FSOC Meeting, July 13, 2011

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Sixth meeting of the Financial Stability Oversight Council.

Contents

Meeting Agenda

The Financial Stability Oversight Council (FSOC) convened its sixth meeting at the U.S. Department of the Treasury on July 13, 2011 to present and discuss the release of the council's annual report. As Secretary Tim Geithner was not present, Deputy Secretary of the Treasury Neal Wolin presided over the meeting. The meeting, which lasted 23 minutes, was held entirely in executive session.

Each voting member will be required to submit a written statement regarding the annual report. The annual report and minutes of the meeting can be found below.

FSOC 2011 Annual Report

The 2011 annual report was presented on July 13, 2011 and approved on July 22, 2011. It consists of:

  1. Member Statement (p. 1)
  2. Executive Summary (p. 3)
  3. Annual Report Recommendations (p. 11)
  4. Macroeconomic Environment (p. 17)
  5. Financial Developments (p. 45)
  6. Progress in the Implementation of the Dodd-Frank Act; Council Activities (p. 115)
  7. Potential Emerging Threats to U.S. Financial Stability (p. 131)
  8. Glossary (p. 151)
  9. Abbreviations (p. 165)
  10. Notes on the Data (p. 171)
  11. List of Charts (p. 173)

From the report:
Financial Developments

  • Funding has not returned to the private securitized mortgage market, which financed a significant portion of household borrowing in the first decade of the 2000s...[Fannie Mae and Freddie Mac], and the Federal Housing Administration now dominate mortgage lending, guaranteeing or insuring over 90 percent of mortgage loan originations. This is not a viable long-term solution, but, given the current fragility of the real estate market, the transition back to more private involvement will require time and care.
  • U.S. banking institutions now have substantially stronger capital and liquidity buffers than before the crisis. However, smaller banks, particularly those with large commercial real estate exposures, have not recovered as quickly as larger banks and have continued to fail at elevated rates.
  • Regulatory reforms and advances in technology have altered the landscape for financial infrastructure, providing financial markets with advances in efficiency and transparency.
  • Compensation practices that incented financial institution employees to take excessive risks are widely acknowledged to have been a contributing factor in the financial crisis. Under pressure from regulators and investors, financial institutions are reforming their compensation practices to better align the interests of managers, traders, and other employees with the long-term health of the firm, although more needs to be done.

Progress of Regulatory Reform

  • The Dodd-Frank Act, which created the Council, closed gaps in the financial regulatory framework and strengthened supervisory, risk management, and disclosure standards in important ways.
  • The new Basel III international standards for banks, negotiated with major input from U.S. regulators, will require banks globally to hold more capital, particularly when they take market risk, and will subject banks to a liquidity standard for the first time, and new accounting rules will serve to limit financial institutions’ off-balance-sheet activities.
  • For the first time, information on trading in swaps will be available through trade repositories. In addition, standardized derivatives will have to be traded on regulated trading platforms and centrally cleared, improving price transparency and reducing counterparty credit risk for market participants.

The Council is also in the process of defining the characteristics under which it will designate nonbank financial institutions for Federal Reserve supervision, and the Federal Reserve, in consultation with other Council member agencies, is establishing tougher supervisory guidelines for large financial institutions.

Potential Emerging Threats to U.S. Financial Stability

  • While the rise of international banking and the important role of foreign banks in U.S. financial markets allow risks to be transferred more broadly across the global economy, they also increase the links across economies and add to the complexity of the financial system.
  • Financial product innovation and growth is crucial to support a vibrant economy, but at times it can result in dramatic changes in business models and can introduce increased complexity, thereby altering the evolution of linkages among firms. Three such products examined in the report are exchange traded funds, structured notes, and collateralized commercial paper.
  • Further, increases in trading volumes and enhanced market liquidity have been fostered, in part, by the increasing use of electronic trading. This liquidity can evaporate in stressed environments, as the flash crash demonstrated. New technology has helped strengthen the resilience of payment systems, data repositories, and other financial infrastructure.
  • If the [European soverign debt] crisis, now affecting Greece, Ireland, and Portugal, were to intensify significantly or spread more broadly across the euro area, then the impact on the U.S. financial system would be greater.
  • The weakness of the current recovery has delayed monetary policy normalization and exacerbated the unsustainable fiscal trajectory in the United States.
  • The recent financial crisis provides a stark illustration of how quickly confidence can erode and financial contagion can spread, as well as how challenging and expensive it is to repair the damage.

Related Documents: Meeting Minutes; 2011 Annual Report

References

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