Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Friday, July 29, 2011

Financial Stability Oversight Council Issues Annual Report on Current State of U.S. Financial System

The Financial Stability Oversight Council released its 2011 Annual Report. 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.
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 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.

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