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House Financial Services Committee Considers Testimony on FSOC Annual Report

The House Financial Services Committee considered Financial Stability Oversight Council ("FSOC") recommendations to mitigate risks in the financial markets contained in its Annual Report, and testimony by Treasury Secretary Steven Mnuchin. Separately, the committee considered legislation addressing the financial risk of climate change.

In its annual report, the FSOC made a number of recommendations to mitigate risks currently facing the financial market:

Cybersecurity

The FSOC recommended that:

  • Congress pass legislation to allow member agencies to conduct regular assessments of third-party service providers' cybersecurity systems to ensure comprehensive monitoring;
  • government agencies and private firms (i) coordinate efforts and (ii) implement information sharing to reduce the chances of cybersecurity events and to respond more quickly when there is such an event; and
  • the Financial and Banking Information Infrastructure Committee and the Department of Homeland Security work together to address the systemic implications of cybersecurity incidents.

Structural Vulnerabilities

the FSOC recommended:

  • implementing rules to ensure that "large and complex" financial institutions retain enough capital to defend against economic shocks;
  • continuing to (i) collaborate on the monitoring of systemically important financial market utilities ("FMUs") and (ii) focus on FMU resolution planning;
  • overseeing repo markets and considering the extent to which risks remain even after recent reforms;
  • monitoring short-term cash management vehicles using stable net asset values;
  • reviewing available data in order to understand any potential risks posed by private funds;
  • evaluating the use of coordinated tools, such as trading halts in interdependent markets, during times of economic stress;
  • adopting standardized mortgage terms, definitions, etc., to lessen the burden for borrowers and investors concerning servicing rights or when transferring loans; and
  • harmonizing derivatives data globally to provide the appropriate authorities with trade repository data.

Alternative Reference Rates

The FSOC warned that with the ending of LIBOR, adequate preparation is necessary in order to avoid "significant disruptions" across the financial market. To make the appropriate preparations for the transition away from LIBOR, the FSOC emphasized the importance of:

  • market participants establishing transition plans prior to the end of 2021;
  • market participants assessing whether new agreements provide "robust fallback" provisions (e.g., those that are approved by the Alternative Reference Rates Committee ("AARC")); and
  • the AARC continuing to facilitate an organized transition to alternative reference rates.

Prolonged Credit Expansion and Nonbank Mortgage Origination and Servicing

The FSOC highlighted several areas of progress within the housing market, including an increase in the value of residential and certain types of commercial real estate since the 2008 financial crisis. The FSOC suggested:

  • agencies continue to monitor the levels of nonfinancial business leverage, patterns of asset valuations and possible outcomes for the entities they regulate as a means of handling severe losses; and
  • regulators coordinate efforts to gather data and identify risks concerning nonbank companies that are involved in the origination and servicing of residential mortgages.

Financial Innovation

The FSOC stated that as financial innovation concerning digital assets and distribution ledgers advances, regulators must continue to examine the possible risks.

Housing Finance

The FSOC emphasized the importance of housing finance reform in addressing the conservatorships of Fannie Mae and Freddie Mac, codifying existing reforms and implementing a stable housing finance system.

Statement of Secretary Steven T. Mnuchin

Mr. Mnuchin highlighted the growth of the U.S. economy, stating that since the last annual report was released by the FSOC in 2018, the economy has performed "extremely well." Specifically, he stated that the United States surpassed fellow G7 members in growth and that unemployment rates have reached a 50-year low.

Legislative Proposal

The House Committee on Financial Services also considered H.R. 5194, the "Climate Change Financial Risk Act of 2019," which would require the FSOC to create a subcommittee focused on emerging threats to financial stability arising from climate change. Additionally, the bill would mandate that the Federal Reserve Board select climate scientists and climate economists to design climate change scenarios for financial stress tests.

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