The Financial Stability Oversight Council (FSOC) will meet Tuesday, May 19 in open and closed sessions. The preliminary agenda for the open session includes a discussion of—and likely an approval to release—FSOC’s 2015 annual report, as well as a discussion of the charters for FSOC’s committees. The agenda for the closed session includes an update on resolution planning for banks and a discussion of international market developments.
Here’s what we’ll be watching for:
What will the annual report say?
We expect FSOC to consider and approve the release of its 2015 annual report, which highlights the activities of the council, significant financial market and regulatory developments, potential emerging threats to financial stability, systemically important financial institution (SIFI) designations, recommendations to resolve jurisdictional disputes between and among member agencies, and recommendations to enhance US financial markets while promoting market discipline and maintaining investor confidence.1 If the council approves the report, we expect it to be released later the same day. The annual report is lengthy—the 2014 report was 147 pages—and includes key areas where FSOC and its member agencies are likely to focus. Will this year’s report contain more information on how FSOC plans to look at activities and practices of asset managers? Will there be more discussion on leveraged lending, a topic highlighted in the 2014 annual report and became the focus of greater regulatory scrutiny? Will FSOC give any hints about new areas where it plans to probe for potential systemic risk such as the business of re-insurance, student loans, or the impact of leaving a zero interest rate environment? FSOC Chairman and Treasury Secretary Jacob J. Lew is required to testify before Congress about the report. We plan to analyze the report separately once it is released.
What will FSOC and its members do if one or more banks fails to submit a credible living will?
We expect the agenda’s update from member agencies regarding resolution planning for bank holding companies (BHCs) to be on the status of resolution plans, or living wills, for the largest US BHCs. Dodd-Frank required living wills for all BHCs with more than $50 billion in assets to show they could be safely liquidated in case of failure. We expect that presentations will be given by the Federal Reserve (Fed) and Federal Deposit Insurance Corporation (FDIC), the two member agencies that oversee the process. FSOC may discuss what actions the Fed and the FDIC might take if any of the updated plans are deemed to be not credible.
Last August, the FDIC told 11 BHCs,2 all of which are large and globally active, that their living wills were “not credible and do not facilitate an orderly resolution under the U.S. Bankruptcy Code,” while the Fed stopped short of saying they were not credible, but did say that these BHCs “must take immediate action to improve their resolvability and reflect those improvements in their 2015 plans.”3 Further, the Fed and the FDIC stated that if the 11 BHCs fail to make sufficient changes to their 2015 plans, the two agencies “expect to use their authority under section 165 (d)” of Dodd-Frank. Section 165 (d) says that if a company fails to submit an adequate resolution plan, the Fed and the FDIC may “impose more stringent capital, leverage, or liquidity requirements, or restrictions on the growth, activities, or operations of the company” until it submits an acceptable plan.4 If the company still has not submitted an acceptable plan two years after these restrictions are put into place, the Fed and the FDIC may even direct a company “to divest certain assets or operations.”5 The 11 BHCs must submit their 2015 plans by July 1.
What international developments is FSOC most concerned about?
The agenda for the closed section also includes “a discussion of international market developments.” This description does not give much hint as to what the council will discuss in this area. However, FSOC may discuss the potential systemic consequences of the sharp appreciation of the dollar, by some measures its strongest surge in 40 years. While that appreciation has recently stabilized, the impact of the strong dollar contributed to the surprisingly slow first—and possibly second—quarter of economic growth. Minutes of recent Federal Reserve meetings have included analysis discussing the potential for continued dollar appreciation. A related issue has been the increasing use of negative nominal interest rates in Europe. Will the FSOC focus on these and other changes in international markets, or will the council be more focused on global regulatory coordination and discuss issues pertaining to the Financial Stability Board (FSB), which coordinates global financial regulation between members of the G-20?
Will FSOC change its committee structure?
The agenda includes a discussion of charters for the council’s committees. FSOC’s bylaws authorize it to establish a Deputies Committee (which has its own bylaws) and other “special advisory, technical, or professional committees as may be useful in carrying out the functions of the council.” The council’s current committee structure consists of a Deputies Committee, a Systemic Risk Committee, and several standing functional committees that handle nonbank designations, heightened prudential standards for SIFIs, orderly liquidation authority and resolution plans, and data. FSOC may discuss putting more structure around its committees. This might include more clearly defining committee membership and duties, a more formalized meeting frequency and structure, rules on meeting attendance, and processes for making decisions and recommendations. Doing so may enhance the predictability and transparency of the council’s work.
1 12 U.S.C. Section 5322 (a) (2) (N).
2 The 11 BHCs were Bank of America, Bank of New York Mellon, Barclays, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan Chase, Morgan Stanley, State Street Corp., and UBS.
3 Board of Governors of the Federal Reserve System and Federal Deposit Insurance Corporation, joint press release, “Agencies Provide Feedback on Second Round Resolution Plans of ‘First-Wave’ Filers,” August 5, 2014. Available at: http://www.federalreserve.gov/newsevents/press/bcreg/20140805a.htm.
4 12 U.S.C. Section 5365 (d) (5) (A).
5 12 U.S.C. Section 5365 (d) (5) (B).