Meeting of the Financial Stability Oversight Council
AT TODAY’S MEETING OF THE FINANCIAL STABILITY OVERSIGHT COUNCIL (FSOC), regulators approved the release of their 2012 annual report, which describes the activities of the Council as well as outlines significant developments in financial markets and makes relevant recommendations. The FSOC also approved its study on contingent capital requirements which was mandated by the Dodd-Frank Act.
In his opening remarks, Treasury Secretary Timothy Geithner noted that the Council designated eight financial market utilities as systemically important and said the names of those firms will be made public shortly.
Staff provided an overview of both reports. Regarding the annual report, factors contributing to the strengthening of the U.S. financial system are discussed while challenges to economic growth and financial stability are highlighted. These challenges include potential threats arising from Europe, the depressed housing market, and uncertainty over fiscal policy. The report provides a number of recommendations to mitigate these concerns, including measures to address weaknesses in money market funds (MMFs) and housing finance reform, particularly with respect to enhanced mortgage servicing standards and facilitating a greater role for the private market. The report also urges continued implementation of Dodd-Frank reforms and stresses the importance of international coordination with regard to those financial regulatory reform measures.
Geithner specifically pointed to the report’s support for the Securities and Exchange Commission’s (SEC) work regarding MMF reforms and asked SEC Chairman Mary Schapiro for an update on the SEC’s work.
Schapiro said the SEC has made substantial progress over the last year regarding the proposal of two alternatives that would strengthen MMFs’ vulnerability to runs. Those alternatives would include imposing a floating net asset value and requiring a tailored capital buffer with possible redemption restrictions. She did not specify when such proposals would be released.
Both Federal Reserve Chairman Ben Bernanke and Commodity Futures Trading Commission Chairman Gary Gensler voiced their support for the SEC’s work and stated their hope for a measure to be released for public comment.
The report on the use of contingent capital provides an analysis of the feasibility, benefits and costs of such instruments. The study ultimately concludes that contingent capital may help enhance the safety and soundness of large financial firms at lower costs, but does not provide the same loss absorbing capacity as common equity. The study recommends that contingent capital “remain an area for private sector innovation” and encourages regulators to continue studying the instruments. The study notes that contingent capital comes with a set of drawbacks, including further interconnecting bank and nonbank sectors if firms significantly invest in each other’s instruments, which may also spread contagion of financial distress. The study also notes that conversion triggers for contingent capital instruments may result in negative market signals which may further harm firms and make it more difficult to raise capital at a time it is needed most.
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AT TODAY’S MEETING OF THE FINANCIAL STABILITY OVERSIGHT COUNCIL (FSOC), regulators approved the release of their 2012 annual report, which describes the activities of the Council as well as outlines significant developments in financial markets and makes relevant recommendations. The FSOC also approved its study on contingent capital requirements which was mandated by the Dodd-Frank Act.
In his opening remarks, Treasury Secretary Timothy Geithner noted that the Council designated eight financial market utilities as systemically important and said the names of those firms will be made public shortly.
Staff provided an overview of both reports. Regarding the annual report, factors contributing to the strengthening of the U.S. financial system are discussed while challenges to economic growth and financial stability are highlighted. These challenges include potential threats arising from Europe, the depressed housing market, and uncertainty over fiscal policy. The report provides a number of recommendations to mitigate these concerns, including measures to address weaknesses in money market funds (MMFs) and housing finance reform, particularly with respect to enhanced mortgage servicing standards and facilitating a greater role for the private market. The report also urges continued implementation of Dodd-Frank reforms and stresses the importance of international coordination with regard to those financial regulatory reform measures.
Geithner specifically pointed to the report’s support for the Securities and Exchange Commission’s (SEC) work regarding MMF reforms and asked SEC Chairman Mary Schapiro for an update on the SEC’s work.
Schapiro said the SEC has made substantial progress over the last year regarding the proposal of two alternatives that would strengthen MMFs’ vulnerability to runs. Those alternatives would include imposing a floating net asset value and requiring a tailored capital buffer with possible redemption restrictions. She did not specify when such proposals would be released.
Both Federal Reserve Chairman Ben Bernanke and Commodity Futures Trading Commission Chairman Gary Gensler voiced their support for the SEC’s work and stated their hope for a measure to be released for public comment.
The report on the use of contingent capital provides an analysis of the feasibility, benefits and costs of such instruments. The study ultimately concludes that contingent capital may help enhance the safety and soundness of large financial firms at lower costs, but does not provide the same loss absorbing capacity as common equity. The study recommends that contingent capital “remain an area for private sector innovation” and encourages regulators to continue studying the instruments. The study notes that contingent capital comes with a set of drawbacks, including further interconnecting bank and nonbank sectors if firms significantly invest in each other’s instruments, which may also spread contagion of financial distress. The study also notes that conversion triggers for contingent capital instruments may result in negative market signals which may further harm firms and make it more difficult to raise capital at a time it is needed most.
For related documents, please click here.