INTERNATIONAL MONETARY FUND 

United States 

Financial System Stability Assessment 

Prepared by the Monetary and Capital Markets and Western Hemisphere Departments 

Approved by José Viñals and Nicolás Eyzaguirre 

July 9, 2010 

This report summarizes the findings of the Financial Sector Assessment Program (FSAP) for the United 

States. The assessment involved two missions, during October 14–November 3, 2009 and February 17–

March 12, 2010. The team comprised Christopher Towe (head), Christian Durand and S. Kal Wajid 

(co-deputies), Martin Čihák, Francesco Columba, Randall Dodd, Jennifer Elliott, Dale Gray, Simon Gray, 

Andreas Jobst, Elias Kazarian, John Kiff, Aditya Narain, Miguel Segoviano, Ian Tower (all IMF/MCM), 

Ashok Bhatia (IMF/SPR), Andrea Maechler (IMF/WHD), and the following outside experts: 

Susanne Bergsträsser, Richard Britton, Wayne Byres, Andrew Gracie, Frédéric Hervo, Tom Karp, 

Nicholas Le Pan, Goran Lind, Tanis McLaren, and Daniela Russo. Concluding meetings were held with 

Treasury Secretary Geithner, Federal Reserve Chairman Bernanke, and heads of various U.S. agencies. 

A forceful policy response has rolled back systemic market pressures, but the cost of intervention has 

been high and stability is tenuous. Comprehensive reforms are being legislated, addressing many of the issues 

that left the system vulnerable. Given the severity of the crisis and the many weaknesses revealed, bolder action 

could have been envisaged—but the priority now is to ensure effective implementation: 

 Strengthen micro-prudential regulation and supervision and establish clear macro-prudential 

responsibilities: This requires more robust and consistent regulation and consolidated supervision; forceful 

action to improve cooperation among regulatory agencies given their multiplicity; and the closing of 

material gaps in market regulation. Clear responsibilities and accountability for assessing and responding 

promptly to systemic risks, buttressed by clear communication, will be critical. 

 Bolster market discipline: Prompt and proactive application of new resolution mechanisms will be needed 

to ensure the non-disruptive failure of systemic financial groups. There is also a need to reform U.S. credit 

policies that have sought to promote access to credit and home ownership but have helped soften lending 

standards, imposed conflicting mandates on supervisors, and weakened the financial position of the 

housing-related government sponsored enterprises (GSEs). 

 Continue U.S. leadership in building an international consensus on reforms: Many of the issues addressed 

in this assessment are also being considered by the international standard setters, the G20, the Financial 

Stability Board, and others to establish a globally coordinated response to the crisis. To the extent that 

U.S. measures move in advance of these deliberations, it will be important to avoid inconsistent approaches 

that could widen the scope for regulatory arbitrage. 

FSAP assessments are designed to assess the stability of the financial system as a whole and not that of individual 

institutions. They have been developed to help countries identify and remedy weaknesses in their financial sector structure, 

thereby enhancing their resilience to macroeconomic shocks and cross-border contagion. FSAP assessments do not cover 

risks that are specific to individual institutions such as asset quality, operational or legal risks, or fraud.
 2 

 Contents Page

Glossary .................................................................................................................................... 4 

 

Executive Summary .................................................................................................................. 5 

Key Recommendations ..............................................................................................................9 

I. Overall Stability Assessment ............................................................................................... 11

A. Financial Crisis and Risk Factors .......................................................................... 11

B. Stability of Financial Markets ................................................................................ 15

C. Stress Testing Vulnerabilities in the Financial System .......................................... 18

D. Systemic Liquidity Arrangements and Exit Issues ................................................ 26

II. Strengthening Financial Sector Oversight .......................................................................... 27

III. Macrofinancial and Systemic Oversight ........................................................................... 33

A. Regulatory Architecture ......................................................................................... 33

B. Addressing Macro-Prudential Risks ....................................................................... 36

C. Strengthening Crisis Management and Resolution ................................................ 38

Liquidity provision .......................................................................................... 38

Deposit insurance ........................................................................................... 39

Resolution arrangements ................................................................................ 40

IV. Withdrawing Crisis Interventions and Addressing Housing Finance ............................... 41

V. International Linkages and Coordination ........................................................................... 42

Tables 

1. Financial Soundness Indicators for the Banking Sector, 2002–10 .....................................13 

2. Financial System Structure, 2002–10 .................................................................................16

3. Macroeconomic Scenarios for FSAP Stress Tests, 2010–14 ..............................................19

4. Peak Net Loan Loss Charge-Off Rates, 2009–2014 ...........................................................20

5. BHC Capital Needs, 2010–14 .............................................................................................20

6. Systemic Distress-Dependent Losses, 2007–13 .................................................................23

7. Financial System CCA-Based Contingent Liabilities .........................................................25

8. Financial Soundness Indicators for the Insurance Sector, 2004–09 ...................................26
 3 

 Contents Page 

Figures 

1. Banking System Net Charge-Off and Reserve Coverage Ratios, 1990–2010 .....................11

2. TARP Programs, 2008–10 ...................................................................................................12

3. Number of FDIC-Insured ‘‘Problem Institutions,’’ 2001–10 ..............................................14

4. BHC Capital Trends, 1997–2010 .........................................................................................21

5. Scenario Analysis of BHC Tier 1 Common Capital Ratios, 2007–14 .................................21

6. Global Spillover Effects, 2005–09 .......................................................................................24 

7. Total Market-Implied Contingent Liabilities of the Financial Sector .................................24

8. Financial System Linkages to the Rest of the World ...........................................................43

Boxes

1. The TARP and Other U.S. Government Interventions ........................................................12

2. Stress Test Scenarios and Shocks ........................................................................................19

3. The (Current) U.S. Regulatory Framework .........................................................................28

Appendixes 

I. Risk Assessment Matrix ......................................................................................................45
 4 

GLOSSARY

ABCP Asset backed commercial paper 

ABS Asset backed security 

AIG American International Group 

AML/CFT Anti-Money Laundering/Combating the Financing of Terrorism 

BHC Bank holding company 

CCA Contingent claims analysis 

CCP Central counterparty 

CFTC Commodity Futures Trading Commission 

CPP Capital Purchase Program 

CRE Commercial real estate 

FATF Financial Action Task Force 

FBA Federal banking agency 

FDIC Federal Deposit Insurance Corporation 

Fed Federal Reserve 

FFIEC Federal Financial Institutions Examination Council 

FHFA Federal Housing Finance Agency 

FHLB Federal Home Loan Bank 

FICC Fixed Income Clearing Corporation 

FSAP Financial Sector Assessment Program 

FSOC Financial Stability Oversight Council 

GAO Government Accountability Office 

GSE Government sponsored enterprise 

IOER Interest on excess reserves 

LCFI Large complex financial institution 

MBS Mortgage backed security 

NAIC National Association of Insurance Commissioners 

NSCC National Securities Clearing Corporation 

OCC Office of the Comptroller of the Currency 

OMO Open market operations 

OTC Over-the-counter 

OTS Office of Thrift Supervision 

PCA Prompt corrective action 

QFC Qualified financial contract 

RBC Risk-based capital 

ROSC Report on Observance of Standards and Codes 

SCAP Supervisory Capital Assessment Program 

SEC Securities and Exchange Commission 

SIPC Securities Investor Protection Corporation 

TALF Term Asset-Backed Securities Loan Facility 

TARP Troubled Assets Relief Program 
5 

EXECUTIVE SUMMARY

1. The United States has experienced one of the most devastating financial crises in 

a century, but now seems to be slowly recovering. The costs of the crisis have been 

massive, in terms of job and output losses, a significant deterioration in public debt, and 

enormously damaging spillovers to the rest of the world. Helpfully, the U.S. policy response 

was bold and aggressive and has helped restore stability. As a result, most emergency 

liquidity and guarantee facilities have been wound down, and significant legislative steps are 

being taken to strengthen the supervisory and regulatory system.

2. The factors that contributed to the crisis were multi-faceted, but its scale and 

breadth revealed many important weaknesses. In the years prior, the U.S. economy 

experienced an unsustainable lending boom, fueled by low interest rates and capital inflows 

from abroad; a housing bubble; the rapid rise of a “shadow banking system”; a decline in 

underwriting standards; weaknesses in risk management, governance, and compensation 

structures in the financial sector; and the growing use of complex derivative and structured 

credit instruments whose risk properties and contribution to systemic fragility were poorly 

understood. These vulnerabilities were allowed to build as a result of insufficient market 

discipline but also because of critical shortcomings and gaps in the supervisory and 

regulatory framework, both at a micro- and macro-prudential level.

3. Despite the restoration of stability, pockets of vulnerability linger and difficult 

challenges remain in implementing financial sector reforms. This assessment was 

undertaken as a major legislative overhaul of the financial system was being developed, and 

the report was finalized before it was signed into law. Encouragingly, the reforms have 

evolved in a way largely consistent with the team’s recommendations, but implementation 

will be the key test. Critical priorities will be to: (i) strengthen micro-prudential regulation 

and supervision; (ii) establish clear macro-prudential responsibilities; and (iii) strengthen 

market discipline and reform U.S. credit policies. Every effort should be taken to coordinate 

these efforts internationally, to ensure they encourage a “race to the top” rather than 

inconsistent approaches that could widen the scope for regulatory arbitrage. 

Stability is being restored but remains fragile...

4. There remain important risks to the U.S. financial system and its ability to 

support the economic recovery. Bank balance sheets remain fragile and capital buffers may 

still be inadequate in the face of further increases in nonperforming loans. The economy and 

financial system remain vulnerable to an unexpected weakening of demand, credit quality in 

the commercial real estate (CRE) sector, and housing prices. Recent months have also 

illustrated, both domestically and internationally, heightened risks of a sharp deterioration in 

market perceptions of sovereign risk.

5. The team’s stress tests illustrate important vulnerabilities in the bank and 

nonbank sectors. Thanks to substantial public and private capital injections, equity buffers 
6 

now appear adequate from a systemic perspective. Nonetheless, some institutions may still 

face strains even under a baseline macroeconomic scenario, given the lagged effects of the 

economic downturn on credit quality, regulatory demands for higher capital, and the 

continuing adjustment to more sustainable levels of leverage. And even a modestly adverse 

scenario could leave important parts of the system—especially the regional and smaller 

banks—facing further difficulties.

...and crisis management required considerable improvisation

6. The U.S. framework for crisis management and financial stability was severely 

tested and effective implementation of new arrangements will be critical. The experience 

of recent years illustrated the need for a more systematic and forward-looking framework, 

one that clearly defines responsibilities and takes a broader, more systemic view. The new 

systemic oversight council, and a strengthened role for the Fed as the consolidated supervisor 

of systemically important financial institutions and market utilities, are appropriate responses 

to these evident weaknesses. But it will be critically important to ensure that mechanisms are 

in place to ensure effective inter-agency coordination, accountability, and the will and 

capacity to act. 

7. Decisive action was taken to expand official liquidity backstops, when traditional 

central bank standing facilities proved insufficient in the face of systemic stress. Most of 

the crisis support facilities have expired without noticeable market impact but the experience 

of the past few years illustrates the need to retain scope for broad liquidity provision in case 

pressures re-emerge. As the Federal Reserve (Fed) articulates principles to guide future 

lending to nonbank financial intermediaries in the event of another run on the shadow 

banking system, it will be important also to strengthen risk monitoring in such areas. 

Financial regulation and supervision need to be strengthened...

8. Shortcomings in the U.S. regulatory and supervisory system left it ill-placed to 

stem the buildup of systemic risks. The Administration’s white paper on regulatory reform 

detailed the numerous “gaps and weaknesses” and similar assessments have come from the 

heads of the various regulatory agencies. Many of these promise to be addressed by 

legislation and rulemaking, and the focus going forward should be on: 

 Strengthening supervision of risk management, especially among regulated and 

systemic entities, through better implementation of existing rules and guidelines as 

well as new processes and rules with clear accountability to ensure a stronger 

supervisory will to act coupled with more effective management of credit, market, 

liquidity, and operational risks. 

 Reinforcing consolidated supervision and attendant capital and liquidity rules, 

including by addressing legal and administrative constraints on bank holding 
7 

company (BHC) oversight, and by establishing effective and comparable oversight of 

broker-dealer, insurance, finance company, and savings and loan groups. 

 Broadening the perimeter for oversight of securities and derivatives, to cover key 

funding and risk transfer markets, e.g., over-the-counter (OTC) derivatives, 

unregistered structured finance securities, and off-exchange trading platforms. 

 Strengthening oversight of payment, clearing, and settlement infrastructures, 

including by providing the Fed authority over systemic infrastructure providers and 

payment, clearing, and settlement activities. 

 Addressing supervisory gaps and the shadow banking sector, given that the crisis was 

fueled in part by regulatory arbitrage that spurred the rapid growth of leverage and 

maturity transformation outside the banking sector. Steps are needed to level the 

playing field, improve risk management in repo and other funding markets, and 

ensure that all systemic institutions and markets are inside the regulatory perimeter.

...with the fragmentation of U.S. supervision posing challenges...

9. The complexity of the U.S. supervisory system and the diffusion of powers across 

agencies undermined its efficiency, effectiveness, transparency, and accountability. The 

crisis brought home weaknesses in systemic oversight, inter-agency communication, and 

consolidated supervision, compounded by the blurring of lines between banks, brokerdealers, insurers, and other financial intermediaries. Important steps have been taken to 

improve inter-agency coordination, but there remains the need to reinforce this effort to 

clarify the mandate and accountability of each agency and enforce greater cooperation, 

including in the area of information sharing. 

10. Reform legislation seeks to address these issues but bolder action would have 

been preferable. Some streamlining of bank supervision has been achieved, but the number 

of U.S. agencies responsible for financial sector oversight has been increased rather than 

shrunk. The continued fragmentation of the supervisory system means that achieving the 

needed improvement in supervisory coordination and effectiveness will represent a critical 

challenge for the new council of regulators. 

...as will new responsibilities for systemic risk 

11. This new council of regulators is to be mandated to identify and act upon 

systemic risk. Effective discharge of this responsibility will require appropriate authority to 

access information, to mandate council members to undertake coordinated “horizontal” 

(cross-firm) supervisory reviews and market analysis, and to require supervisory and 

regulatory actions to head off emerging systemic threats. It is appropriate to define the Fed as 

its lead agent for systemic risk oversight, given its existing expertise, synergies with 

monetary policy, and responsibility as lender of last resort. 
8 

12. The experience of recent years illustrates the need to reverse perceptions that 

major financial institutions are “too-big-to-fail.” This should involve steps to discourage 

both size and complexity, including by: subjecting systemic firms to stricter enterprise-wide 

standards for capital, liquidity, and risk management; requiring such firms to submit “living 

wills” and enabling supervisors to order pre-emptive changes to group structure to facilitate 

orderly resolution; introducing a special resolution framework to ensure early intervention 

and non-disruptive wind-down of failing systemic conglomerates; and compensation and 

governance rules that discourage excessive risk taking. 

Critical reforms of the GSEs are still pending... 

13. The housing GSEs have helped both underpin and unhinge the U.S. financial 

system, and require fundamental reform. These entities were pivotal in developing key 

markets for securitized credit and hedging instruments, but their implicit guarantee and social 

policy mandates contributed to a softening in credit discipline and a buildup of systemic risk. 

As part of the planned overhaul of the U.S. housing finance system, there would be merit in 

moving to a public–private model, in which the GSEs’ retained portfolios are privatized and 

their social objectives/guarantee functions are re-assigned to an explicitly public utility. 
9 

KEY RECOMMENDATIONS

(ST: short-term, implementation within 12 months; MT: medium-term, 1–3 years; 

HP: high priority; MP: medium priority) 

RECOMMENDATION Timing, 

Priority 

Institutionalize and strengthen systemic risk oversight 

 Establish a council of the regulatory agencies, the Fed, and the Treasury, with a mandate for financial 

stability and powers inter alia to designate potentially systemic financial firms for enhanced regulation 

and supervision focused on systemic risk 

 Define the Fed as the lead executor of this council and the consolidated supervisor of designated 

potentially systemic financial firms, to work with other regulators 

 Provide the Fed oversight authority over systemically important payment, clearing, and settlement 

infrastructure 

ST, HP 

ST, HP 

ST, HP 

Redesign the regulatory architecture 

 Strengthen the Fed’s role in consolidated regulation and supervision, including by enhancing 

coordination with bank and functional regulators and restricting deference requirements 

 Unify safety-and-soundness regulation and supervision of commercial banks and thrifts in a single 

federal agency and eliminate the federal thrift charter 

 Unify federal securities and derivative market regulation into one federal agency 

 Establish an independent and accountable federal consumer protection agency, removing this 

responsibility from the other agencies to enhance their focus and effectiveness in their primary roles 

 Establish a federal office tasked with promoting greater regulatory uniformity in the insurance sector 

ST, HP 

ST, HP 

ST, MP 

ST, MP 

MT, MP

Strengthen micro-prudential regulation and supervision 

Banking 

 Enhance the capacity for group-wide oversight of banking groups and conduct regular inter-agency 

horizontal assessments of complex groups (possibly by establishing domestic supervisory “colleges”) 

 Boost timeliness and forcefulness of supervisory and regulatory interventions to address weaknesses in 

enterprise-wide risk management practices 

 Strengthen channels for cooperation, coordination, and learning from best practices—within and among 

the federal banking agencies (FBAs), market regulators, and the states—to close regulatory gaps and 

prevent regulatory arbitrage, including with regard to charter conversions 

MT, HP 

MT, HP 

MT, HP 

Securities and derivative markets 

 Enhance enforcement and oversight capacities and re-examine capital rules and other prudential 

requirements, such as risk management standards, to ensure that risks are fully addressed 

 Implement the recommendations of the Joint Report to enhance investor protection and improve 

cooperation between the Commodity Futures Trading Commission (CFTC) and Securities and 

Exchange Commission (SEC); close legislative and regulatory gaps identified in the Joint Report 

 Complete the consolidation of equity and equity option market surveillance into a single entity taking 

into account issues of dark pools, high-frequency trading, predatory algorithms, and other technologybased practices 

 Promote standardization of OTC derivatives in order to increase market reliance on exchange trading 

and multilateral clearing and require proper collateralization of all derivative transactions, whether held 

at a clearinghouse or bilaterally 

 Improve transparency of OTC derivative and securities markets by requiring timely reporting of 

transactions and providing better information to investors 

ST, HP 

MT, HP 

ST, MP 

MT, MP 

MT, MP
10 

RECOMMENDATION Timing, 

Priority

Shadow banking and other short-term funding markets 

 Discourage the use of deposit-like instruments outside the formal banking sector and ensure appropriate 

liquidity management by sectors potentially falling within the systemic liquidity safety net 

 Set minimum haircuts for repo transactions and address incentives for the repo clearing banks to extend 

intraday credit in the clearing and settlement cycle 

 Require money market funds to make real-time disclosures of their actual (as opposed to “stabilized”) 

net asset values 

ST, HP 

ST, HP 

MT, MP

Insurance 

 Develop the supervision of insurance groups through consolidated financial reporting and establish 

policies and procedures for the regulation of systemically important institutions, markets, and 

instruments in the insurance sector 

 Increase information sharing and coordination between state regulators and federal authorities, 

including through representation of state regulators in national bodies with responsibilities for systemwide oversight 

 Strengthen regulation of bond insurance and securities lending and modernize solvency requirements

 The National Association of Insurance Commissioners (NAIC) and state legislatures should undertake 

reforms covering the terms of Commissioners’ appointments, the rulemaking powers of state insurance 

departments, and their funding and staffing to bolster specialist skills 

MT, HP 

MT, MP 

MT, MP 

MT, MP 

Strengthen oversight of market infrastructure 

 Allow systemic payment, clearing, and settlement infrastructures to have accounts at the Fed in order to 

settle in central bank money and to have emergency access to Fed liquidity under terms and conditions 

established by the Fed’s Board of Governors as an additional buffer against systemic risk 

 The Fed should continue to assess payment, clearing, and settlement infrastructures for their ability to 

cope with extreme liquidity stress and explore the introduction of a queuing and offsetting mechanism 

in the Fedwire Funds Service similar to those in other G10 countries’ large value payment systems 

 Clearing and settlement infrastructures should enhance their risk management procedures by increasing 

the frequency of stress testing from monthly to weekly and strengthening liquidity back-up facilities 

ST, HP 

ST, MP 

ST, MP 

Enhance crisis management, resolution, and systemic liquidity arrangements 

 Extend the special powers of the Federal Deposit Insurance Corporation (FDIC) to enable receivership 

or conservatorship of BHCs and systemically important financial firms 

 Review the funding arrangements for the Deposit Insurance Fund by removing the ceiling on the size of 

the fund and increasing its size 

 Implement “living will” requirements for large and complex financial groups, and address group 

structures that appear likely to severely impede effective resolution 

 Consider widening the range of counterparties and collateral used for open market operations (OMO) 

and articulating policies for future Fed lending to nonbank financial firms to enhance the scope and 

predictability of systemic liquidity provision 

ST, HP 

MT, MP 

MT, HP 

MT, HP 

Address too-big-to-fail issues and the future of the GSEs 

 Discourage size and complexity by subjecting systemic financial institutions to more stringent 

prudential requirements 

 Provide regulators the authority to take pre-emptive actions when vulnerabilities build at potentially 

systemic financial firms 

 Reform the housing GSEs, possibly by privatizing their retained asset portfolios and re-assigning 

responsibilities for social objectives/system support to an explicitly guaranteed public utility 

ST, HP 

ST, HP 

MT, HP 
11 

I. OVERALL STABILITY ASSESSMENT

A. Financial Crisis and Risk Factors 

14. Decades of lax regulation of maturity and risk transformation rendered the 

U.S. financial system vulnerable to crisis. In the lead up to the crisis, the “originate-todistribute” model for residential mortgage and other debt gave rise to increasingly complex 

structured securities, credit derivatives, and funding chains with embedded leverage and 

poorly understood risk characteristics. This process was facilitated by a shadow banking 

sector that provided short-term wholesale funding of longer-maturity, illiquid, structured 

credit. Much of the activity was driven by regulatory gaps and arbitrage, information 

asymmetries, and diluted underwriting standards. 

15. The trigger for the crisis was the collapse of the subprime mortgage segment. 

This led to downgrades of a broad range of structured debt securities that impaired investor 

confidence and caused a seizing of markets. Mistrust of counterparties and volatility of 

collateral values led to a jump in repo “haircuts” and a run on wholesale funding. Spectacular 

failures and losses resulted. 

16. The authorities responded aggressively to avert systemic collapse. The Fed 

relaxed monetary policy and provided liquidity support to depository institutions and critical 

nonbank financial firms and markets.1

 The Treasury intervened through its Troubled Assets 

Relief Program (TARP; Box 1), injecting capital into financial holding companies and firms, 

and guaranteeing stable net asset values across the money fund industry. Significant 

exceptional financial support was provided to systemically important, failing institutions, and 

the FDIC guaranteed new debt of banks 

and holding companies. 

17. Bank balance sheets have been 

strengthened but remain vulnerable. 

Capital positions have been improved and 

banks are provisioning substantially 

against loan losses (Figure 1 and 

Table 1). Nonetheless, although the ratio 

of reserves to noncurrent loans showed 

its first signs of stabilization by the first 

 

1

 The Fed provided liquidity through its discount window and a new Term Auction Facility; introduced funding 

mechanisms to support primary dealers and the tri-party repo market, money market mutual funds and the asset 

backed commercial paper (ABCP) market, other commercial paper issuers, selected securitizations, and 

offshore dollar markets; and mounted a Large Scale Asset Purchase program to support mortgage and other 

private credit markets. 

Figure 1. United States: Banking System Net Charge-Off 

and Reserve Coverage Ratios, 1990–2010 

Sources: Fed, FDIC, and Haver Analytics. 

0

50

100

150

200

250

0

1

2

3

4

5

1990 1995 2000 2005 2010

Other

Commercial & Industrial

Commercial Real Estate

Residential Real Estate

Total Real Estate

Consumer

Coverage Ratio

(reserves/noncurrent 

loans; right)

Charge-offs

(pct; left)
12 

Box 1. The TARP and Other U.S. Government Interventions 

An aggressive policy response helped avert the collapse of the U.S. financial system. 

Coordinated actions were taken by the Treasury, the Fed, the FDIC, and other public bodies.

The TARP played a critical role in this 

success. In September 2008, the Treasury 

was given authority to use $700 billion 

under the TARP to purchase assets, make 

equity investments and loans, and provide 

asset guarantees in a range of financial 

institutions and markets. The program, now 

subject to strict transparency and reporting 

requirements and close monitoring by the 

Special Inspector General for the TARP, 

focused on three key areas: (i) providing 

capital infusions to financial institutions 

through the Capital Purchase Program 

(CPP) or more-targeted assistance to 

particular institutions; (ii) supporting 

securitization markets critical to restoring credit to consumers and small businesses through the 

Term Asset-Backed Securities Loan Facility (TALF); and (iii) mitigating the foreclosure crisis 

through a mortgage modification program. So far, some $310 billion of capital has been 

provided to around 400 financial institutions.

A range of other government measures were also taken. At the height of the crisis, the 

Treasury also guaranteed over $3 trillion in assets to prevent runs on money market mutual 

funds. The FDIC extended the coverage of insured deposits to $250,000, provided an unlimited 

guarantee of transactions deposits, and guaranteed new bank debt issues. The Fed provided a 

range of liquidity support to depository institutions, securities dealers, select foreign central 

banks, and key markets, and conducted unconventional large-scale asset purchases to support 

the housing sector and the economy.

By end-FY2009, the fiscal cost of stabilizing the financial system was estimated at less than 

$120 billion, lower than initially expected. In September 2009, the Treasury ended its 

Temporary Guarantee Program for money market funds, with no losses and earning $1.2 billion 

in fees. Issuances under the FDIC’s Debt Guarantee Program ended in October 2009, with over 

$10 billion in fees collected thus far. The Fed’s crisis-related programs have expired 

progressively as scheduled, except for the foreign exchange swap lines with foreign central 

banks, which were re-opened in May 2010 in response to turbulence in Europe. The CPP has 

effectively been closed, earning $19 billion in dividends, interest income, and other income and 

representing a 17 percent return on investment on the top-25 institutions that have fully repaid. 

The TARP was extended until October 3, 2010, to support small business lending, foreclosure 

mitigation efforts, and TALF commitments.

Figure 2. United States: TARP Programs, 2008–10 

(In billions of dollars) 

0

100

200

300

400

500

600

Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Mar-10 Apr-10 Jun-10

Home affordable modification program

Consumer and business lending initiative investment program (TALF)

Asset guarantee program (Citi) 1/

Targeted investment program repayments

Targeted investment program (Citi+BoA)

Auto programs, net of repayments

Systemically significant failing institution (AIG)

CPP repaid

CPP outstanding

Source: www.FinancialStability.gov
13 

2002 2003 2004 2005 2006 2007 2008 2009 March 2010

Capital adequacy

Total regulatory capital to risk-weighted assets 13.0 13.0 13.2 12.9 13.0 12.8 12.8 14.3 14.7

Tier 1 capital to risk-weighted assets 10.4 10.5 10.8 10.6 10.5 10.1 10.0 11.7 12.1

Core capital (leverage) ratio 2/ 7.9 7.9 8.1 8.3 8.2 8.0 7.5 8.7 8.6

Equity capital to total assets 9.2 9.2 10.3 10.3 10.5 10.3 9.3 11.0 10.9

Asset quality

Sectoral distribution of credit 3/

Securities 26.7 27.0 26.1 24.9 24.2 23.3 22.0 25.6 26.0

Commercial and industrial loans 16.9 14.9 14.0 14.3 14.7 16.1 17.3 14.8 14.1

Real estate loans 35.4 36.7 38.7 40.1 41.6 40.5 40.8 41.8 41.3

Consumer loans 10.4 10.7 10.6 9.7 9.2 9.0 9.3 9.2 9.9

Other loans and leases 10.6 10.7 10.7 11.0 10.3 11.1 10.5 8.6 8.6

Nonperforming loan ratio 4/ 1.4 1.1 0.8 0.7 0.8 1.4 2.9 5.4 5.5

Nonperforming loans net of provisions to capital 5/ -10.8 -9.8 -8.4 -6.5 -2.1 1.0 6.1 14.8 13.1

Reserve coverage ratio 6/ 123.7 140.3 168.0 154.8 134.8 91.7 75.3 58.1 64.2

Loan-loss provisions to loans 1.7 1.6 1.3 1.2 1.1 1.3 2.2 3.1 3.5

Net charge-off rates 7/

Business loans 1.8 1.1 0.5 0.4 0.5 0.8 1.6 2.6 1.9

Loans secured by real estate 0.2 0.3 0.1 0.1 0.1 0.4 1.8 2.9 2.2

Residential 0.2 0.4 0.1 0.1 0.2 0.5 1.6 2.8 2.4

CRE 0.2 0.1 0.1 0.1 0.1 0.4 2.2 3.3 2.1

Consumer loans 3.0 3.1 2.8 3.2 2.4 2.8 4.2 5.4 6.5

Profitability and efficiency

Return on assets 8/ 1.3 1.4 1.3 1.3 1.3 0.8 0.0 0.1 0.5

Return on equity 9/ 14.1 15.1 13.2 12.4 12.3 7.8 0.4 0.9 5.0

Net interest income to gross income 60.1 58.1 59.1 58.7 57.9 60.2 63.3 60.3 63.9

Noninterest expenses to gross income 56.2 56.6 58.0 57.3 56.8 59.5 59.4 55.5 54.4

Noninterest income to average earning assets 2.6 2.7 2.4 2.5 2.4 2.2 1.8 2.3 2.2

Net operating income to average assets 1.2 1.3 1.2 1.2 1.2 0.8 0.1 0.1 0.5

Net interest margin 10/ 4.0 3.7 3.5 3.5 3.3 3.3 3.2 3.5 3.8

Yield on earning assets 11/ 6.2 5.4 5.0 5.7 6.5 6.8 5.4 4.8 4.9

Cost of funding earning assets 12/ 2.2 1.6 1.5 2.2 3.1 3.5 2.2 1.3 1.0

Retained earnings to average equity 3.9 3.7 6.2 5.6 4.4 -0.8 -3.6 -2.5 3.8

Earnings coverage of net charge-offs 13/ 417 503 632 706 882 496 197 145 144

Share of institutions with earnings gains 73.6 58.4 62.7 64.3 55.4 48.5 36.3 41.0 52.4

Liquidity

Liquid assets to total assets 14/ 24.4 24.2 22.6 21.4 20.7 19.0 22.7 27.1 27.2

Net loans and leases to total deposits 89.2 89.7 91.7 93.0 91.5 92.7 85.2 76.5 78.7

Net loans and leases to core deposits 15/ 120.9 122.2 129.4 133.9 136.5 137.1 122.7 105.8 107.7

Sensitivity to market risk

Derivative exposure to tier 1 capital 16/ ... ... ... ... 126.9 155.5 210.6 128.9 ...

Annual change in house price index 17/ 6.9 7.0 10.5 11.2 4.8 -0.1 -4.4 -4.5 -6.8

Memorandum items:

Number of institutions 9,354 9,181 8,976 8,833 8,680 8,534 8,305 8,012 7,932

Household debt-service ratio 18/ 13.2 13.2 13.3 13.8 13.9 13.9 13.6 12.7 12.5

Sources: Fed, FDIC, and Federal Housing Finance Agency (FHFA).

2/ Tier 1 (core) capital to average total assets less ineligible intangibles. 

3/ Shares of total gross credit; commercial banks only.

4/ Loans and leases 90 days or more past due or in nonaccrual status to gross loans and leases. 

5/ Nonperforming loans net of allowances for loan and lease losses to tier 1 capital.

6/ Allowances for loan and lease losses to nonperforming loans.

17/ FHFA national index, not seasonally adjusted.

18/ Debt-service payments to personal disposable income.

1/ All FDIC-insured commercial banks and savings associations unless otherwise indicated.

Table 1. United States: Financial Soundness Indicators for the Banking Sector, 2002–10 1/

(In percent unless otherwise indicated)

7/ Gross charge-offs less recoveries to average gross loans and leases by sector; commercial banks only.

11/ Gross interest income to average earning assets. 

12/ Gross interest expense to average earning assets. 

13/ Income before income taxes and extraordinary items and other adjustments, plus provisions for loan and lease losses and allocated transfer risk reserve, plus gains 

on securities not held in trading accounts, to net charge-offs.

14/ Liquid assets defined here as cash and due from depository institutions plus total investment securities.

15/ Core deposits defined as total domestic deposits less time deposits of $100,000 or more held in domestic offices. 

16/ Derivative exposure defined as credit equivalent amount of current plus potential future exposure; derivative reporters only (e.g., 1,124 institutions at end-2009).

8/ Net income after taxes and extraordinary items to average total assets.

9/ Net income after taxes and extraordinary items to average equity.

10/ Net interest income to average earning assets.
 14 

quarter of 2010, nonperforming loans and net charge-offs seem likely to rise further owing to 

high jobless rates and still significant weaknesses in the real estate sectors. About 

$1.4 trillion of CRE loans will mature in 2010–14, nearly half of which are already seriously 

delinquent (90 days or more past due) or 

“underwater” (loan values exceeding 

property values). The rising gap between 

residential real estate foreclosures and 

seriously delinquent loans suggests the risk of 

further bank losses, especially for regional 

and community banks, as foreshadowed by 

the growing number of such firms on the 

FDIC’s “problem bank” list (Figure 3). 

Furthermore, the very high level of 

underwater mortgages increases the risk of 

strategic defaults and further losses to banks 

and mortgage backed security (MBS) 

investors. 

18. Although stability seems to have been 

restored, the macrofinancial situation is still 

fragile. The economy and some key financial markets continue to depend heavily on fiscal, 

monetary, and financial policy support, and the output gap is expected to remain wide for 

many years. Household balance sheets are undergoing significant adjustment and the sector 

continues to deleverage rapidly. Corporate default probabilities have been falling, but credit 

conditions for the smaller firms are expected to tighten further. 

19. As illustrated by recent events in Europe, macroeconomic risks remain 

significant.

2

 These risks persist with much less fiscal and monetary policy leeway to absorb 

additional unexpected financial shocks. Key concerns include:

 Sluggish growth: The near-term outlook could worsen with a slower-than-expected 

recovery. In conjunction with tight financial conditions, this could dampen 

borrowers’ ability to honor their debts and further reduce credit demand, thereby 

undermining balance sheet rehabilitation and earnings in the financial sector. 

 A sharp worsening of real estate conditions: A sharp rise in mortgage rates or a new 

wave of foreclosures could create a self-reinforcing price dynamic between low 

property prices, tight financial conditions, and a further rise in delinquencies and

 

2

 Macroeconomic developments and risks are covered in more detail in the accompanying staff report for the 

2010 Article IV consultation with the United States. 

Figure 3. United States: Number of FDIC-Insured 

“Problem Institutions,” 2001–10

Source: FDIC.

114 136 116 80 52 50 76

252

305

416

552

702

775

0

100

200

300

400

500

600

700

800

900

Dec01Dec02Dec03Dec04Dec05Dec06Dec07Dec08Mar09Jun09Sep09Dec09Mar10
 15 

 foreclosures. Small or midsize depositories with significant exposures to CRE and 

limited access to private capital could be especially vulnerable. 

 Mounting fiscal deficits and debt: The Administration’s 2011 budget proposal 

projected federal debt to rise to over 70 percent of GDP by 2020. Especially in light 

of recent events in Europe, an erosion of market confidence could trigger higher 

interest rates and impair the process of balance sheet repair. 

B. Stability of Financial Markets 

20. The U.S. financial system comprises a broad range of intermediaries and 

markets with deep linkages to the global financial system (Table 2). About one-quarter of 

aggregate financial assets is held by depository institutions and slightly over one-fifth is 

owned or guaranteed by the GSEs. Private securitization pools, securities broker-dealers, 

pension and investment funds, and insurance firms account for most of the rest. A uniquely 

large share of intermediation takes place in arm’s-length credit and capital markets, including 

vast and essentially borderless OTC derivative markets that are subject to fewer market 

conduct and prudential regulations and where notional amounts are many times GDP. The 

crisis revealed shortcomings in certain OTC markets, including with regard to collateral, 

haircutting, and margin requirements. 

21. Financial markets have broadly stabilized but remain more volatile than before 

the crisis. Although equity and fixed income markets recovered some of their lost ground 

and credit spreads have narrowed, growing concerns regarding sovereign and banking risks 

in Europe have once again roiled sentiment and raised broader concerns regarding public 

debt sustainability, including in the United States. In addition, some securities markets have 

not recovered—e.g., trading volume in the OTC municipal bond market is less than half of 

what it was before the crisis and private-label residential mortgage securitization markets 

remain essentially closed. Given the importance of these markets for credit flow, their 

impairment could weigh on the economic recovery.

22. Exchange-traded securities and derivative markets, while suffering heightened 

price volatility, weathered the crisis relatively well. Derivative transactions (futures and 

options) conducted on exchanges maintained liquidity and tight bid-ask spreads, facilitating 

price discovery and risk management. However, concerns that some market participants 

might take advantage of issuers that were temporarily in distress by engaging in short selling, 

thereby further undermining confidence, prompted the SEC to strengthen its rules concerning 

failures to deliver on short sales and impose a temporary ban on short selling for designated 

financial stocks.3

 

3

 The ban exempted certain bona fide market-making activities. 
 16 

% share % GDP % share % GDP % share % GDP % share % GDP % share % GDP

Fed 1.9 6.9 1.4 6.4 3.6 15.1 3.6 15.7 3.7 16.0

Depository institutions 24.0 88.3 22.1 97.8 25.9 109.0 25.9 112.6 26.5 113.6

Commercial banking 19.1 70.0 18.0 79.5 22.1 92.8 22.5 97.8 23.0 98.9

U.S.-chartered commercial banks 14.1 51.8 13.3 58.7 15.9 67.1 16.0 69.5 16.4 70.2

Foreign banking offices in U.S. 2/ 2.1 7.7 1.6 7.1 2.6 10.9 2.0 8.8 2.1 8.9

Banks in U.S.-affiliated areas 0.2 0.7 0.2 0.8 0.2 0.7 0.2 0.7 0.2 0.7

BHCs 3/ 2.7 9.8 2.9 12.9 3.4 14.2 4.3 18.8 4.4 19.0

Savings associations 4/ 3.5 12.9 2.9 12.9 2.5 10.5 2.0 8.7 2.0 8.6

Credit unions 1.5 5.4 1.2 5.4 1.3 5.6 1.4 6.1 1.4 6.1

GSEs 14.8 54.5 12.3 54.3 13.7 57.8 13.3 58.0 12.7 54.3

Agencies and GSEs 5/ 6.6 24.4 5.1 22.5 5.6 23.5 4.8 20.9 11.0 47.2

Agency- and GSE-backed mortgage pools 6/ 8.2 30.2 7.2 31.7 8.2 34.4 8.5 37.2 1.7 7.2

“Shadow banking system” 21.4 78.5 23.5 103.9 24.5 103.3 20.9 90.8 19.3 83.1

Issuers of ABSs 5.1 18.9 7.3 32.1 6.7 28.4 5.4 23.4 4.5 19.2

Money market mutual funds 5.8 21.2 4.9 21.5 6.2 26.0 5.2 22.5 4.7 20.1

Securities broker-dealers 3.5 12.8 5.0 22.0 3.6 15.4 3.3 14.4 3.3 14.3

Finance companies 7/ 3.8 13.8 3.1 13.6 3.0 12.8 2.6 11.5 2.7 11.4

Real estate investment trusts 0.3 1.0 0.5 2.2 0.4 1.8 0.4 1.8 0.4 1.8

Funding corporations 8/ 2.9 10.8 2.8 12.4 4.5 18.9 4.0 17.2 3.8 16.4

Insurance companies 11.1 40.8 10.1 44.8 9.6 40.3 9.8 42.9 10.1 43.2

Life insurance companies 8.7 31.9 8.0 35.2 7.4 31.3 7.7 33.4 7.8 33.7

Property and casualty insurance companies 2.4 9.0 2.2 9.7 2.1 9.0 2.2 9.5 2.2 9.5

Investment and pension funds 26.8 98.3 30.5 134.6 22.7 95.5 26.5 115.4 27.7 119.1

Mutual funds 9.5 34.8 12.6 55.6 8.9 37.6 11.1 48.2 11.7 50.1

Closed-end and exchange-traded funds 0.4 1.4 0.5 2.3 0.3 1.4 0.4 1.6 0.4 1.6

Private pension funds 9.6 35.1 10.3 45.4 7.6 31.9 8.7 37.9 9.1 39.2

State and local government retirement funds 5.0 18.4 5.2 22.8 3.8 16.1 4.3 18.6 4.5 19.1

Federal government retirement funds 2.3 8.5 1.9 8.5 2.0 8.5 2.1 9.2 2.1 9.0

Total financial system 100.0 367.2 100.0 441.7 100.0 420.9 100.0 435.3 100.0 429.3

Memorandum items:

Equity market capitalization

NYSE 81.9 86.1 79.6 111.2 79.4 63.8 78.5 81.9 78.0 85.1

NASDAQ 18.1 19.1 20.4 28.5 20.6 16.6 21.5 22.4 22.0 24.0

Average monthly bond market trading volume

Treasury and municipal securities 59.9 3.6 58.7 4.2 55.4 4.0 51.6 2.9 55.5 3.3

Agency MBSs 24.5 1.5 31.6 2.3 33.4 2.4 36.8 2.1 34.1 2.0

Corporate debt 2.6 0.2 1.6 0.1 1.1 0.1 2.1 0.1 2.1 0.1

Agency debt 13.0 0.8 8.2 0.6 10.1 0.7 9.5 0.5 8.2 0.5

Total bond market volume 100.0 6.0 100.0 7.2 100.0 7.2 100.0 5.6 100.0 6.0

Average monthly equity market trading volume

NYSE 58.7 8.2 59.1 12.9 58.0 12.0 52.9 6.8 47.3 6.6

NASDAQ 41.3 5.8 40.9 9.0 42.0 8.7 47.1 6.0 52.7 7.3

Yearly options contract volume 9/

Equity options 90.9 ... 90.3 ... 91.6 ... 92.9 ... 91.5 ...

Non-equity options 9.1 ... 9.4 ... 8.3 ... 6.8 ... 7.9 ...

Futures 0.0 ... 0.3 ... 0.1 ... 0.3 ... 0.7 ...

New capital issuance 10/

Total debt 89.6 12.7 91.0 17.7 79.4 6.5 80.9 7.8 89.0 9.1

Straight corporate debt 42.9 6.1 41.2 8.0 59.6 4.9 64.7 6.3 76.0 7.7

Convertible debt 2.1 0.3 2.8 0.5 3.0 0.2 2.4 0.2 2.4 0.2

ABSs 25.2 3.6 18.6 3.6 13.5 1.1 12.1 1.2 9.9 1.0

Private-label MBSs 19.4 2.8 28.3 5.5 3.4 0.3 1.7 0.2 0.8 0.1

Total equity 10.4 1.5 9.0 1.8 20.6 1.7 19.1 1.8 11.0 1.1

Common stock 7.8 1.1 6.9 1.3 14.0 1.1 18.5 1.8 9.7 1.0

Preferred stock 2.5 0.4 2.2 0.4 6.6 0.5 0.7 0.1 1.3 0.1

Sources: Fed, Securities Industry and Financial Markets Association, and World Federation of Exchanges.

1/ Total financial assets; some assets may be double-counted if they appear on the balance sheets of more than one group of financial intermediaries. 

2/ Branches and agencies of foreign banks, Edge Act corporations, and Agreement corporations.

3/ Unconsolidated; holding company assets only.

4/ Savings and loan associations, mutual savings banks, and federal savings banks.

5/ Housing GSEs, Federal Agricultural Mortgage Corporation, Farm Credit System, Financing Corporation, Resolution Funding Corporation, and Sallie Mae (in 2002).

6/ Ginnie Mae, Fannie Mae, Freddie Mac, Federal Agricultural Mortgage Corporation, and Farmers Home Administration pools.

7/ Includes retail captive finance companies and mortgage companies.

9/ Based on number of contracts traded; figures in March 2010 column are for January to mid-June 2010.

10/ Figures in March 2010 column are annualized.

8/ Funding subsidiaries, nonbank financial holding companies, custodial accounts for reinvested collateral of securities lending operations, Fed lending facilities, and 

funds associated with the Public-Private Investment Program.

Table 2. United States: Financial System Structure, 2002–10 1/

(In percent unless otherwise indicated)

2002 2007 2008 2009 March 2010
 17 

23. The opacity of OTC markets exacerbated uncertainty and contributed to the 

depth and scope of the crisis.

4

 Trading volumes for the more bespoke products—including 

many forwards, options, swaps, credit derivatives, and private-label pool securities—fell 

sharply and trading sometimes ceased altogether, undermining the usefulness of market 

prices for valuing and hedging positions. These markets suffered from critical weaknesses, 

including: lack of transparency in pricing; opacity of the risk characteristics of many of the 

instruments (especially collateralized debt obligations); and inadequate collateralization.

Lack of publicly available information on derivatives transactions and financial institutions’ 

exposures to derivative counterparties exacerbated market uncertainty about risk 

management, losses, and capital positions.5 Moreover, weak margining practices were a key 

vulnerability. The widespread rehypothecation of collateral to secure derivative or repo 

trades exacerbated system-wide leverage and left the system highly vulnerable.6

24. Markets for structured credit products were subject to significant valuation 

uncertainty with substantial knock-on effects. There was a heavy reliance on third-party 

ratings to gauge risk and an under-appreciation of the vulnerability of these instruments to 

sharp downgrades and price declines. In addition, given the degree to which such products 

were funded by maturity mismatched portfolios (structured investment vehicles, securities 

lending, etc.), downgrades and price declines fed disruptive deleveraging. Markets for ABCP 

experienced similar problems. 

25. Legislative and other initiatives now seek to strengthen SEC oversight of the 

credit rating agencies.New mechanisms will be established to avoid “ratings shopping” by 

issuers and to enhance the SEC’s regulatory authority to address conflicts of interest at credit 

rating agencies. 

26. The securitization market has remained dysfunctional since 2007 and could 

become a drag on the economic recovery. Almost all of the recent issuance of U.S. privatelabel MBSs has comprised re-securitizations of formerly “AAA” senior securities (so-called 

“re-remics”), with the Fed’s TALF responsible for much of the 2009 issuance of other asset 

backed securities (ABSs). Although signs of recovery are appearing in some ABS markets, 

care will be needed to avoid unintended consequences from the combination of tougher 

accounting rules, higher regulatory capital requirements, and “skin in the game” proposals 

 

4

 See the forthcoming technical note on OTC derivatives. 

5

 For instance, inadequate disclosure of the accumulation of massive, but improperly collateralized, derivative 

books contributed to the consequences of the collapse of Lehman Brothers and the near-failure of American 

International Group (AIG).

6

 For example, Lehman had reused or rehypothecated an estimated $427 billion of securities posted as collateral 

by its counterparties or prime brokerage clients. 
 18 

 

for securitizers.7 The absence of well functioning securitization markets may impair the 

ability of banks and others to roll over maturing securitized products and engage in new 

lending, and thus weigh heavily on credit conditions, especially for small- and medium-sized 

companies that do not have capital market access. 

C. Stress Testing Vulnerabilities in the Financial System 

27. The U.S. authorities undertook a detailed stress test of the financial system in 

early 2009. The Supervisory Capital Assessment Program (SCAP) involved multiple 

supervisory agencies and subjected the 19 largest BHCs (groups with businesses ranging 

from banking to securities underwriting to insurance) to a comprehensive and uniform stress 

test. Where capital deficiencies were identified, institutions were required to either raise 

private capital or access public funds through the Capital Assistance Program. Following this 

exercise, the “SCAP-19” raised a total of some $205 billion of private capital, 54 percent of 

which was in common equity, and redeemed 86 percent of the $221 billion of preferred 

shares previously issued under the Treasury’s CPP. However, the CPP remains an important 

source of capital, accounting for about one-quarter of the aggregate tier 1 capital of the 

roughly 260 institutions yet to redeem their government shares. 

28. Stress tests carried out by the FSAP team show pockets of vulnerability in the 

system and considerable interdependencies among institutions.

8

 Reflecting the 

authorities’ preferences and confidentiality concerns, the team’s analysis utilized only 

publicly available data. While an impressive range of information is publicly available on 

U.S. financial institutions, the lack of access to more granular supervisory data was a 

constraint, particularly in the area of funding risk. The analysis employed three different 

approaches: a balance sheet-based macro-prudential analysis, a distress-dependency model, 

and a contingent claims analysis (CCA). Results point to vulnerabilities among specific sets 

of institutions that could be amplified by inter-linkages, and suggest that, while capital 

injections significantly lowered individual institutions’ (market-implied) contingent liabilities 

and reduced systemic tail risk, it may take time to clean up financial institutions’ portfolios. 

29. The team stress tested the 53 largest BHCs, representing 85 percent of aggregate 

BHC assets. The baseline was consistent with the IMF’s World Economic Outlook, while the 

adverse scenario was predicated on further shocks to demand and potential output, as well as 

the impact of market fears of an unsustainable fiscal situation and related inflationary 

expectations (Box 2, Tables 4–5, and Figures 4–5).9 The scenarios are consistent with

 

7

 For details on policies affecting securitization, see the IMF’s October 2009 Global Financial Stability Report. 

8

 Details on data and methodology are provided in the forthcoming technical note on stress testing. 

9 In a recent speech, for example, Fed Vice Chairman Kohn highlighted the potential upward push on interest 

rates if the rising trajectory of U.S. debt to GDP is not curbed in the future, and the impact of higher interest 

rates on financial intermediaries (“Focusing on Bank Interest Rate Risk Exposure,” January 29, 2010).
 19 

 

Box 2. Stress Test Scenarios and Shocks 

The Baseline Scenario was the scenario from the IMF’s April 2010 World Economic Outlook update. The 

output gap closes over the medium term from a negative level in 2009, while inflation is well-anchored and 

stabilizes at about 21⁄4 percent. Government bond yields continue to rise moderately, reflecting the increasing 

government debt-to-GDP ratio. 

An Adverse Scenario was generated using a simple closed-economy business cycle model for the United 

States, with standard monetary channels (Taylor rule and nominal rigidities) and fiscal channels (a fiscal rule 

and a link between the real interest rate and government debt).1

 The scenario was calibrated to illustrate the 

combined impact of the following four adverse shocks: (i) a sizeable and persistent shock to the growth rate of 

potential output, reflecting continued difficulties in the financial system and very weak investment; (ii) an 

additional demand shock in the short run, reflecting high unemployment, weak credit, and continued fall in 

house prices; (iii) further near-term fiscal stimulus to support near-term growth; and (iv) rising inflation 

expectations, reflecting concerns over medium-term fiscal risks and renewed higher oil prices. Reflecting this 

combination of shocks, economic growth falters, inflation and government bond yields rise, and the 

government debt-to-GDP ratio climbs almost 10 percentage points above the baseline by 2013. 

The Alternative Scenario was a different type of stressful scenario, conducted to test banks’ resilience to a 

further deterioration in the real estate sectors (lower real estate prices and higher loan losses), reflecting 

difficulties in rolling over maturing CRE debt and continuing accumulation of seriously delinquent mortgages 

on their balance sheets. Nearly half of the $1.4 trillion in CRE loans maturing in 2010–14 have negative 

equity and foreclosures lag far behind the rising stock of “seriously delinquent” mortgages (many of which are 

“underwater”).2

 This would suggest that banks could face difficulties in rolling-over loans if economic 

conditions did not improve and real estate prices did not rebound. Relative to the adverse scenario, the 

unemployment rate rises faster in 2010 and real estate prices are expected to fall until 2011 (e.g., CRE prices 

fall by another 8 percent by end-2012 as opposed to 3.3 percent in the adverse scenario). CRE losses are 

assumed to peak at 5.1 percent at end-2011. 

Single-factor shocks were also employed. The calibration of these shocks was based on U.S. historical data 

for the last 50 years as well the experience from other countries. 

Table 3. United States: Macroeconomic Scenarios for FSAP Stress Tests, 2010–14 

(Annual percentage change unless otherwise indicated) 

_____________ 

1 See M. Kumhof and D. Laxton, 2007, “A Party Without a Hangover? On the Effects of U.S. Fiscal Deficits,” IMF 

Working Paper 07/202. 

2 Congressional Oversight Panel, 2010, “February Oversight Report: Commercial Real Estate Losses and the Risk to Financial 

Stability,” February, Available at http://cop.senate.gov/reports/library/report-021110-cop.cfm

Baseline scenario

Real GDP 3.1 2.6 2.4 2.5 2.4

Output gap (percent) -2.0 -1.0 -0.6 -0.3 -0.1

Unemployment rate (percent) 9.8 8.9 7.0 5.8 5.5

Case-Shiller 10-city house prices 2.1 2.0 2.9 2.5 1.5

General government debt (percent of GDP) 66.2 72.0 75.4 78.4 81.8

Adverse

Real GDP 2.3 -0.8 0.8 -1.7 2.6 0.2 2.6 0.1 2.2 -0.2

Output gap (percent) -3.0 -1.0 -3.3 -2.3 -2.1 -1.5 -1.1 -0.8 -0.6 -0.4

Unemployment rate (percent) 10.0 0.2 9.9 1.0 8.9 1.9 7.7 1.9 6.9 1.5

Case-Shiller 10-city house prices -2.2 -4.3 -2.1 -4.1 2.2 -0.7 2.5 0.0 1.8 0.2

General government debt (percent of GDP) 70.4 4.2 78.8 6.8 83.3 7.9 88.8 10.4 95.3 13.5

Alternative 

Real GDP 2.4 -0.6 0.8 -1.8 1.6 -0.8 2.5 0.0 2.4 0.0

Output gap (percent) -3.3 -1.3 -2.6 -1.6 -0.8 -0.3 -0.3 0.0 -0.1 0.0

Unemployment rate (percent) 10.6 0.8 9.9 1.0 7.2 0.1 5.8 0.0 5.5 0.0

Case-Shiller 10-city house prices -4.1 -6.1 -2.6 -6.7 3.1 0.3 2.4 0.0 1.5 0.0

 Sources: IMF, World Economic Outlook; and Fund Staff Estimates.

 Note. Numbers in italic denote deviations from baseline.

2010 2011 2012 2013 2014
 20 

 

Max. Timing Max. Timing Max. Timing

Residential real estate loans 2.7 2009 Q4 3.4 2011 Q4 3.5 2012 Q1

Consumer loans 6.5 2010 Q1 6.5 2010 Q1 6.5 2010 Q1

CRE loans 3.4 2011 Q2 4.6 2011 Q3 5.1 2011 Q4

Commercial and industrial loans 2.6 2009 Q3 2.6 2009 Q3 2.6 2009 Q3

Other loans 3.4 2009 Q4 3.8 2011 Q2 3.6 2011 Q3

Sources: Bloomberg, SNL Financial, and IMF staff estimates.

Table 4. Peak Net Loan Loss Charge-Off Rates, 2009–12 

Baseline Scenario Adverse Scenario Alternative Scenario

(In percent)

All Top-4 Regional Small SCAP

Baseline scenario

Cumulative pre-tax, pre-provision net revenue 1,792.6 895.0 179.7 55.2 1,481.7 121.6

Cumulative loan losses 794.9 496.3 87.2 46.2 631.8 66.0

Cumulative securities losses 1.9 1.5 0.2 0.1 1.8 0.0

Capital needed (at lowest point) to attain tier 1 common capital ratio of:

4 percent 1/ 7.9 0.0 0.0 4.1 3.8 15.8

6 percent 1/ 14.2 0.0 1.3 6.3 7.4 26.3

Number of BHCs falling short of tier 1 common capital ratio of:

4 percent 1/ 6 0 1 4 1 4

6 percent 1/ 12 0 4 7 3 4

Adverse scenario

Cumulative pre-tax, pre-provision net revenue 1,559.8 770.8 156.1 46.3 1,295.0 94.9

Cumulative loan losses 1,022.6 633.3 121.4 61.5 811.0 90.8

Cumulative securities losses 93.3 47.2 9.4 3.6 64.6 7.8

Capital needed (at lowest point) to attain tier 1 common capital ratio of:

4 percent 1/ 31.8 0.0 8.1 14.9 14.5 21.8

6 percent 1/ 44.6 0.0 12.8 19.7 21.9 31.7

Number of BHCs falling short of tier 1 common capital ratio of:

4 percent 1/ 15 0 4 10 3 4

6 percent 1/ 17 0 5 11 4 6

Alternative funding risk scenario

Cumulative pre-tax, pre-provision net revenue 1,641.4 812.6 163.5 49.4 1,357.8 106.4

Cumulative loan losses 980.7 625.3 112.9 56.0 790.0 88.2

Cumulative securities losses 41.2 21.1 4.1 1.6 28.8 3.3

Capital needed (at lowest point) to attain tier 1 common capital ratio of:

4 percent 1/ 20.5 0.0 4.0 10.0 8.9 17.8

6 percent 1/ 32.4 0.0 8.2 14.5 15.7 27.6

Number of BHCs falling short of tier 1 common capital ratio of:

4 percent 1/ 14 0 4 9 3 4

6 percent 1/ 16 0 4 11 3 5

Sources: Bloomberg, FinancialStability.gov , SNL Financial, and IMF staff estimates.

1/ Tier 1 common capital ratio defined as tier 1 capital less all “non-common” elements (qualifying minority interest in consolidated subsidiaries, qualifying trust 

preferred securities, and qualifying perpetual preferred stocks) as a percentage of risk-weighted assets.

Foreign BHCs

U.S. BHCs

Table 5. BHC Capital Needs, 2010–14

(In billions of dollars unless otherwise indicated)
 21 

 

Figure 4. United States: BHC Capital Trends, 1997–2010 

(In percent of risk-weighted assets) 

8.2

9.7

10.7

7.2

4.3

8.3 8.2

10.0

11.4

7.4

5.0

8.1

9.8 9.9

11.4

8.6

7.0

8.9

12.6

11.7

12.6

11.4

9.4 9.5

0

2

4

6

8

10

12

14

16

1997-2007 2008Q4 2010Q1 1997-2007 2008Q4 2010Q1

Top4 Total SCAP (above $100 bn) $10-$100bn Less than $10 bn

Tier 1 Capital Tier 1 Common Capital 

 Source: SNL Financial. 

Figure 5. United States: Scenario Analysis of BHC Tier 1 Common Capital Ratios, 2007–14 

Sources: SNL Financial and Fund staff estimates.

0

2

4

6

8

10

12

14

0

2

4

6

8

10

12

14

2007Q4 2008Q4 2009Q4 2010Q4 2011Q4 2012Q4 2013Q4 2014Q4

4 pct threshold 6 pct threshold

Top 4 banks Regional banks

Small banks Foreign banks

SCAP banks

Baseline Scenario

0

2

4

6

8

10

12

14

0

2

4

6

8

10

12

14

2007Q4 2008Q4 2009Q4 2010Q4 2011Q4 2012Q4 2013Q4 2014Q4

Adverse Scenario

0

2

4

6

8

10

12

14

0

2

4

6

8

10

12

14

2007Q4 2008Q4 2009Q4 2010Q4 2011Q4 2012Q4 2013Q4 2014Q4

Alternative Scenario
 22 

 

historical distress episodes, with shocks broadly in the range analyzed in other FSAPs. The 

results, which are necessarily subject to wide confidence bands, are summarized below: 

 In the baseline scenario, capital should be adequate for most banks. Notwithstanding 

record-high charge-off rates and high unemployment, the four largest BHCs and the 

former investment banking groups are expected to maintain a 6 percent tier 1 

common equity ratio over 2010–14. However, to meet this same capital threshold, 

four regional banks and seven smaller institutions (with assets below $60 billion) 

would require a total of $8 billion in additional capital, owing to their high exposure 

to CRE losses; subsidiaries of foreign banks, which tend to be lightly capitalized, 

would require up to $26 billion.10 However, these estimates do not allow for new 

capital injections nor the possibility of limiting dividend payments. Nonetheless, the 

6 percent threshold is not ambitious relative to historical norms, as the average was 

7.4 percent for the SCAP institutions over 1997–2007 and did not fall below 

7 percent for the smaller banks during the crisis. 

 In an adverse scenario, around one-third of the U.S. BHCs would experience some 

capital shortfall, even assuming a less stringent capital threshold. A total of 

$32 billion would be needed to maintain a 4 percent tier 1 common equity ratio until 

end-2014, including $15 billion for three SCAP banks.11 In particular, four regional 

banks would require $8 billion and ten smaller institutions another $15 billion; 

foreign BHCs would need $22 billion in additional capital. These estimates assume 

that residential real estate and CRE losses continue to rise until the second half of 

2011 (peaking at 3.4 percent and 4.6 percent, respectively), while losses on consumer 

loans remain elevated over the same period (although below their 6.5 percent peak in 

the first quarter of 2010).

30. Market liquidity risks appear to have declined for the systemic financial firms, 

although rollover risk should be monitored carefully. Financial institutions have been able 

to improve liquidity buffers, but they face rollover risks owing to a bunching of loan 

maturities in 2011–13. If banks were to face difficulties in refinancing these maturing loans, 

this would accelerate the rate of foreclosures and hence bank losses, as foreclosures tend to 

be very costly, especially when occurring in large numbers. 

 

10 The capital shortfalls in the case of the foreign institutions may be somewhat misleading, as these firms tend 

to operate with lower capital buffers than their domestic peers (foreign-owned BHCs may be exempted from 

U.S. regulatory capital requirements if their parents are deemed well-capitalized and well-managed). The 

exercise presented here, however, stress tests foreign institutions in the same way as it does domestic ones, as a 

way of gauging the shock absorption capacity of the U.S. banking system. 

11 The adverse scenario assumes a 2010–11 cumulative loan loss rate of 7.7 percent (or 8.7 percent including 

write-downs on securities), which remains below the 9.1 percent 2009–10 cumulative loan loss rate assumed 

under the authorities’ SCAP stress tests. 
 23 

 

31. The system was also tested for distress dependencies among major financial 

firms—something that was not explicitly taken into account in the SCAP. The distress 

dependencies were analyzed using a forward looking, market data-based framework.12

Broadly consistent with the findings above, the analysis suggests that under both the baseline 

and adverse scenarios, substantial cumulative losses could weigh on the capital adequacy of 

the system (Table 6). The analysis illustrates that the contribution of firms to systemic risk 

depends not only on their size, but also on their linkages to the rest of the system.13

$ billion % of assets % of GDP $ billion % of assets % of GDP

2007 28 0.2 0.2 28 0.2 0.2

2008 125 1.0 0.9 125 1.0 0.9

2009 82 0.6 0.6 82 0.6 0.6

2010 75 0.6 0.5 77 0.6 0.5

2011 34 0.3 0.2 56 0.4 0.4

2012 20 0.2 0.1 24 0.2 0.1

2013 21 0.2 0.1 20 0.2 0.1

2007 182 1.5 1.3 182 1.5 1.3

2008 427 3.3 3.0 427 3.3 3.0

2009 330 2.5 2.3 330 2.5 2.3

2010 326 2.5 2.2 331 2.6 2.2

2011 224 1.7 1.5 280 2.2 1.8

2012 191 1.5 1.2 204 1.6 1.3

2013 192 1.5 1.1 192 1.5 1.1

Memorandum item:

Total equity (2009) 1,020 7.9 7.2 ... ... ...

Sources: SNL Financial and IMF staff estimates.

1/ 99th percentile.

Table 6. United States: Systemic Distress-Dependent Losses, 2007–13

Baseline scenario Adverse scenario

Systemic extreme (unexpected) losses 1/

Systemic expected losses

32. Tight inter-linkages persist between U.S. and European banks (Figure 6). 

Although this inter-dependence—measured by the probabilities of distress of U.S. banks 

conditional on distress in European Union banks, and vice-versa—has eased from its recent 

peak in early 2009, it continues to be higher than pre-crisis levels. By mid-2010, this 

interdependence was rising again, possibly reflecting instability in the euro area. For 

example, as of June 2010, if all the U.S. (or, conversely, all the European) banks in the 

sample were to fall into distress, there would be a roughly 40 percent chance that this distress 

would spill over to European (U.S.) banks. 

 

12 These tests cover 14 major financial firms, including the ten largest BHCs, two housing GSEs (Fannie Mae 

and Freddie Mac), and two large insurance groups (AIG and Met Life). The calculations were based on the Joint 

Implementation of the Consistent Information Multivariate Density Optimizing methodology (Segoviano, 2006, 

and Segoviano and Padilla, 2006) and the Banking Stability Index measure (Segoviano and Goodhart, 2009). To 

ensure computational stability, the exercise focused on the largest firms and a limited sample size. Simulations 

indicate that approximately 20 percent of the overall systemic losses are attributable to the housing GSEs.

13 The firms included in this part of the analysis are chosen according to their relevance based on market 

capitalization, and comprise Bank of America, Citibank, JPMorgan Chase, Wells Fargo, Goldman Sachs, and 

Morgan Stanley (banks); and Boeing, AT&T, Johnson and Johnson, IBM, Walmart, and Chevron (corporates).
 24 

 

Figure 6. United States: Global Spillover Effects, 2005–09 

(In percent of risk-weighted assets) 

33. The team’s analysis demonstrated the 

efficacy of the public support provided to 

financial institutions during the crisis.

14

Systemic CCA indicates that capital injections 

into the three largest TARP recipients 

significantly lowered individual (marketimplied) contingent liabilities and systemic tail 

risk. CCA simulations also suggested that 

doubling the original amount of capital injected 

into these firms would have had little additional 

effect overtime. Conversely, in the absence of 

capital injections, the tail risk and average risk 

would have escalated substantially (Figure 7 

and Table 7). 

 

14 The systemic CCA framework combines equity market and balance sheet information to infer underlying 

asset dynamics and expected losses in a multivariate set up. For a discussion see Gray and Jobst, 2010, “New 

Directions in Financial Sector and Sovereign Risk Management,” Journal of Investment Management, Vol. 8, 

No. 1, pp. 1–16.

0

250

500

750

1,000

1,250

1,500

Apr-07

May-07

Jun-07

Jul-07

Aug-07

Oct-07

Nov-07

Jan-08

Feb-08

Mar-08

Apr-08

Jun-08

Jul-08

Aug-08

Oct-08

Nov-08

Dec-08

Jan-09

Feb-09

Apr-09

May-09

Jun-09

Jul-09

Aug-09

Oct-09

Nov-09

Dec-09

Jan-10

In US dollar billions

Total Cont. Liabilities (sum of ind. alpha*put option)

Total Expected Losses (sum of individual put options)

Total Cont. Liabilities (GEV, 50th percentile)

Lehman Lehman 

Collapse

Figure 7. United States: Total Market-Implied 

Contingent Liabilities of the Financial Sector 1/ 

0

0.1

0.2

0.3

0.4

0.5

0.6

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10

Distress Dependence: Global

US-EUR

US-ASIA

EUR-US

ASIA-US

0

0.01

0.02

0.03

0.04

0.05

0.06

0.07

0.08

0.09

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10

Probability of Distress: Regions

Average-US

Average-EU

Average-AS

Source: IMF staff estimates. 

Sample includes US FIs (Citigroup, Bank of America, J.P Morgan, Wachovia, Merril Lynch, Morgan Stanley, Goldman Sachs), European FIs (HSBC, RBS, 

UBS, Deutsche Bank) and Asian FIs (Industrial Bank of Korea, ANZ, Mitsubishi UFJ, Bank of China). Distress dependence (group A-group B) shows the 

probability that all members in group A become distressed conditional on all members in group B becoming distressed. 

Source: IMF staff estimates 

 1/The multivariate density is generated from univariate marginals that 

conform to the Generalized Extreme Value Distribution estimated via 

the Linear Ratio of Spacings method over a rolling estimation window of 

60 working days with daily updating, and a non-parametric identification 

of the time-varying dependence structure.
 25 

 

Period Dates

Assuming no capital 

injection Actual

Assuming 2x actual 

capital injection

Full period April 1, 2007–January 29, 2011 238 214 197

Pre-crisis period July 1, 2007–September 14, 2009 91 91 91

Crisis period 1 September 15–December 31, 2009 484 479 469

Crisis period 2 January 1–May 8, 2010 414 359 353

Crisis period 3 May 11, 2009–December 31, 2010 356 227 226

Source: IMF staff estimates.

1/ 95th percentile.

Table 7. United States: Financial System CCA-Based Contingent Liabilities 1/

(In billions of dollars)

34. Much of the insurance industry, especially the property and casualty segment, 

remained resilient through the crisis but severe distress was experienced at some firms

(Table 8).15 The monolines—writers of financial guarantees—lost their high credit ratings 

after serious losses on structured finance exposures.16 While pressures have eased, life 

insurers are exposed to weakness in the economy on account of their exposure to CRE, both 

in loans and investments. In addition, health insurers are subject to significant uncertainty 

arising from implementation of recently enacted legislation to reform the U.S. healthcare 

system. Property and casualty risks are more dispersed and, while some companies are 

heavily exposed to particular events, national companies have broadly diversified risks and 

the largest catastrophe risks are carried by reinsurers offshore. 

35. Quantitative analysis suggests that buffers in the life insurance sector are 

adequate. Stress tests for the largest 30 life insurance companies (accounting for two-thirds 

of U.S. life insurance premium income) were carried out in cooperation with the NAIC. 

These included an adverse scenario that combined negative shocks to the companies’ assets 

(including their bond, stock, real estate, and loan portfolios), a liability-side shock impacting 

variable annuity writers, and a major insurance shock (a pandemic).17 The aggregate riskbased capital (RBC) ratio would decline from 843 percent at end-2008 to 459 percent after 

the shocks, with six out of the 30 companies having RBC ratios below 200 percent. 

Companies with substantial variable annuity business would be particularly hard hit, but no 

company would have a negative RBC ratio under the scenario.18

 

15 The U.S. insurance market is the largest in the world, comprising 7,948 licensed insurance companies at 

end-2008. Total premium volume in 2008, at $1.24 trillion, accounted for 29 percent of the global market. 

There are three main sectors: life, property and casualty (divided between personal and commercial lines), and 

health insurance. Key specialist lines (those which must be written in separate companies) are: financial 

guaranty (bond insurance—the “monoline insurers”), mortgage insurance, and title insurance. 

16 AIG required massive federal support after major losses were experienced by its capital market affiliate. 

17 The shocks were calibrated consistently with the adverse macroeconomic scenario; the pandemic was an 

additional shock with an impact equivalent to 100 percent of RBC (see technical note on stress testing). 

18 Detailed stress testing of property and casualty insurance companies was not carried out because a high-level 

test indicated a relatively limited sensitivity of the sector to macroeconomic shocks. 
 26 

 

2004 2005 2006 2007 2008 2009

Life insurance 

Total adjusted capital ($ billion) 340 344 364 383 338 385

RBC requirement ($ billion) 44 42 45 48 45 46

Aggregate RBC ratio (percent) 775 814 811 802 758 835

Median RBC ratio (percent) 940 975 996 1,009 910 989

Number of companies in action levels 17 11 13 13 23 18

(Percent of all companies) 1.7 1.1 1.4 1.5 2.7 2.2

Property and casualty insurance 

Total adjusted capital ($ billion) 485 524 599 641 579 644

RBC requirement ($ billion) 94 94 99 103 97 100

Aggregate RBC ratio (percent) 518 556 608 624 598 645

Median RBC ratio (percent) 828 877 935 977 992 1,047

Number of companies in action levels 108 86 75 71 79 65

(Percent of all companies) 4.3 3.4 2.9 2.7 3.0 2.5

Health insurance 

Total adjusted capital ($ billion) 47 62 72 80 75 82

RBC requirement ($ billion) 8 10 11 12 13 14

Aggregate RBC ratio (percent) 578 642 662 655 592 590

Median RBC ratio (percent) 548 574 582 589 545 533

 

Source: NAIC.

Table 8. United States: Financial Soundness Indicators for the Insurance Sector, 2004–09

D. Systemic Liquidity Arrangements and Exit Issues 

36. During the crisis the authorities expanded liquidity backstops in extraordinary 

ways. The maturity transformation activities of the shadow banking sector—notably, money 

market funds with stabilized net asset values, and ABCP conduits—had become both 

systemically important and highly “bank-like” in their liquidity risk, but were neither 

supervised as banking activities nor backstopped by the official safety net. Liquidity support 

thus had to be provided to a broader range of firms and markets and entailed invoking the 

“unusual and exigent” provisions of Section 13(3) of the Federal Reserve Act.

37. While these extraordinary facilities have been allowed to expire, the Fed’s 

balance sheet is likely to remain swollen for years to come. Conventional borrowing under 

the Fed’s discount window fell below $5 billion at end-May 2010, far below the peak level of 

$112 billion at end-October 2008. Borrowing under the Term Auction Facility, which had 

peaked at nearly $500 billion, was fully repaid by mid-April 2010. As a result of its Large 

Scale Asset Purchase program, Fed holdings of GSE bonds and MBSs totaled $1.3 trillion at 

end-May 2010, with the counterpart being excess bank reserves of over $1 trillion.

38. Instruments are being developed to enable the Fed to implement monetary 

policy even in the face of large excess reserves, but they are untested. The likely initial 

focus will be on reverse repos of assets into the market, auctions of term deposits, and 

adjustments to the rate of interest on excess reserves (IOER). However, operational and 

communications challenges include: (i) gauging the post-crisis demand for reserve balances 

and its elasticity to the IOER rate; (ii) estimating the impact of large reserve balances, or the 

use of tri-party repos and term deposits, on the transmission of changes in money market 
 27 

rates to lending rates; and (iii) ensuring that the various policy rates are consistent and 

properly aligned while providing markets with clear signals regarding the policy stance. 

39. The crisis has illustrated the possible merit of amending certain operational 

aspects of the Fed’s OMO framework. For example, once excess reserve balances are 

drained and the Fed resumes lending operations, consideration could be given to expanding 

the list of regular OMO counterparties beyond primary dealers to include selected moneycenter banks. While such a step could entail drawbacks, it could encourage this broader 

group of counterparties to hold reliably liquid assets and to become familiar with the Fed’s 

operating procedures. Also, the flow of liquidity through a wider range of counterparties 

could be helpful in periods of incipient market strain. Similarly, consideration could be given 

to widening the range of collateral eligible for OMO, although care would be needed to avoid 

exposing the Fed to unnecessary risk and distorting markets. 

II. STRENGTHENING FINANCIAL SECTOR OVERSIGHT

40. The financial crisis revealed important weaknesses in U.S. supervision and 

regulation. These weaknesses stemmed from the system’s exceptional complexity—

involving a large number of agencies—as well as important gaps in coverage and 

responsibility (Box 3). Coupled with a tilt toward a laissez-faire approach in recent decades, 

the system did not respond effectively to the growth of shadow banking, opacity in the 

securitization and OTC derivative markets, weak risk management, compensation practices 

skewed toward short-term profits, and bubbles in the real estate and equity markets. 

41. Assessments of the U.S. supervisory system against international codes identified 

many positive aspects, as well as important shortcomings. A more detailed overview of 

U.S. compliance with core international standards is provided in the reports on observance of 

standards and codes (ROSCs) accompanying this report, but key points include: 

 The multiplicity of regulators also creates challenges for systemic oversight, both 

because no single body has a clear financial stability mandate, and because 

information sharing and tools are inadequate. 

 Consolidated regulation and supervision have fallen short of what is necessary for 

effective oversight of systemic groups, which is a particular concern given the 

complexity, size, and interconnectedness of the U.S. financial system. 

 Weaknesses exist in the regulation and supervision of risk management. This was 

illustrated in the run-up to the crisis, when the build-up of credit concentrations and 

the deterioration in underwriting standards did not trigger a timely response. 

 Funding arrangements for supervisors are also a concern, especially for the SEC, the 

CFTC, and the state insurance regulators (which are subject to state-level budgetary 

pressures). 
 28 

Box 3. The (Current) U.S. Regulatory Framework 

Although legislation will imply significant reforms in coming years, the present U.S. system includes five 

independent federal regulators of depository institutions: 

 The Fed, founded in 1913, is consolidated supervisor of some 520 financial holding companies and 

4,400 other BHCs, and joint primary supervisor with the respective state authorities of about 840 statechartered banks that are Fed members. 

 The FDIC, created in 1933, is joint primary supervisor with the respective state authorities of some 

4,500 state-chartered banks that are not Fed members and about 400 state-chartered thrifts. In addition, 

it serves as a backup supervisor of state member banks, national banks, and federal thrifts, and is deposit 

insurer and presumptive receiver of all commercial banks and thrifts. 

 The Office of Comptroller of Currency (OCC), established in 1863 as a financially autonomous bureau 

of the Treasury, is chartering authority and primary supervisor of about 1,500 national banks as well as 

primary supervisor of some 50 U.S. branches of foreign banks. 

 The Office of Thrift Supervision (OTS), established in 1989 as an autonomous bureau of the Treasury 

and successor to the Federal Home Loan Bank Board, is consolidated supervisor of some 440 savings 

and loan holding companies, charterer and primary supervisor of some 750 federal thrifts, and joint 

primary supervisor of about 60 state thrifts. 

 The National Credit Union Administration, set up in 1970, is chartering authority and supervisor of 

about 5,000 federal credit unions, and deposit insurer of all federal and some 3,000 state credit unions. 

These organizations are bound together by institutionalized coordination mechanisms. As members of the 

Federal Financial Institutions Examination Council (FFIEC), they jointly propose principles, standards, and 

reporting forms. 

There are also 50 state regulators of state-chartered commercial banks, 50 state regulators of state-chartered 

savings associations, and 50 state regulators of state-chartered credit unions. Coordination between the 

FBAs and their state counterparts is achieved through the participation in the FFIEC of a representative of 

the State Liaison Committee, a body comprising the Conference of State Banking Supervisors, the 

American Council of State Savings Supervisors, and the National Association of State Credit Union 

Supervisors. Coordination with functional regulators, in turn, is achieved primarily through the Fed’s 

authorities over BHCs, with arrangements permitting joint inspections of nonbank institutions within the 

group structure. 

Functional oversight of the securities and futures markets is also fragmented: 

 The SEC regulates securities markets, participants, and self-regulatory organizations, including 

exchanges, securities associations, broker-dealers, investment advisers, investment companies, 

alternative trading systems, and clearing agencies. 

 The CFTC regulates futures markets, participants, and self-regulatory organizations, including 

exchanges, derivative transaction execution facilities, clearing organizations, futures associations, 

futures commission merchants, introducing brokers, commodity trading advisors, and commodity pool 

operators. 

 Certain permissible securities activities are performed by banks and overseen by banking regulators. 

 Self-regulatory organizations are responsible for oversight of exchange members, clearing members, 

and certain intermediaries: the Financial Industry Regulatory Authority oversees more than 4,750 

securities broker-dealers; and the National Futures Association and others oversee more than 130 futures 

commission merchants. 

The insurance industry is regulated exclusively by the states, with the NAIC acting as a coordinating body. 

The housing GSEs—Fannie Mae, Freddie Mac, and the Federal Home Loan Bank (FHLB) system—are 

regulated by the FHFA, which is also their presumptive receiver. 

The Fed’s Board of Governors writes consumer protection regulations governing all lending to households, 

but shares the enforcement authority with other federal regulators of depositories, the Federal Trade 

Commission, and the states.
 29 

 

42. These shortcomings were evident in U.S. banking supervision, notwithstanding 

its many strengths.

19 Deficiencies included a lack of comprehensive consolidated prudential 

regulation and supervision of all important entities involved in banking, stemming primarily 

from certain exceptions embedded in the Bank Holding Company Act and restrictions 

imposed by the Gramm–Leach–Bliley Act that limited the capacity of any one regulator to 

supervise on a group-wide basis. The large number of agencies and their multiple mandates 

undermined supervisory efficiency, effectiveness, and accountability; left the system open to 

regulatory arbitrage (including by charter conversion); and meant that there were overlapping 

responsibilities for holding companies. 

43. A comprehensive effort to strengthen both the structure and conduct of 

U.S. banking supervision is needed. This effort should aim to improve the forcefulness of 

interventions, timeliness of guidance, and consistency of follow-up on new guidance. It 

should enable the FBAs to make their views known about weaknesses in risk management 

practices or policies, including in areas they may not control. Additional investments in staff 

skills, data collection and processing, and examination procedures will be required to: 

 Enhance the capacity for group-wide oversight of complex banking groups and 

conduct regular inter-agency horizontal assessments (possibly by establishing 

domestic supervisory “colleges”). 

 Boost the timeliness and forcefulness of supervisory and regulatory interventions to 

address weaknesses in credit risk management practices. 

 Strengthen channels for cooperation, coordination, and learning from best practices—

within and among the FBAs, functional regulators, and relevant state authorities—

including with regard to charter conversions. 

44. Given the weaknesses in oversight of risk management, it will be important to 

ensure improvements under Basel II. The United States was a key sponsor of the new 

capital adequacy framework and preparations for implementation by large internationally 

active banks are advanced. However, the authorities have yet to take a final view on the 

capital regime that would apply to the multitude of small and midsize banking institutions. 

Moreover, the authorities will need to take into account the changes in the Basel Framework 

being considered at the international level, while also giving due weight to Pillars II and III. 

45. Regulatory oversight in the securities area has not kept pace with innovation in 

financial markets and instruments. Securitization and growth in certain OTC derivative 

markets, along with the growth of “shadow banking,” were key factors contributing to the 

 

19 Details are provided in the ROSC on the Basel Committee’s Core Principles for Effective Banking 

Supervision and in the forthcoming technical note on consolidated regulation and supervision. 
 30 

 

crisis. The oversight of these markets, the prudential regulation of firms trading in them, and 

the market conduct rules governing market participants fell behind, resulting in important 

regulatory gaps. Although a strong legal framework is in place and the regulatory agencies 

are independent and have sufficient authority, institutional insularity, over-specialization, and 

the lack of a comprehensive risk map have undermined effectiveness. Recent securities 

scandals have revealed shortcomings in enforcement programs and a need to enhance 

inspections. Moreover, the sharp intra-day crash in stock prices in May 2010 illustrated the 

risks associated with algorithmic trading, while so-called “flash trading” and “dark pools,” 

have created challenges to the regulatory goals of equal market access and transparency. 

46. Significant gaps existed in the regulation of OTC derivative products and 

markets. Legislation in 2000 generally excluded derivatives from much market regulation 

(although most major derivative dealers are affiliated with regulated financial firms), and the 

lack of collateral requirements for certain significant market participants in bilaterally-settled 

OTC derivatives contributed to the undetected build up of leverage. 

47. The new legislation should strengthen the regulation of OTC derivative markets 

and improve the resiliency of the system. Key provisions include: (i) registration 

requirements for OTC derivative dealers and “major swap participants”; (ii) powers for the 

CFTC and SEC to determine which instruments should be subject to clearing and to trading 

on an exchange or swap execution facility; (iii) reporting requirements for all derivative 

transactions and the trading positions of major market participants; (iv) enhanced prudential 

requirements for risk exposures arising from OTC derivative trading for transactions that are 

not centrally cleared and collateral requirements for OTC derivatives; and (v) authority for 

regulators to safeguard market stability. Decisions of regulatory agencies on what services a 

swap execution facility is required to provide, what is suitable for clearing, and the breadth of 

exemptions for trades with end-users will be critical to the effectiveness of these reforms. 

48. Welcome steps are also being taken to address the risks posed by securitized 

credit instruments, especially those that are “structured.”As the crisis illustrated, while 

these products provided greater scope for diversification and lowered borrowing costs, their 

complexity and opacity, coupled with poor risk management, led to an overreliance on 

ratings and a build-up of systemic risk. The new legislation and other proposals would 

improve disclosure standards for issuers—including requirements to publicly provide the 

computer coding for complex cash-flow “waterfalls”—and the quality of credit ratings. Care 

will be needed, however, to ensure that the interaction between accounting rule changes, 

higher capital charges, and requirements that issuers retain some exposure to the performance 
 31 

of their products (“skin in the game”) do not result in disincentives for these instruments 

beyond that warranted by the systemic risk they pose.20

49. Important shortcomings in the supervision of the insurance sector, which is a 

state responsibility, also should be addressed.

21 Segments of the insurance industry 

contributed to the buildup of systemic pressures and to the subsequent bust (most notably the 

so-called monoline insurers and AIG), and while the state-based regulatory system was 

effective in assuring policyholder protection and the soundness of individual insurance 

companies, it lacked a systemic focus and the capacity to exercise group-wide oversight. 

Federal regulators had limited regulatory responsibility over insurance companies, extending 

only to those that are affiliated with commercial banks or thrifts. The multiplicity of state 

regulations also imposes inefficiencies and can constrain the effectiveness of 

U.S. participation in multilateral discussions on insurance regulation. 

50. Insurance regulatory reforms that would help address these issues include: 

 Improving the regulation of bond insurance and securities lending, including the 

reserving and capital treatment of market risks associated with guarantees (as in 

variable annuities) and the treatment of liquidity risks. 

 Modernizing solvency requirements, including through more forward-looking 

approaches to solvency regulation (e.g., utilizing stress and scenario testing and other 

forms of dynamic financial analysis). 

 Developing the approach to supervision of groups through consolidated financial 

condition reporting and analysis of the group as a whole (including unregulated 

affiliates) and further development of colleges of supervisors. 

 Moving further from the current, rules- and compliance-based, supervisory approach 

to relatively more emphasis on principles and risk-based techniques. 

51. Payment and securities settlement systems held up well during the crisis, but 

systemic concerns remain. These systems benefited during the crisis from the exceptional 

liquidity that was injected. Nonetheless: 

 In the payment system, the Fed’s new intraday liquidity policy—to be implemented 

in late 2010 or early 2011—will facilitate collateralization of daylight credit and 

 

20 New accounting rules (Financial Accounting Standards 166 and 167) now significantly limit the extent to 

which firms treat securitized assets as off balance sheet, while the FDIC has proposed rules that would limit the 

“safe harbor” provided to securitized assets in the case of bank failures. 

21 A more detailed assessment is provided in the ROSC on the International Association of Insurance 

Supervisors’ Insurance Core Principles included in this report. 
 32 

reduce the Fed’s credit risk, but it remains to be seen whether incentives to 

discourage late-day payments will be strong enough.22

 As regards securities settlement systems, the concentration of government securities 

settlement in two clearing banks exposes the Fixed Income Clearing Corporation 

(FICC) and its participants to potential settlement bank risk, which requires careful 

monitoring. Also, to reduce their vulnerability to defaults by participants, the FICC 

and National Securities Clearing Corporation (NSCC) would benefit from increasing 

the frequency of stress testing, external validation of testing parameters, a separate 

pool of collateral to cover exceptional losses in extreme but plausible scenarios, and 

access to liquidity outside the repo market. 23

52. The reform legislation will give the Fed new powers to oversee systemically 

important payment, clearing, and settlement systems. Under the outgoing legal 

arrangements, the Fed may supervise only payment, clearing, and settlement systems 

chartered as state member banks or Edge corporations, leaving other systems beyond its 

reach. The systemic importance of several systems in the latter category argued for a clearer 

legal mandate for the Fed from a systemic risk perspective, irrespective of the systems’ 

charter type. The recent financial reform legislation takes this important step. 

53. The June 2006 Financial Action Task Force (FATF) AML/CFT mutual 

evaluation report indicated that the U.S. system is broadly in line with the international 

standard but made a number of recommendations.

24 The regime has been significantly 

strengthened since then, including through enhanced legislation and the continuation of 

aggressive law enforcement action. A financial intelligence unit has been established that is 

fully operational and substantially meets the FATF standard. Most financial institutions are 

covered by customer due diligence, recordkeeping and reporting obligations. However, the 

majority of designated non-financial business categories and professions are not subject to 

the preventive measures regime required under the FATF standard. Deficiencies also remain 

with respect to the transparency and availability of beneficial ownership and control 

information for legal persons and arrangements. 

 

22 The U.S. wholesale payment infrastructure comprises two systems, which are of systemic importance and 

settle in central bank money: the Fedwire Funds Service, which is a real time gross settlement system operated 

by the Fed; and the Clearing House Interbank Payments System, which is a private sector system combining net 

and gross real time settlement. Payment services are also provided by CLS Bank International, which operates 

payment-versus-payment settlement services mainly for foreign exchange-related transactions. 

23 The FSAP covered two securities settlement systems, the FSS and the Depository Trust Company, and two 

securities central counterparties (CCPs), the FICC–Government Securities Division and the NSCC. 

24 The June 2006 mutual evaluation report is the latest available comprehensive Anti-Money Laundering/ 

Combating the Financing of Terrorism (AML/CFT) assessment of the United States. A technical note has been 

prepared for the U.S. FSAP that will update some of the findings and follow up on the mutual evaluation report. 
 33 

III. MACROFINANCIAL AND SYSTEMIC OVERSIGHT

A. Regulatory Architecture 

54. The complexity of the U.S. regulatory system is a well-recognized problem, and 

both the Administration and the Congress have acknowledged the need for change. The 

standards assessments undertaken as part of this FSAP assessment also have uniformly 

identified the complex web of multiple federal and state authorities as having contributed to 

regulatory gaps and overlaps, as well as weaknesses in supervisory accountability. 

55. The team argued for a bold reorganization and streamlining of oversight along 

functional lines. Although the international experience during the crisis did not demonstrate 

the superiority of any particular regulatory model, significant opportunities exist to simplify 

the U.S. system, focusing agency responsibilities on what firms and markets do rather that 

their legal pro forma. The team encouraged a reorganization along six axes: 

 Micro-prudential safety-and-soundness regulation and supervision of all financial 

firms deemed systemically important, individually or collectively, at both the legalentity and consolidated levels; 

 Special resolution procedures for financial firms deemed to require carve-outs from 

the creditor-centered process of the U.S. Bankruptcy Code, at either the legal-entity 

or consolidated levels or both, as appropriate; 

 Market conduct and investor protection covering all financial products, markets, and 

investors, with appropriate tailoring to the complexity of products and the 

sophistication of market participants; 

 Consumer protection in retail financial products, including residential mortgages, 

credit cards and consumer loans, deposits, and all other financial services geared 

primarily to households; 

 Oversight of payment, settlement, and clearing systems deemed systemically 

important; and 

 Cross-sectoral systemic risk oversight bringing together all of the above elements as 

well as a macroeconomic perspective. 

56. In many respects, but not all, the U.S. authorities have sought to meet these 

criteria. Detailed legislative proposals were put forward by the Administration in mid-2009, 

and omnibus reform legislation—the Dodd–Frank Wall Street Reform and Consumer 

Protection Act of 2010—was passed on the floor of the House on July 1, 2010. The Act 

heralds far-reaching changes in the way U.S. financial sector oversight is to be applied, 

although it will likely take some years before its impact is fully defined and understood. The 

opportunity to introduce a substantive streamlining of the regulatory architecture was not 

taken, however, with the focus being much more on the “what” than the “who” of regulation.
 34 

 

 

57. A critical and welcome step has been taken to define a Financial Stability 

Oversight Council (FSOC) to serve as the systemic risk regulator. This statutory body, 

bringing together the Treasury, the Fed, and essentially all financial regulators, backed by a 

dedicated Office of Financial Research, will bear the financial stability mandate. It will have 

powers to: (i) demand information from any member agency or regulated or unregulated 

financial firm; (ii) deem any nonbank financial firm potentially systemic for enhanced 

regulation and supervision (by the Fed), and deem financial market utilities and payment, 

clearing, or settlement activities potentially systemic; (iii) recommend (but not require) 

surveillance or corrective regulatory or supervisory actions by one, several, or all member 

agencies; and (iv) approve the break-up of systemic financial firms deemed by the Fed to 

pose a “grave threat” to financial stability. The FSOC would be tasked with publishing 

periodic reports to and testifying before the Congress on emerging systemic and regulatory 

challenges, with a special emphasis on issues that might call for a legislative response. 

58. The Fed’s strengthened role as consolidated supervisor, including of all 

potentially systemic financial groups, positions it as the “lead executor” of the FSOC. A 

pre-eminent, hands-on role for the Fed backed by binding enforcement authorities is wholly 

appropriate given its existing expertise, broad understanding of the financial sector, role as 

lender of last resort, the synergies with monetary policy, and its statutory mandate. Success 

will require a more muscular approach to consolidated regulation and supervision (quite 

likely involving less deference to functional regulators of nonbank subsidiaries) to enable it 

to effectively identify and act upon emerging systemic risks.25 

59. A new special resolution mechanism will cover potentially any systemic financial 

firm. This new resolution authority will provide the FDIC with substantially similar powers 

to those it has long exercised in resolving insured depository institutions. The FDIC will 

henceforth be able to intervene in a failing systemic financial group by taking control at the 

level of the ultimate holding company, even as bank, broker-dealer, and insurance 

subsidiaries would remain under their pre-existing resolution regimes (with some 

adjustments). The team had strongly encouraged this concept of “umbrella resolution,” but 

had also suggested greater automaticity, based on prompt corrective action (PCA) triggers, as 

well as greater reach, e.g., extending to all BHCs, to help mitigate moral hazard. 

60. Unfortunately, only partial steps have been taken to streamline federal safetyand-soundness regulation and supervision. The new Act eliminates the OTS but preserves 

the Federal thrift charter. The responsibilities of the OTS regarding federal thrifts, state-

 

25 Equally, the team stressed the need for all holding companies owning FDIC-insured depository institutions to 

be subject to consolidated oversight, with appropriate activity restrictions (notably, to separate banking from 

commerce) and group-level capital and liquidity requirements (see technical note on consolidated supervision). 

Unfortunately, the Dodd–Frank Act does not close the related exceptions in the Bank Holding Company Act, 

imposing instead certain moratoria pending a review by the Government Accountability Office (GAO).
 35 

 

chartered thrifts and savings and loan holding companies will be transferred to the OCC, 

FDIC, and the Fed, respectively. This, however, will still leave three FBAs with significant 

and overlapping oversight responsibilities; in the team’s view, there remains a good case for 

defining one agency with safety-and-soundness responsibility for national banks, federal 

thrifts, state member banks, state nonmember banks, and state thrifts, in the latter cases 

serving as joint primary supervisor along with the applicable state regulators. This would free 

the Fed to focus on monetary policy, macrofinancial oversight, and consolidated regulation 

and supervision, and the FDIC on insurance and resolution.26

61. Similarly, no steps were taken to unify responsibilities for securities and 

derivatives markets. As many observers have noted, the SEC and CFTC have similar and 

converging market oversight and conduct-of-business missions, and a merger would help 

address the seeming artificiality of the present separation between securities and futures 

oversight, as well as the complexities of reporting to two separate Congressional oversight 

committees, which have led to inefficiencies and jurisdictional disputes.27

62. Oversight authority for systemically important payment, clearing, and 

settlement systems is taking an important step forward. The new Act (i) vests the FSOC 

with responsibility to designate as systemic any payment, clearing, or settlement activity or 

financial market utility to be subject to heightened and uniform risk management standards, 

including on margin, collateral, capital, and default policies, to mitigate systemic risk; and 

(ii) allows the Fed’s Board of Governors to authorize designated financial market utilities to 

open deposit accounts at the Fed and, in unusual and exigent circumstances and after 

consultation with the Treasury Secretary, access the discount window. 

63. Welcome steps are being taken to strengthen consumer protection in the area of 

financial services. Pre-crisis, weak consumer disclosures in retail lending products helped 

foster a systemic deterioration in underwriting practices. A strong rulewriting and 

enforcement function for retail lending—applying to all lenders—was thus needed to help 

protect not only vulnerable borrowers but the system as a whole. Under the Dodd–Frank Act, 

this function will sit at a new, independent Bureau at the Fed. Preliminary analysis suggests 

this outcome may satisfactorily meet the goals of ensuring: (i) clarity of mandate to avoid 

potential overlaps and co-mingling of consumer protection and safety-and-soundness 

 

26 The recommendation was contingent upon the Fed gaining separate oversight authorities over systemically 

important payment, clearing, and settlement systems, including those chartered as state member banks. The 

team also felt, on balance, that the Fed should retain some responsibility for the consolidated supervision of 

non-systemic BHCs, even as broad back-up supervisory authorities spanning all insured banks and thrifts would 

suffice for the FDIC’s resolution planning and deposit insurance responsibilities. 

27 Several systemic financial intermediaries are classed as both SEC-registered securities broker-dealers and 

CFTC-registered futures commission merchants, subject to overlapping rules. The Dodd–Frank Act introduces 

yet another designation, the “major swaps participant,” with securities swaps and commodities swaps to fall 

under SEC and CFTC jurisdiction, respectively. 
 36 

 

 

responsibilities across regulators; (ii) independence/autonomy from other functional 

regulators to effect rules; and (iii) span to cover customers of all firms that provide consumer 

financial services, irrespective of whether they are regulated, to ensure consistency. 

64. The reform legislation establishes a federal office to monitor the insurance 

sector. This office will track industry developments and help identify systemic insurance 

groups. It should help promote uniformity of certain state regulations (such as those related 

to the treatment of non-U.S. insurers), assure a more coordinated system-wide perspective, 

and enhance U.S. participation in international discussions on insurance. In view of the costs 

associated with the existing state-based regulatory system, the team considers it appropriate 

to re-consider past proposals for an optional federal insurance charter. 

B. Addressing Macro-Prudential Risks 

65. As noted above, a new framework for macro-prudential oversight is to be 

established, with the FSOC as its keystone. The FSOC will identify and address systemic 

risks, with powers and duties, inter alia, to gather information, designate systemically 

important nonbank financial firms for consolidated regulation and supervision by the Fed, 

make broad recommendations to its member agencies, and report to Congress. 

66. Successful implementation of this framework will require addressing a number 

of challenges. First, the FSOC will be composed of ten voting members, and ensuring this 

large body achieves consensus and timely responses to emerging risks will be important. 

Second, it will be critical that data and information be available to the FSOC in a timely 

fashion, which will require investment in systems and commitment to inter-agency 

information sharing. Third, member agencies of the FSOC will need to develop or adjust a 

range of regulations to focus more on systemic risk mitigation, combining automatic triggers 

with room for discretionary action.28 Fourth, the accountability and “will to act” of all 

agencies will need to be underpinned by transparency and communication, ideally to include 

policies governing the release of minutes of FSOC proceedings.

67. Moral hazard and the too big-to-fail problem will be an important challenge. 

The substantial liquidity and capital support that has been provided in recent years is likely to 

exacerbate long-standing concerns that larger institutions bear an implicit government 

guarantee. Action will be appropriate on multiple fronts: Prudential norms: International 

efforts are underway to redefine capital and liquidity charges that apply to banks to take 

better account of their risk profiles, including with regard to their trading books. Enhanced 

 

28 Such instruments, many of which are enumerated in the Dodd–Frank Act, could include: (i) penalizing size, 

complexity, and interconnectedness through measures such as liquidity and capital surcharges, anti-cyclical 

provisioning, leverage ratios, contingent capital, resolution fees, or insurance schemes; (ii) encouraging 

financial firms to build capital buffers in good times; (iii) tightening risk exposure limits on rapidly expanding 

asset classes; and (iv) limiting the impact of corporate governance and compensation policies on risk-taking. 
 37 

 

 

supervisory oversight and application of prudential norms will also need to apply to CCPs, in 

concert with efforts to encourage a greater role for them in the clearing of OTC derivatives. 

 Systemic risk charges: The U.S. effort to subject all systemically important financial 

institutions to comprehensive, consolidated supervision should help limit systemic 

risks. These institutions should also be subject to prudential norms that help them 

internalize the systemic risks they pose.29

 Narrow banking/size limitation: The legislation includes limitations on banks’ 

proprietary trading and investments in or sponsoring of hedge or private equity funds. 

Nonetheless, given the difficulty of ring-fencing business lines, and the risk of 

potentially systemic activities migrating outside the regulatory perimeter, these 

measures should not be seen as substitutes for effective supervision, prudential 

norms, and limits on complexity. 

 Compensation/governance: Compensation practices need to avoid encouraging 

excessive risk taking, and it will also be important to ensure that shareholders are 

engaged in oversight of the financial firm, Boards of Directors are of a level of 

competence and authority to exercise appropriate risk management, and management 

information systems are state of the art.30 

 Prompt corrective action: A critical outcome of the U.S. savings and loan crisis was 

the establishment of a set of PCA triggers for mandatory intervention based on 

regulatory leverage ratios. Although these were viewed internationally as best 

practice, most if not all of the very large institutions that failed during the recent crisis 

experienced liquidity pressures before breaching these triggers, underscoring the need 

to develop better, forward-looking maturity mismatch and liquidity indicators and a 

greater willingness for swift, pre-emptive action on the part of supervisory bodies. 

 Living wills: The complexity involved with the resolution of large groups and the 

need to stem moral hazard underscores the importance of ex ante resolution plans 

(“living wills”). These can help ensure that group structures are kept manageable 

and—in the event of crisis—the resolution agency is prepared to take effective action. 

They would need to be reviewed critically, updated periodically, and acted on preemptively, to require systemic firms to simplify their structures.31

 

29 Several efforts are underway (Arachya et al., 2009; Brunnenmeier, et al., 2009; Jobst and Gray, 2010), to 

calibrate the contribution to systemic risk of individual institutions. 

30 The Dodd–Frank Act introduces stronger shareholder rights on executive pay and independent compensation 

committees for listed companies, and on Fed-defined compensation rules for financial institutions. 

31 The Dodd–Frank Act requires large, complex financial institutions to periodically submit plans for their rapid 

and orderly resolution, and these firms would be subject to capital charges and other sanctions, including 

divestment, if these plans are deemed deficient. A critical responsibility of the supervisor will be to use these 

plans to develop institution-specific contingency plans. 
 38 

 

 

68. A key role of the FSOC will be to monitor and adjust the regulatory perimeter. 

Steps are already being taken to address the risks posed by the so-called shadow banking 

system, and the FSOC will need to carry forward these in a number of important areas: 

(i) requiring money market funds to make real-time disclosures of their actual, as opposed to 

“stabilized,” net asset values; (ii) eliminating restrictions that bar depository institutions from 

remunerating transaction deposits; (iii) subjecting ABCP conduits and ABS issuers to 

stringent disclosure and other requirements; and (iv) restructuring the tri-party repo system to 

make it more resilient to stress.32

69. The reform debate has also addressed concerns regarding the governance 

structure of the Fed. The Presidents of the regional Federal Reserve Banks, which are in 

charge of conducting on-site supervision under authorities delegated from the Fed’s Board of 

Governors, are elected by boards of directors that are majority-controlled by the supervised 

entities. While this seems to have had little impact in practice, the Dodd–Frank Act moves to 

eliminate this seeming conflict of interest. 

C. Strengthening Crisis Management and Resolution 

70. Although the U.S authorities improvised well in the face of crisis, shortcomings 

were exposed in crisis management arrangements. The President’s Working Group on 

Financial Markets, established by an Executive Order after the stock market crash of 1987, 

provided a framework for coordination. However, crisis events underscored the challenges 

posed by the multiplicity of agencies, the lack of a statutory crisis management framework, 

and the limitations of the toolkit available to deal with failing financial firms. 

71. The reform legislation will formalize most crisis management arrangements 

under the FSOC. This should build on the regular process for macro-prudential surveillance 

already envisaged for the FSOC, but will require enhanced arrangements for coordination, 

information sharing, and decision making in crisis. Such arrangements should be tested 

periodically in simulation exercises similar to those currently employed by the agencies to 

check the resilience of business continuity arrangements. 

Liquidity provision 

72. The U.S. authorities responded decisively in the midst of crisis to expand 

liquidity backstops. Given the scale of maturity transformation outside the formal banking 

system, liquidity support had to be provided to a broad range of nonbank financial 

intermediaries and markets in order to contain the crisis. In many cases, Fed lending relied on 

 

32 The recommendations of a market working group sponsored by the Federal Reserve Bank of New York to 

address these issues should go some way to reduce liquidity risk in the tri-party repo system, notably through 

the phased elimination of the “daily unwind.” 
 39 

 

 

the “unusual and exigent circumstances” provision of Section 13(3) of the Federal Reserve 

Act. These extraordinary facilities have largely been wound up. 

73. The international dimension of managing systemic liquidity in stressed 

conditions was made amply evident in the crisis. In response to the vulnerability of 

offshore dollar markets, especially in Europe, and the potential for feedback to 

U.S. markets—given linkages via the interbank market, foreign exchange swaps, and 

securities trading—swap agreements were forged with 14 foreign central banks. These 

proved an effective means to provide dollar liquidity to strained offshore markets. Although 

first-round support for such markets was wound down, some swap arrangements have been 

resurrected in the wake of the new market turbulence in Europe. The experience suggests 

merit in ensuring that such facilities are readily available in the future. Close international 

cooperation should be sought to systematically collect information on relevant markets and 

ensure continued timely and effective well-coordinated responses to systemic turmoil abroad. 

74. The recent experience has left open the question of whether the Fed is optimally 

equipped to support domestic liquidity in situations of incipient systemic stress. The 

Dodd–Frank Act introduces new requirements on the future use of the “unusual and exigent 

circumstances” clause of the Federal Reserve Act, which will be limited to broadly available 

liquidity programs for solvent nonbank financial firms, subject to ex ante Treasury sign-off 

and ex post reporting to Congressional committees and GAO audit. The Act also requires the 

Fed, in consultation with the Treasury Secretary, to develop regulations to guide such 

emergency lending. While proscribing Fed liquidity support to failing individual firms is 

generally appropriate, since this carries with it moral hazard and exposes the Fed to 

inappropriate credit risk, the inherent unpredictability of crises and their scale argues for 

retaining some flexibility in this area.33 

Deposit insurance 

75. Despite widespread bank failures, U.S. deposit insurance arrangements 

performed well through the crisis. Confidence was bolstered especially by the FDIC’s 

capacity to resolve small or midsize banks quickly, typically executing the transfer of insured 

deposits over a weekend from a failing institution to another institution. 

76. However, resources in the Deposit Insurance Fund have been eroded, and should 

be restored under revised rules. The FDIC’s restoration plan will only restore funding to 

pre-crisis levels by 2017, and the system remains subject to procyclical funding 

 

33 See the technical note on crisis management arrangements. The Dodd–Frank Act also includes an emergency 

financial stabilization provision under which the FDIC, “during times of severe economic distress,” may create 

a widely available program to guarantee obligations of solvent insured depository institutions or BHCs, to be 

activated using procedures analogous to those used to trigger the systemic risk exception (to the general 

requirement that the FDIC resolve failed depositories at least cost to the Deposit Insurance Fund). 
 40 

 

 

arrangements. Under current rules, banks only pay premiums up to a certain level after which 

they are rebated, and while premiums are risk-based, they capture only expected losses from 

an individual bank failure and do not build in any allowance for systemic risk. 

77. In light of the experience of the crisis, deposit insurance funding arrangements 

should be reviewed, revisiting premiums and the size of the fund. One response would be 

to increase the targeted ratio of reserves in the fund to insured deposits, and the mission 

therefore welcomes increased target ratios in the Dodd–Frank Act and the additional 

flexibility provided to the FDIC to set risk-based premiums and revise funding arrangements. 

Resolution arrangements 

78. The crisis highlighted the lack of effective resolution arrangements for large 

complex financial conglomerates. A special resolution regime operated by the FDIC is in 

place for depository institutions but most other types of financial firms are subject to the 

Bankruptcy Code.34 This denied the authorities the scope to take control of groups at the 

holding company level (either as receiver or conservator). As a result, the cost and systemic 

disruption of the disorderly collapse of Lehman Brothers, the emergency sale of Bear 

Stearns, and the outright rescue of AIG were likely greater than otherwise, and highlighted 

the need for tools to deal effectively with such entities. The new “orderly liquidation 

authority” for systemic financial firms as created by the Dodd–Frank Act should substantially 

fortify the U.S. resolution toolkit, although it is unfortunate that earlier proposals to establish 

a pre-funded special resolution fund have been dropped. 

79. Application of the new authority will not be easy. The crisis illustrated the speed 

with which large entities can lose access to wholesale funding, their critical role in markets 

and payment and settlement systems, and the pace at which difficult rescue operations need 

to be formulated. Moreover, especially in the case of systemic firms, contagion risks may 

require that short-term funding in repo and securities lending would need to be honored and 

the close-out of foreign exchange and derivative contracts avoided.35 Ex ante information 

gathering, preparation, and “war gaming” will thus be essential. 

 

34 Under the Securities Investor Protection Act, the Securities Investor Protection Corporation (SIPC) has the 

power, inter alia, to intervene in the liquidation of a securities broker-dealer to ensure that assets are returned to 

customers (where assets are missing, customers are compensated from the SIPC Fund up to $500,000 each); the 

FHFA has FDIC-like resolution powers over the housing GSEs; and insurance companies are subject to 

dedicated state-level resolution procedures. 

35 Under both the Federal Deposit Insurance Act and the new systemic resolution authority, repos, forwards, 

swaps and other similar transactions are defined as “qualified financial contracts” (QFCs). The FDIC must 

decide within a day of intervening whether to transfer QFCs to another solvent entity (e.g., a bridge bank) or to 

leave them in the failed firm subject to termination and close out. 
 41 

 

 

IV. WITHDRAWING CRISIS INTERVENTIONS AND ADDRESSING HOUSING FINANCE

80. Official interventions have dramatically increased public involvement in the 

U.S. financial system. Encouraging steps have been taken by many financial firms to repay 

TARP funding, but the exit has a way to go. Given that the TARP is likely to maintain 

significant ownership of financial and nonfinancial firms for some years, it may be 

appropriate to transfer these to a trust or similar arrangement to avoid any appearance of 

conflicts of interest with the supervisory function. 

81. An orderly withdrawal from government ownership of financial firms, as 

conditions permit, is important to leveling the playing field and reducing distortions. 

Continued official ownership risks undermining the system’s dynamism and subjecting it to 

inappropriate political influence in pursuit of social policy goals. It may also aggravate 

concerns associated with “too-big-to-fail,” moral hazard, and the scope of safety nets. 

82. Key to the exit process will be to establish a vision for U.S. housing finance. 

Government support for the housing market is extensive, with the housing GSEs—Fannie 

Mae, Freddie Mac, and the FHLB system—as cornerstones. These entities play important 

roles in maintaining liquidity in the market for MBSs, with their guarantees assuring a 

plentiful supply of credit risk-free “rates products.” Their statutory privileges bestow a riskinsensitive funding advantage that incentivizes growth and leverage. 36 Fannie and Freddie’s 

Senior Preferred Stock Purchase Agreements commit the Treasury to providing unlimited 

capital support to these entities through 2012 and capped but large amounts thereafter.37 

83. The U.S. authorities have emphasized that lasting reforms will be defined once 

the mortgage market stabilizes. This remains an important unfinished area in the reform 

process. The housing finance system continues to be costly, inefficient, and complex, with 

numerous subsidies that do not translate into a sustainably higher homeownership rate. Any 

reform of the system should avoid a return to the status quo ante involving ambiguous 

public/private status and implicit guarantees, including of the FHLB system. 

 

36 The privileges include: a dedicated regulator and presumptive receiver, the FHFA; exemptions from state and 

local income taxes; eligibility to settle through the Fedwire Funds Service; and classification of their debt and 

MBSs as “exempt securities” under the Securities Act of 1933 (with important ramifications such as eligibility 

to issue through the Fedwire Securities Service; use by the Fed in OMO; exemption from bank concentration 

limits; and low risk-based bank regulatory capital charges, currently only 0.8 percent). 

37 Total assets of these entities have broadly stabilized and their net worth is now roughly zero, but their 

guaranteed MBS pools have grown dramatically, with the Fed as the predominant buyer throughout 2009. The 

share of U.S. single-family residential mortgage originations financed (retained) or guaranteed (securitized) by 

the two GSEs increased from 54 percent in 2007 to 78 percent in the first three quarters of 2010, in addition to 

which they are actively involved in the various government mortgage modification programs. Fed purchases of 

agency MBSs were terminated at end-March 2010. The GSEs are also among the largest participants in the 

market for OTC interest rate derivatives, which is another aspect of their systemic importance. 
 42 

 

 

84. The mandate of the GSEs should be streamlined, guarantees removed or made 

explicit, and Fannie and Freddie’s retained portfolios privatized. These retained 

portfolios have been key sources of past losses and are largely separable from the two GSEs’ 

core bundling and guarantee business—a function that arguably provides a public good worth 

making explicitly public. The implicit guarantee of the FHLB system should similarly be 

stripped away or made explicit. Strong oversight will be required of any new public entities 

to ensure robust asset-vetting and pool-structuring standards, as well as derivative market 

involvement consistent with systemic stability. Alternatives include: 

 Full privatization: Under this option, the GSEs would be recapitalized and sold to the 

public, as a whole or in pieces, and the conservatorships terminated, with Congress 

legislating to rescind their federal charters and associated privileges.38 This would 

mark a definitive solution to the competitive equality issue, leveling both the public–

private and mortgage–nonmortgage playing fields, but could leave the system without 

a public body for promoting securitization. 

 Part privatization/part public utility: This option would involve restoring the GSEs’ 

investment operations to profitability and recapitalizing them (again whole or in 

pieces) by selling shares to the public, even as the Congress legislated, first, to 

rescind the federal charters and, second, to establish a new public entity to take over 

the guarantee operations.39 The resulting privatized investment companies would have 

no special privileges and the new public entity no ambiguity in its federal backing. 

This would limit any future misappropriation of a funding advantage, with the utility 

preserving government support for securitization, subject to appropriate criteria. 

V. INTERNATIONAL LINKAGES AND COORDINATION

85. The U.S. financial system represents a significant and deeply connected 

component of the global financial system (Figure 8). U.S. large complex financial 

institutions (LCFIs) play a critical role in international financial markets, and U.S. payment 

and securities settlement systems involve a large volume of transactions with foreign 

entities.40 International trading in securities and derivatives linked to U.S. securitized assets 

has been substantial—over one-fifth of U.S. ABSs are estimated to have been held abroad in 

the lead up to the crisis. This, along with transactional, reputational, and ownership ties 

 

38 Lessons could be drawn from the successful privatization of Sallie Mae in 1995. 

39 Under the receivership provisions of the Housing and Economic Recovery Act of 2008, the FHFA could start 

by establishing “limited-life regulated entities”—modeled on FDIC bridge banks—which would afford it the 

flexibility to, say, move core securitization and guarantee operations to the bridge while leaving lower-quality 

portfolio assets in the receivership pending liquidation. 

40 The role of U.S. LCFIs in markets is described in G10, “Report on Consolidation in the Financial Sector” 

(2001) and Hawkesby, March, and Stevens, “Large complex financial institutions: common influences on asset 

price behaviour?” (Bank of England Financial Stability Review, 2003). 
 43 

 

 

between leading intermediaries in the U.S., U.K., and Euro area financial systems, help 

explain the speed and virulence of the freeze of the U.S. funding markets.

86. These interlinkages increase 

the premium on mutually consistent 

macroeconomic and financial 

policies.

41 The growth in transactions 

booked in offshore tax havens 

illustrates the channels that have 

opened for regulatory and tax arbitrage 

and underscore the importance of 

U.S. participation in international 

efforts toward coordinated and 

consistent supervisory and regulatory 

policies. As the U.S. authorities have 

advanced relatively quickly in 

developing specific regulatory reform 

proposals, care will be needed to 

ensure these encourage a “race to the 

top” rather than mutually inconsistent 

approaches. 

87. The U.S. authorities can play a leading role in international efforts to strengthen 

international crisis coordination. U.S. agencies appear to have managed to achieve a high 

level of coordination with counterparts abroad during the recent crisis, building on longstanding relationships. Looking forward, it would be helpful to build on this experience and 

further develop the arrangements for coordinating supervisory policies. As noted, there 

would be merit in establishing a more permanent and coordinated mechanism for addressing 

periodic pressures in offshore dollar markets. 

88. The United States has embraced efforts to improve information sharing and 

cooperation in the supervision of internationally active financial firms. This has helped 

 

41 Cross-border financial flows are discussed in greater detail in the Spring 2009 Global Financial Stability 

Report and World Economic Outlook. 

Figure 8. United States: Financial System Linkages 

to the Rest of the World 1/

Sources: Kubelec, C., and F. Sa, 2010, “The Geographical Composition of National 

External Balance Sheets: 1980-2005,” Bank of England Working Paper (forthcoming); 

and “Organic Mechanics,” 2009, Financial Times, November 26. 

 1/ Vertices reflect relative size of total external assets & liabilities (FDI, equity, debt, 

and reserves) for each country; thickness of connectors (green being thickest and red 

thinnest) reflects relative size of bilateral external financial stocks (assets and liabilities 

divided by the sum of host and source country GDP) 
 44 

 

 

establish supervisory colleges for some 30 globally active firms. The mission supports the 

authorities’ commitment to the operational development of these colleges, which should 

result in joint risk assessments under the auspices of a lead supervisor and plans for remedial 

actions as needed. Given the growing importance of emerging markets, consideration should 

be given to extending the number of institutions and supervisors to include major emerging 

markets in a manner consistent with the efficient functioning of the supervisory colleges. 

89. The authorities’ commitment to coordinated approaches to strengthening the 

international capital framework is similarly welcome. Although the United States has 

been slow to adopt Basel II, the authorities have been active participants in the Basel 

Committee discussion on new risk weights applicable to banks’ trading books and securitized 

products; a new supplemental leverage ratio to ensure adequate quantity and quality of 

capital; harmonization of the definition of capital; and counter-cyclical capital buffers.

90. U.S. financial sector reforms could provide impetus to international efforts to 

improve arrangements for dealing with the resolution of global financial conglomerates. 

The Lehman collapse illustrated the constraints on reaching coordinated solutions given 

differences in insolvency, regulatory, accounting, and governance regimes. It would be 

helpful to ensure that the “living wills” that will be required for systemically important 

financial firms identify inconsistencies and tensions with legal frameworks in foreign 

jurisdictions where the large U.S. firms operate and catalyze the preparation of coordinated 

ex ante crisis management frameworks, building on the Financial Stability Forum’s 

Principles for Cross-border Cooperation in Crisis Management.

42 

91. Reforms to U.S. markets for structured securitization and OTC derivatives 

could have significant cross-border implications, given strong global participation. 

These reforms encourage greater reporting, standardization, and oversight of credit and other 

OTC derivatives through the greater use of exchanges and CCPs. They would also require 

advisers to hedge funds to register and to regularly report information to facilitate 

assessments of systemic risk. It would be important to coordinate to the extent possible these 

efforts with other key jurisdictions to avoid pushing transactions to less stringent 

jurisdictions. 

 

42 For example, under the Federal Deposit Insurance Act, deposits in overseas branches of a U.S. bank rank 

behind insured U.S. deposits in a wind up. 
 45 

 

 

APPENDIX I: RISK ASSESSMENT MATRIX

Nature/Source of 

Main Threats

Likelihood of Severe Realization in the 

Next Three Years

Expected Impact on Financial Stability if 

Threat is Realized

Inability to roll 

over outstanding 

CRE loans 

Staff assessment: High 

 Given the employment situation, which 

tends to be a good indicator for CRE, 

commercial property prices are not 

expected to recover soon. Around 

$1.4 trillion of CRE loans are expected to 

mature by 2014, and almost half of these 

are underwater or seriously delinquent. The 

market for commercial MBSs remains 

depressed. 

Staff assessment: Medium 

 Banks are the largest lenders against 

commercial property, comprising nearly 

50 percent of CRE debt outstanding. CRE 

exposure accounts for 10 percent of total 

bank loans, but represents 50 percent of 

smaller banks’ loan books. 

Further 

weaknesses in 

residential real 

estate prices 

Staff assessment: High 

 The rising gap between the volume of 

delinquent mortgages and the number of 

foreclosures suggests an overhang of 

homes still to be placed on the market. 

“Strategic defaults” by underwater but 

performing mortgage borrowers are on the 

increase. 

 A modest rise in mortgage rates could 

speed up the rate of foreclosures, 

dampening a recovery in house prices.

Staff assessment: Medium 

 A worsened house price outlook would 

hurt the value of repossessed homes on 

banks’ balance sheets. 

 It could also induce banks to foreclose 

more aggressively the rising stock of 

seriously delinquent residential 

mortgages. Given low callateral values, 

this would raise losses across the financial 

system and lower bank capital.

Double-dip 

recession 

Staff assessment: Low 

 Consumption spending could remain lower 

than projected, given still-high debt loads, 

substantive hits to household net worth, 

high unemployment, and possible further 

pressures on house prices. 

 Low consumer spending would depress 

corporate and small business profits, 

hampering employment and GDP growth. 

Staff assessment: Medium 

 Slower GDP growth would reduce credit 

demand and thence net interest margins, 

and possibly impact financial sector fee 

and trading income. 

 A weaker economy would dampen 

corporate and small business profits and 

employment, and undermine credit 

quality.

 Lower profits would make it more 

difficult for banks to re-build capital 

buffers. 

Loss of 

credibility of 

long-term fiscal 

consolidation

Staff assessment: Low (but rising) 

 The potential need for more aggressive 

public support for housing and 

employment, state governments, and smalland medium-sized companies, could 

weaken long-term fiscal credibility and 

trigger a sharp hike in risk premiums 

attached to U.S. securities. Under the 

authorities’ current projections, the federal 

debt-to-GDP ratio is expected to rise to 

nearly 100 percent by 2020.

Staff assessment: Medium 

 Higher U.S. interest rates could 

undermine growth prospects and credit 

quality. They would also increase rollover 

risks and hurt convexity hedging by 

mortgage holders, triggering a re-pricing 

of long-term instruments.
 46 

 

 

Nature/Source of 

Main Threats

Likelihood of Severe Realization in the 

Next Three Years

Expected Impact on Financial Stability if 

Threat is Realized

Credit 

crunch/limited 

securitization 

Staff assessment: Low 

 Some banks continue to face balance sheet 

pressures and are likely to remain reluctant 

to expand their lending. 

 Private securitization markets remain 

impaired. 

 However, the risk of a more severe 

disruption to credit supply seems to have 

dissipated with signs of some easing of 

bank lending standards, and the uneventful 

expiration of the Fed’s Large Scale Asset 

Purchase program. 

Staff assessment: Low 

 Constrained credit and crisis legacies are 

likely to depress potential output, with 

negative spillover effects on banks’ asset 

quality and earnings outlook. 

 Limited securitization could be 

particularly difficult for the small 

community banks, which almost doubled 

their market share of residential loans in 

the run up to the crisis in the expectation 

of selling them after origination.

Regulatory 

uncertainty

Staff assessment: Low

 The new financial reform legislation is 

likely to be passed into law before end-July 

2010, but rule writing will take some time. 

 Implementation delays could impede 

lending with negative macroeconomic 

consequences, especially if new rules are 

not mutually consistent. 

Staff assessment: Low 

 Unless new requirements are carefully 

phased in, a sharp increase in funding 

costs could weaken credit growth. Credit 

quality, bank capital, and earnings could 

also be hurt. 

 Lending could be pushed to new (less 

well managed) channels, contributing to 

new systemic risks. 

Failure of 

systemically 

important 

institutions 

Staff assessment: Low 

 Recent efforts to boost capital have borne 

fruit and regulatory reform will further 

improve regulation and supervision of 

systemic firms, including by allowing an 

expansion of the supervisory perimeter to 

include systemically important nonbank 

financial firms. 

Staff assessment: Medium

 The new reform legislation introduces a 

new mechanism to resolve failing 

systemically important financial 

conglomerates, but challenges remain, 

including with regard to cross-border 

groups.