FSOC Open Meeting, July 18, 2012

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Meeting Agenda

On July 18, 2012, the Financial Stability Oversight Council met in an open meeting to consider two agenda items:

  • The FSOC 2012 Annual Report
  • A report to Congress on a study of contingent capital requirements for nonbank financial companies and bank holding companies.

Contingent Capital Study

The study includes policy options and considerations that would be involved in any framework setting contingent capital standards. Specifically, the report contains:

  • an overview of features of contingent capital instruments that would enable them to absorb losses (such as conversion to common equity) and the types of host instruments that would be initially issued to investors as contingent capital;
  • a review of considerations for the pricing of, and conversion ratio for, contingent capital instruments;
  • a discussion of the different types of ―triggers‖ for a conversion, write off or write down of contingent capital instruments, including triggers based on market, macroeconomic, and firm-specific factors, and the potential benefits, costs, and drawbacks of each, both with respect to firms individually and the financial markets as a whole;
  • a general overview of tax, accounting, and legal considerations relevant to contingent capital instruments;
  • conclusions regarding next steps for policymakers in the United States; and
  • an appendix that reviews international developments in the issuance of contingent capital instruments and policy standards for such issuances, including an overview of ongoing discussions by international supervisory bodies and steps taken by some foreign regulators to incorporate contingent capital into regulatory capital.

The study was conducted to comply with a mandate from section 115 of the Dodd-Frank Act.

2012 Annual Report

Key points from the annual report:

  • The macroeconomic environment in the US has been a challenge subsequent to the prolonged recession, with restrained investment spending, modest household income growth, depressed housing market, fiscal policy ineffectiveness, and unsustainable budgetary trends.
  • Market volatility increased sharply in 2011 around the US debt ceiling debate, which led to a downgrade of US sovereign debt, and again in 2012 amid concern over Europe. However, demand for US treasury securities remains strong.
  • Regulators led by the Orderly Liquidation Authority established a framework for unwinding systemically important financial institutions. Also, the Federal Reserve and FDIC submitted the first plans for "living wills" to be submitted by large financials.
  • The CFTC and SEC began finalizing rules for the clearing of OTC derivatives.
  • There is concern about the potential interaction between reliance on short term wholesale funding and incentives to "reach for yield" in the low interest rate environment.
  • Other areas of vulnerability include weaknesses in tri-party repo market infrastructure and among money market funds, which remain susceptible to "runs" because of the commitment to stable net asset values.

Related Documents: Report to Congress on Contingent Capital Study; 2012 Annual Report

To view the FSOC 2012 Annual Report, Click HERE.

To view the executive summary of the annual report, click HERE.

References

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