FSOC - White Papers
Studies Produced by the Financial Stability Oversight Council (FSOC).
- 1 Proposed Recommendations Regarding Money Market Mutual Fund Reform - November 2012
- 2 Report to the Congress on Secured Creditor Haircuts - July 2011
- 3 Macroeconomic Effects of Risk Retention Requirements
- 4 Study & Recommendations on Prohibitions on Proprietary Trading & Certain Relationships with Hedge Funds & Private Equity Funds (see: Volcker Rule)
- 5 Study & Recommendations Regarding Concentration Limits on Large Financial Companies
- 6 References
Following the financial crisis of 2008, the Department of the Treasury released a roadmap for financial reform in June 2009, which called for, among other things, that the SEC address money market mutual fund (MMF) reform. In 2010 the SEC implemented several reforms to 2010 reforms,but noted that they served as a “first step” in addressing MMF reform, and that, they alone, would not have prevented the type of money market "run" as experienced in the crisis.
Internationally, on October 9, 2012, the International Organization of Securities Commissions (“IOSCO”) issued policy recommendations for reforming MMFs that mirrored recommendations by the G-20 and the Financial Stability Board. However, in August 2012, SEC Chair Mary Schapiro announced that the commission would not support money market reform efforts. The following month, September 2012, she sent a request to the FSOC requesting that it take action to address money market reform.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) calls for the Financial Stability Oversight Council to study whether treating a portion of fully secured creditors' claims as unsecured ("secured creditor haircutting") would promote the Act's goals of market discipline and taxpayer protection.
This study analyzes whether secured creditor haircuts should be imposed by the Orderly Liquidation Authority (OLA).
Proponents suggest that haircuts would:
- encourage better credit analysis by creditors;
- protect taxpayers by giving the U.S. a higher priority over secured claims; and
- reduce collateral demands on distressed firms and protect value.
Opponents suggest that haircutting would:
- limiting the availability of secured lending in a crisis;
- negatively impact borrowers' cost of funds; and
- lead financial firms to rely on other types of financing.
After analyzing secured creditor haircutting with regards to the Bankruptcy Code, the Federal Deposit Insurance Act, the OLA, Basel III, and other reforms, the study concludes that "the new supervisory framework provided by Title I of the Dodd-Frank Act can be used to achieve the goals of market discipline and taxpayer protection effectively in the absence of secured creditor haircuts."
The study also includes Appendix A, which gives an overview of cetain forms of secured lending, such as repurchase agreements, stock loan and stock borrow, and "sell-buyback" arrangements.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) mandated a study on the legislation's risk retention requirements. The study, titled "Macroeconomic Effects of Risk Retention Requirements" was released on January 18, 2011 by the Financial Stability Oversight Council (FSOC).
The Dodd-Frank Act imposes credit risk retention requirements by which securitizers, and in certain circumstances originators of asset-backed securities, "must retain not less than 5 percent of the credit risk for any asset unless the asset is a Qualified Residential Mortgage."
The report also warns that risk-retention requirements which are too stringent may harm lending and negatively impact credit.<ref>Fact Sheet: The Financial Stability Oversight Council Chairman’s Study on “Risk Retention”. US Department of the Treasury. Retrieved on January 21, 2010.</ref> The study notes that asset-backed securitization provides important economic benefits by improving the availability and affordability of credit to a diverse group of consumers, businesses, and homeowners.
However, as the recent financial crisis demonstrated, without reform, risks in the securitization process can detract from these benefits. Leading up to the recent crisis, originators and securitizers made loans, bundled them together, and then sold them off to a broad array of outside investors, often without retaining a meaningful share of the risk. Because originators had little interest in whether the borrowers would be able to repay the loans, underwriting standards deteriorated and excessively risky mortgages flooded the market. This helped fuel the financial crisis.
To address this serious flaw in the pre-crisis securitization market, the Dodd-Frank Act generally requires that securitizers or originators have “skin in the game” by retaining at least 5 percent of the credit risk of an asset sold to investors through the securitization process, which should allow market participants to price credit risk more accurately and allocate capital more efficiently.
By putting in place such safeguards, the Dodd-Frank Act can help ensure that securitization is a stable and reliable source of credit for consumers, businesses, and homeowners in the United States.
Study & Recommendations on Prohibitions on Proprietary Trading & Certain Relationships with Hedge Funds & Private Equity Funds (see: Volcker Rule)
In January, 2011, the Financial Stability Oversight Council (FSOC) released an 81-page study and recommendations on proprietary trading by financial institutions, and these institutions' relationships with hedge funds and private equity funds (see: Volcker Rule). It includes the following sections:
- Overview and summary (pp 1-7)
- Statutory mandate and objectives (pp 8-9)
- A summary of selected public comments regarding the proposal (pp 10-14)
- Proprietary Trading -- overview, implementation, supervision, and application (pp 15-55)
- Hedge Funds and Private Equity Fund Investment Restrictions (pp 56-70)
- The Accommodation of the Business of Insurance (pp 71-75)
- Annex A: Public comment topics from Federal Register posting, October 6, 2010 (pp 78-81)
Section 622 of the Dodd-Frank Act establishes a financial sector concentration limit that would prohibit a financial company from merging or consolidating with, or acquiring, another company if the resulting company’s consolidated liabilities would exceed 10 percent of the aggregate consolidated liabilities of all financial companies. This concentration limit is intended, along with a number of other provisions in the Dodd-Frank Act, to promote financial stability and address the perception that large financial institutions are “too big to fail.”
As required by the Dodd-Frank Act, the Financial Stability Oversight Council (FSOC) completed a study of the extent to which the concentration limit would affect: financial stability, moral hazard in the financial system, the efficiency and competitiveness of U.S. financial firms and financial markets, and the cost and availability of credit and other financial services to households and businesses in the United States. The study also contains the FSOC’s recommendations regarding modifications to the concentration limit to mitigate practical difficulties likely to arise in its administration and enforcement, without undermining its effectiveness in limiting excessive concentration among financial companies. These recommendations will be issued for public comment.