FSOC - Minutes

b. Interest Rate Risk
The Chairperson recognized Trent Reasons, Senior Policy Advisor at Treasury, who presented on the ongoing work of the Council’s Systemic Risk Committee related to monitoring interest rate risks and preparedness for potential rate shocks.

  • Finally, Mr. Reasons described continued investment margin pressure on life insurers and
    heightened reinvestment risk stemming from the continued low interest rate environment.
  • He stated that life insurers have extended portfolio duration and moved gradually toward lower-rated
    credit.
  • He also reported that risk-based capital ratios have continued to improve gradually but expressed concern that some insurance companies could be less resilient in the event of a rapid increase in rates.

Mr. Patel stated that the proposed interpretive guidance would establish a two-step process for the activities-based approach.

  • First, the Council would monitor markets to identify and assess potential risks to U.S. financial stability.
  • Second, the Council would work with relevant regulators to seek the implementation of actions intended to address the potential risks.

Mr. Patel stated that only if a potential risk or threat cannot be addressed through an activities-based approach would the Council potentially evaluate a nonbank financial company for a potential designation.

  • Jerome Powell, Chairman of the Federal Reserve - noted that the Council’s annual report effectively uses an activities-based approach because it focuses on potential emerging threats and vulnerabilities associated with activities in major financial markets.
  • J. Mark McWatters, Chairman of the NCUA, stated that the activities-based approach requires the Council to follow the money and look for areas of over-concentration in risky, dubiously underwritten assets, loans, investments, and other ill-conceived financial activities.
    • He concluded by stating that if the Council identifies such over-concentration and activities, it should not hesitate to designate entities that are engaged in those activities, if the primary regulator is not doing its job and Congress is not looking for a structural change.
  • Thomas Workman, the Council’s independent member with insurance expertise, stated that the proposed interpretive guidance was the first time he had seen any substantive structure behind the idea of an activities-based approach. He stated that the proposed interpretive guidance incorporated the elements that need to be considered when applying a system-wide approach, while keeping in mind the relationship with the primary regulator and being mindful of the Council’s statutory obligations.
  • Eric Cioppa, Superintendent of the Maine Bureau of Insurance, stated that state insurance regulators believe the most appropriate approach to addressing financial stability risk is for the Council to work in conjunction with existing regulators to identify risks and use regulators’ authorities to address the risks in the first instance

May 30, 2019

Mr. Patel stated that the public comment period for the proposed interpretive guidance had closed on May 13. He noted that the Council had received 26 comment letters,

 

November 7, 2019

  • The Council approved the proposed interpretive guidance on March 6, 2019.

December 4 , 2019

Stephen Ledbetter, Director of Policy in the Office of the Council, and Executive Director of the Council, at Treasury, to provide an overview of the report’s findings and recommendations.

  • He noted that the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) requires the annual report to include Council recommendations to enhance U.S. financial markets, promote market discipline, and maintain investor confidence.

 

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