Board of Governors of the Federal Reserve System Brian P. Brooks Kathleen Kraninger Acting Comptroller of the Currency Director Office of the Comptroller of the Currency Bureau of Consumer Financial Protection Jay Clayton Jelena McWilliams Chairman Chairman Securities and Exchange Commission Federal Deposit Insurance Corporation Heath P. Tarbert Mark A. Calabria Chairman Director Commodity Futures Trading Commission