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Financial Stability Oversight Council Releases First Annual Report

(Archived Content)

WASHINGTON – On the heels of the first anniversary of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Financial Stability Oversight Council released its 2011 Annual Report. The report – the first of its kind issued by the U.S. government – was produced collaboratively by the members of the Council and their staff, and unanimously approved by the Council.
Under the Dodd-Frank Act, the Council must report annually to Congress on a range of issues, including the activities of the Council; significant financial market and regulatory developments; and potential emerging threats to the financial stability of the United States. The report must also make recommendations for promoting market discipline; maintaining investor confidence; and enhancing the integrity, efficiency, competitiveness, and stability of U.S. financial markets.
“The most important thing we can do right now to safeguard financial stability is lift the cloud of default hanging over our economy,” said Treasury Secretary Tim Geithner. “As we move forward, however, we must also work to ensure that our regulatory framework keeps pace with the evolving global financial system. This report provides key recommendations that will build on the progress we’ve made through the Dodd-Frank Act and further strengthen the resilience of the financial markets and our economy.”
In this first annual report, the Council describes the current state of the U.S. financial system and some of the major forces that will shape its development going forward. The Council and its members will continue to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act on a coordinated basis to enhance the integrity, efficiency, transparency, competitiveness, and stability of U.S. financial markets. The report also includes recommendations for additional steps that should be taken to complement these efforts and further strengthen the financial system. Those recommendations include:
1)      Heightened risk management and supervisory attention
  • Construct robust capital, liquidity and resolution plans.
  • Bolster resilience to unexpected interest rate shifts.
  • Maintain discipline in credit underwriting standards.
  • Employ appropriate due diligence for emerging financial products.
  • Keep pace with competitive, technological, and regulatory market structure developments.
2)      Reforms to address structural vulnerabilities
  • Implement structural reforms to mitigate run risk in money market funds. 
  • Elimination of most intraday credit exposure and reform of collateral practices in the tri-party repo market to strengthen the market.
  • Improve the overall quality of mortgage servicing by establishing national mortgage servicing standards and servicer compensation reform.
3)      Continued progress on housing finance
  • To strengthen the housing finance system, the Council member agencies and the Department of Housing and Urban Development should set forth standards and guidelines for participants in the housing finance system, and other actions that strengthen mortgage underwriting.
  • To give further confidence to the market and provide long-term stability to the U.S. financial system, the Council believes Congress must pass responsible legislation to reform the housing finance system. The reform efforts should not further destabilize the fragile housing market.
The report, as approved by the Council, is available at link.