The House Financial Services Subcommittee on Consumer Protection and Financial Institutions considered several bills related to the Financial Stability Oversight Council ("FSOC"). Witnesses included Dino Falaschetti, Director, Office of Financial Research, U.S. Department of the Treasury and Lael Brainard, Governor, Board of Governors of the Federal Reserve System.
In her testimony, Ms. Brainard identified risks to financial stability. These include:
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increasing growth in leveraged lending, which coincides with the significant deterioration of underwriting standards;
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growing rates overall of the net issuance of leveraged loans to risky borrowers;
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the weakening of covenants for leveraged loans by including certain ambiguous and risky elements;
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the packaging of shares of leveraged loans in collateralized loan obligations ("CLOs");
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indirect risk exposures to the banking system through investments in CLOs and credit lines;
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nonbank exposures, which are more difficult to track; and
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the possibility of rising spreads or a deteriorating economy, which could result in (i) downgrades, (ii) refinancing challenges, (iii) rising delinquencies and defaults, and (iv) losses to investors.
The Subcommittee considered the following bills:
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H.R., the "Appropriate Funding and Staffing for the Financial Stability Oversight Council Act", which would increase the budget and staff for the FSOC to $8.5 million and 36 full-time equivalents;
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H.R., "To Amend the Federal Reserve System Act", which would require the FRB to submit a semi-annual report on financial stability conditions; and
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H.R., "To Strengthen the Financial Stability Oversight Council", which would (i) require each FSOC member agency to ensure U.S. financial stability, (ii) amend the nonbank financial company designation process as per Title 1 of Dodd-Frank and (iii) allow FSOC to propose a rulemaking if an agency does not follow an FSOC rulemaking recommendation.
Ms. Brainard noted that the FRB plans to share an assessment of how it will continue to monitor financial vulnerabilities in the "Financial Stability Report," which will be released later in 2019.
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