FINANCIAL STABILITY OVERSIGHT COUNCIL

2020

ANNUAL REPORT

i

Financial Stability Oversight Council

The Financial Stability Oversight Council (Council) was established by the Dodd-Frank Wall 

Street Reform and Consumer Protection Act (Dodd-Frank Act) and is charged with three 

primary purposes:

1. To identify risks to the financial stability of the United States that could arise from the 

material financial distress or failure, or ongoing activities, of large, interconnected bank 

holding companies or nonbank financial companies, or that could arise outside the 

financial services marketplace.

2. To promote market discipline by eliminating expectations on the part of shareholders, 

creditors, and counterparties of such companies that the U.S. government will shield 

them from losses in the event of failure.

3. To respond to emerging threats to the stability of the U.S. financial system.

Pursuant to the Dodd-Frank Act, the Council consists of ten voting members and five 

nonvoting members and brings together the expertise of federal financial regulators, state 

regulators, and an insurance expert appointed by the President. 

The voting members are:

• the Secretary of the Treasury, who serves as the Chairperson of the Council;

• the Chair of the Board of Governors of the Federal Reserve System;

• the Comptroller of the Currency; 

• the Director of the Consumer Financial Protection Bureau;

• the Chairman of the Securities and Exchange Commission;

• the Chairman of the Federal Deposit Insurance Corporation;

• the Chairman of the Commodity Futures Trading Commission;

• the Director of the Federal Housing Finance Agency;

• the Chairman of the National Credit Union Administration; and

• an independent member having insurance expertise who is appointed by the President 

and confirmed by the Senate for a six-year term.

The nonvoting members, who serve in an advisory capacity, are:

• the Director of the Office of Financial Research;

• the Director of the Federal Insurance Office;

• a state insurance commissioner designated by the state insurance commissioners;

• a state banking supervisor designated by the state banking supervisors; and

• a state securities commissioner (or officer performing like functions) designated by the 

state securities commissioners.

The state insurance commissioner, state banking supervisor, and state securities commissioner 

serve two-year terms.

Financial Stability Oversight Council
2020 FSOC // Annual Report ii

Statutory Requirements for the Annual Report

Section 112(a)(2)(N) of the Dodd-Frank Act requires that the annual report 

address the following:

i. the activities of the Council;

ii. significant financial market and regulatory developments, including 

insurance and accounting regulations and standards, along with an 

assessment of those developments on the stability of the financial 

system;

iii. potential emerging threats to the financial stability of the United 

States; 

iv. all determinations made under Section 113 or Title VIII, and the 

basis for such determinations;

v. all recommendations made under Section 119 and the result of such 

recommendations; and

vi. recommendations—

I. to enhance the integrity, efficiency, competitiveness, and stability 

of United States financial markets;

II. to promote market discipline; and

III. to maintain investor confidence.

Approval of the Annual Report

This annual report was unanimously approved by the voting members of the 

Council on December 3, 2020. 

Abbreviations for Council Member Agencies and Member Agency Offices

• Department of the Treasury (Treasury)

• Board of Governors of the Federal Reserve System (Federal Reserve)

• Office of the Comptroller of the Currency (OCC)

• Consumer Financial Protection Bureau (CFPB)

• Securities and Exchange Commission (SEC)

• Federal Deposit Insurance Corporation (FDIC)

• Commodity Futures Trading Commission (CFTC)

• Federal Housing Finance Agency (FHFA)

• National Credit Union Administration (NCUA)

• Office of Financial Research (OFR)

• Federal Insurance Office (FIO)
Contents iii

Contents

1 Member Statement ...................................................... 1

2 Executive Summary ..................................................... 3

3 Financial Developments..............................................11

3.1 Household Finance ...........................................................................11

3.2 Nonfinancial Business Finance..........................................................15

Box A:Nonfinancial Corporate Credit: Financial Market Fragilities and

the COVID-19 Pandemic....................................................................19

3.3 Government Finance .........................................................................24

Box B:U.S. Treasury Market Liquidity at the Onset of the COVID-19 Pandemic27

Box C: Finances of State and Local Authorities and the COVID-19 Pandemic 33

3.4 Financial Markets ............................................................................35

Box D:Recent Stress in Short-Term 

Wholesale Funding Markets ............................................................. 43

Box E: Potential Risks in Commercial Real Estate ........................................74

3.5 Financial Institutions ........................................................................ 77

3.6 Financial Market Structure, Operational Challenges, 

and Financial Innovation.................................................................. 118

3.7 Global Economic and Financial Developments .................................128

4 Council Activities and Regulatory Developments....141

4.1 Select Policy Responses to Support the Economy............................141

4.2 Council Activities ............................................................................143

4.3 Safety and Soundness ....................................................................145

4.4 Financial Infrastructure, Markets, and Oversight..............................154

4.5 Mortgages and Consumer Protection .............................................160

4.6 Data Scope, Quality, and Accessibility .............................................163
2020 FSOC // Annual Report iv

5 Potential Emerging Threats, Vulnerabilities and 

Council Recommendations...................................... 167

5.1 Nonfinancial Business: Corporate Credit .........................................167

5.2 Financial Markets ...........................................................................168

Box F: Council Statement on Activities-Based Review of 

Secondary Mortgage Market Activities ............................................171

5.3 Financial Institutions .......................................................................173

5.4 Financial Market Structure, Operational Challenges, and Financial 

Innovation ......................................................................................175

5.5 Global Economic and Financial Developments .................................184

Box G:“Low-For-Long” Interest Rates and Implications for 

Financial Stability ...........................................................................186

6 Abbreviations ........................................................... 189

7 Glossary.................................................................... 193

8 List of Charts............................................................ 203
1

Steven T. Mnuchin

Secretary of the Treasury 

Chairperson, Financial Stability Oversight Council

Brian P. Brooks

Acting Comptroller of the Currency

Office of the Comptroller of the Currency

Jay Clayton 

Chairman 

Securities and Exchange Commission

Heath P. Tarbert

Chairman 

Commodity Futures Trading Commission

Rodney E. Hood 

Chairman

National Credit Union Administration

Jerome H. Powell 

Chairman 

Board of Governors of the Federal Reserve System

Kathleen Kraninger 

Director 

Bureau of Consumer Financial Protection

Jelena McWilliams 

Chairman 

Federal Deposit Insurance Corporation

Mark A. Calabria

Director 

Federal Housing Finance Agency

Thomas E. Workman 

Independent Member Having Insurance Expertise

Financial Stability Oversight Council

Member Statement

The Honorable Nancy Pelosi

Speaker of the House

United States House of Representatives

The Honorable Kevin McCarthy

Republican Leader

United States House of Representatives 

The Honorable Michael R. Pence 

President of the Senate

United States Senate

The Honorable Mitch McConnell 

Majority Leader

United States Senate 

The Honorable Charles E. Schumer

Democratic Leader

United States Senate

In accordance with Section 112(b)(2) of the Dodd-Frank Wall Street Reform and Consumer Protection 

Act, for the reasons outlined in the annual report, I believe that additional actions, as described below, 

should be taken to ensure financial stability and to mitigate systemic risk that would negatively affect 

the economy: the issues and recommendations set forth in the Council’s annual report should be fully 

addressed; the Council should continue to build its systems and processes for monitoring and responding 

to emerging threats to the stability of the U.S. financial system, including those described in the Council’s 

annual report; the Council and its member agencies should continue to implement the laws they 

administer, including those established by, and amended by, the Dodd-Frank Act, through efficient and 

effective measures; and the Council and its member agencies should exercise their respective authorities 

for oversight of financial firms and markets so that the private sector employs sound financial risk 

management practices to mitigate potential risks to the financial stability of the United States.

1 Member Statement

Executive Summary 3

2 Executive Summary

The U.S. economy was in the midst of the longest 

post-war economic expansion, with historically low 

levels of unemployment, prior to the onset of the 

COVID-19 pandemic earlier this year. The global 

pandemic not only brought about a public health 

crisis but also caused a contraction of economic 

activity at an unprecedented pace. Initially, the 

pandemic reduced consumer spending, slowed 

manufacturing production, and led to widespread 

business closures. The unemployment rate surged 

from 3.5 percent in February to a record high of 

nearly 15 percent in April. Since then, extraordinary 

measures undertaken by policymakers have 

succeeded in arresting the decline in economic 

conditions, initiating a recovery and lowering the 

unemployment rate to 7.9 percent as of September. 

However, a protracted virus outbreak poses 

downside risks that can slow the recovery and even 

prolong the economic downturn. 

Financial Stress from the COVID-19 Pandemic 

and the Policy Response

The COVID-19 outbreak led to substantial financial 

stress in the first quarter of 2020. While economic 

activity was disrupted in March, investors fled riskier 

assets for the safety and liquidity of cash and shortterm government securities. A broad-based selloff in 

equities and commodities resulted in sharp declines 

in both spot and futures prices. The sectors most 

affected by the pandemic, such as airlines, energy, 

transportation, hotels, and restaurants, recorded 

the sharpest declines. The flight to safety and 

liquidity also created disruptions in short-term and 

global dollar funding markets. Meanwhile, trading 

conditions for Treasuries and agency mortgagebacked securities (MBS), generally considered safe 

and liquid assets, were also strained. Moreover, 

credit conditions tightened in the commercial paper 

(CP), corporate bond, and municipal debt markets. 

With the stress in funding markets in March, 

precautionary draws by nonfinancial businesses 

on existing lines of credit with banks increased 

sharply, as firms tried to cover shortfalls in revenues 

and reductions in the availability of short-term 

funding. Substantially increased liquidity and capital 

requirements imposed after the 2008 financial 

crisis helped banks meet the large, unanticipated 

drawdowns. Large deposit inflows from investors 

fleeing to the safety of deposit insurance and 

borrowings at the Federal Reserve’s discount window 

also helped in meeting this surge in liquidity demand.

Meanwhile, policymakers acted to minimize the 

health and economic effects of the pandemic. 

On March 27, the Coronavirus Aid, Relief, and 

Economic Security (CARES) Act was signed into 

law. The CARES Act authorized approximately 

$2.6 trillion in funding to address COVID-19 and 

to support the economy, households, businesses, 

and other entities. In addition, the Federal Reserve 

and Treasury undertook a series of extraordinary 

measures beginning in March to contain the 

financial fallout from the pandemic. The Federal 

Reserve also lowered the target federal funds 

rate to near zero and substantially increased 

purchases of Treasuries and agency MBS to ease 

trading pressures. In a bid to stabilize short-term 

funding markets (STFMs), the Federal Reserve 

launched a series of facilities to provide liquidity to 

foreign central banks, primary dealers, depository 

institutions, and money market funds. In light of 

these exigent circumstances, the Federal Reserve 

and Treasury also enacted a series of unprecedented 

measures to support corporate bonds, bank loans, 

longer-term municipal debt, and asset-backed 

securities. These credit and lending facilities were 

developed with the goal of relieving strains in 

longer-term debt markets through the pandemic. 

These policy actions have substantially improved 

market conditions and investor sentiment in 

financial markets. Federal Reserve purchases of 

Treasuries and agency MBS reduced bid-ask spreads 

and relieved the stress in trading conditions for 

these securities. The announcement of liquidity 

facilities not only succeeded in lowering spreads 

on CP and short-term municipal securities but also 
4 2020 FSOC // Annual Report

reversed the heavy redemptions from prime and 

tax-exempt money funds. The creation of new credit 

facilities lowered spreads on corporate bonds and 

revived new issuance in both the investment grade 

and high-yield bond segments. Overall, these policy 

measures have restored the orderly functioning of 

financial markets and improved investor sentiment, 

as reflected in the rebound in corporate financing 

and equity prices.

The Council provided an important venue for 

facilitating coordination and analysis of risks across 

member agencies at the onset of the pandemic and 

throughout the year. Council members regularly 

identified key risks and shared information 

regarding their policy responses. The Council also 

increased the frequency of staff-level meetings 

to allow important analyses of major market 

developments to be shared in a timely manner 

with all Council member agencies. In addition, the 

Council’s previous identification of vulnerabilities 

and analysis that it had performed leading up to the 

financial stress helped ensure that policymakers’ 

responses were more coordinated, well informed, 

and effective. 

Implications for Financial Stability

A key goal of the Council and its member agencies 

is to monitor vulnerabilities to U.S. financial 

stability so that abrupt and unpredictable changes 

in economic or financial conditions – “shocks” – do 

not disrupt the ability of the financial system to meet 

the demand for financial services. Vulnerabilities 

include structural weaknesses in the financial system 

and its regulatory framework. Vulnerabilities in the 

financial system can amplify the impact of an initial 

shock, potentially leading to substantial disruptions 

in the provision of financial services, such as the 

clearing of payments, the provision of liquidity, and 

the availability of credit. 

The COVID-19 pandemic was an extraordinary 

shock to the global financial system. As discussed 

above, it led to a significant disruption in the 

provision of liquidity and the availability of credit, 

reflecting increasing pessimism and uncertainty 

about the economic outlook as major portions of the 

economy began to shut down.

Though policy actions to minimize the effects of the 

pandemic have been effective at improving market 

conditions, risks to U.S. financial stability remain 

elevated compared to last year. In addition, the 

global outlook for economic recovery is uncertain, 

depending on the severity and the duration of the 

ongoing pandemic. 

Corporate Credit

The corporate debt-to-gross domestic product 

(GDP) ratio was at historic highs when the 

pandemic hit the United States. As economic activity 

contracted in March, there were serious concerns 

about the sustainability of corporate debt. Since 

then, the corporate debt-to-GDP ratio has reached 

new record highs, and, despite the turmoil in credit 

markets, the policy-aided rebound in business 

financing has been strong. 

The potential risk to financial stability from 

nonfinancial business borrowing depends on the 

ability of businesses to service their obligations, 

the ability of the financial sector to absorb losses 

from defaults and downgrades, and the continued 

willingness of market participants to provide 

intermediation during times of stress. 

Elevated valuations in U.S. equities and corporate 

bonds make these markets vulnerable to a major 

repricing of risk, increasing volatility, and weakening 

balance sheets of financial and nonfinancial 

businesses. Sharp reductions in the valuations of 

different assets could negatively impact liquidity, 

increase borrowing costs, and heighten rollover risk.

With cash flows impaired due to the COVID-19 

pandemic, many businesses may be challenged to 

service their debt. Since March, nearly $2 trillion in 

nonfinancial corporate debt has been downgraded, 

and default rates on leveraged loans and corporate 

bonds have increased considerably. The growing 

number of bankruptcy filings could stress resources 

at courts and make it harder for firms to obtain 

critical debtor-in-possession financing. It could also 

prevent many firms from restructuring their debt 

in a timely fashion, potentially forcing them into 

liquidation.
Executive Summary 5

The Council recommends that agencies continue 

to monitor levels of nonfinancial business leverage, 

trends in asset valuations, and potential implications 

for the entities they regulate, in order to assess 

and reinforce the ability of the financial sector to 

manage severe, simultaneous losses. Regulators and 

market participants should also continue to assess 

ways in which leveraged nonfinancial corporate 

borrowers and elevated asset prices may amplify 

stresses in the broader market in the event of a rapid 

repricing of risk or a slowdown in economic activity.

Short-Term Wholesale Funding Markets 

The short-term funding market provides essential 

funding to businesses, local governments, and other 

financial intermediaries and can have implications for 

financial stability and the implementation of monetary 

policy. Recent events, including the financial fallout 

from the pandemic, have confirmed that potentially 

significant structural vulnerabilities remain in STFMs. 

Money market funds (MMFs) offer shareholders 

redemptions on a daily basis while holding many 

short-term assets that are less liquid, especially in 

times of stress. Stresses on prime and tax-exempt 

money funds in March revealed continued structural 

vulnerabilities, which led to increased redemptions 

and, in turn, likely contributed to the stress in 

STFMs. Among institutional and retail prime MMFs, 

outflows as a percentage of fund assets exceeded 

that of the September 2008 crisis. Outflows abated 

after the Federal Reserve announced support for the 

CP market and MMFs.

Liquidity demand from leveraged participants, 

such as hedge funds using Treasury collateral and 

mortgage real estate investment trusts (mREITs) 

using agency MBS collateral, may have also played a 

significant role in the recent market volatility. Some 

of these leveraged participants are vulnerable to 

funding risks because of their reliance on funding 

in repurchase agreement (repo) markets. When 

such leveraged participants face margin calls (either 

because of an external shock to the repo market 

or investor concerns about their profitability), it 

creates incentives for them to deleverage. Since the 

assets on their balance sheets are the same assets 

used as collateral in their repo funding, the need to 

deleverage can increase selling pressures and lead to 

more margin calls. The complexity of interactions 

involving leveraged participants raises concerns as to 

their role in amplifying funding stresses.

The Council recommends that regulators review 

these structural vulnerabilities, including the 

vulnerability of large-scale redemptions in prime 

and tax-exempt MMFs, and the role leveraged 

nonbank entities may have played in the repo 

market. The Council also recommends that, if 

warranted, regulators take appropriate measures to 

mitigate these vulnerabilities.

Residential Real Estate Market: Nonbank 

Mortgage Origination and Servicing

As the shock from the pandemic hit U.S. 

households, federal and state governments enacted a 

series of public assistance policies to aid households, 

such as suspending foreclosures, discouraging 

evictions, and offering flexibilities in home purchase 

and mortgage acquisition processes. The disruption 

in mortgage payments has focused attention on 

nonbank mortgage origination and servicing. 

While the business models of nonbank mortgage 

companies vary, many are subject to certain 

fragilities, such as a heavy reliance on short-term 

funding, obligations to continue to make servicing 

advances for certain delinquent borrowers, and 

limited resources to absorb adverse economic 

shocks. The surge in refinancing due to low rates 

has provided servicers with an additional source 

of liquidity to help sustain operations. An increase 

in forbearance and default rates, however, has the 

potential to impose significant strains on nonbank 

servicers.

The Council encourages relevant state and 

federal regulators to take additional steps to 

coordinate, collect and share data and information, 

identify and address potential risks, and strengthen 

the oversight of nonbank companies involved in the 

origination and servicing of residential mortgages. 

Commercial Real Estate Market

The impact of COVID-19 has adversely affected 

several components of the commercial real estate 

(CRE) market, including the hotel, retail, and 

office segments. A prolonged downturn leaves 
6 2020 FSOC // Annual Report

the CRE sector vulnerable to mortgage defaults 

and declines in valuations, with spillovers to the 

broader economy. While there is variation in 

different institutions’ exposures to pandemic-driven 

CRE stress, a sizeable proportion of CRE loans is 

currently held on bank balance sheets, with small 

and mid-sized banks more likely to be concentrated 

in CRE. Distress in CRE properties makes these 

creditor banks vulnerable to losses and write-downs, 

with the potential to tighten credit and dampen the 

economic recovery.

The Council recommends that regulators continue 

to monitor volatility in CRE asset valuations, the 

level of CRE concentration at banks and other 

entities that hold CRE loans, and the performance 

of CRE loans. The Council recommends that 

regulators continue to encourage banks and other 

entities, such as REITs and insurance companies, 

to bolster, as needed, their loss-absorption capacity 

by strengthening their capital and liquidity buffers, 

commensurate with the levels of CRE concentration 

on their balance sheets.

Large Bank Holding Companies

The banking system has been able to withstand the 

financial fallout of the pandemic in part because 

of the stronger capital and liquidity positions 

built up over the last decade. Large bank holding 

companies (BHCs) have also benefitted from the 

extraordinary policy measures and other supervisory 

and regulatory relief provided under these exigent 

circumstances. 

A severe and prolonged economic deterioration, 

however, can affect the resilience of the banking 

system. Financial distress at a large, complex, 

interconnected BHC has the potential to affect 

global financial markets and amplify the negative 

impact on economic growth by further tightening 

credit conditions. 

The Council is closely monitoring the resilience 

of large BHCs and remains vigilant about their 

willingness and ability to provide credit should 

economic conditions deteriorate further. Member 

agencies use a wide range of tools to identify 

and address risks to these institutions, including 

supervisory and company-run stress tests, 

supervisory review and feedback on the resolution 

plans of large banking organizations, on-site 

examinations and off-site monitoring, and economic 

analysis.

The Council recommends that financial regulators 

ensure that the largest financial institutions 

maintain sufficient capital and liquidity to ensure 

their resiliency against economic and financial 

shocks. In particular, the Council recommends that 

regulators continue to monitor the capital adequacy 

for these banks and, when appropriate, phase out 

the temporary capital relief currently provided. 

The Council also recommends that regulators 

continue to monitor and assess the impact of rules 

on financial institutions and financial markets—

including, for example, on market liquidity 

and capital—and ensure that large BHCs are 

appropriately monitored based on their size, risk, 

concentration of activities, and offerings of new 

products and services. 

Investment Funds

Investment funds play a critical intermediary 

role in the U.S. economy, promoting economic 

growth through efficient capital formation. While 

recognizing these benefits, the Council has also 

identified potential vulnerabilities relating to 

redemption risk in certain open-end funds. For 

example, though both equity and fixed-income 

oriented open-end funds offer daily redemptions 

to investors, some fixed-income markets are less 

liquid than equity markets, and thus funds holding 

mostly fixed-income instruments may face greater 

vulnerability to run risk than funds holding mostly 

equities. The Council has focused in particular on 

the question of whether the structure of open-end 

funds results in greater selling pressure than if 

investors held the fixed income instruments directly. 

During the mid-March financial turmoil, credit 

spreads increased to levels not seen since the 2008 

financial crisis, and corporate bond issuance 

came to a near halt. Meanwhile, bond funds 

experienced historically high levels of outflows 

that some research has suggested contributed to 

stress in corporate and municipal bond markets. 

Interventions by the Federal Reserve and Treasury 
Executive Summary 7

ultimately restored orderly functioning in the 

primary and secondary markets. Nonetheless, 

these events demonstrate the need for additional 

analysis to assess broader market structure dynamics 

that may have contributed to the stress, including 

whether investors redeeming shares from bond 

funds may have affected the extent of selling 

pressure in the bond market differently than if those 

investors had held and sold bonds directly. 

In addition to the potential vulnerability associated 

with redemption risk in mutual funds, the 

Council has also previously highlighted the use of 

leverage by investment funds. Leverage introduces 

counterparty risk, and in a period of stress, if 

leveraged investment funds are forced to sell assets 

on a significant scale, it could exacerbate asset price 

movements.

The Council recommends that the SEC and other 

relevant agencies consider whether additional steps 

should be taken to address these vulnerabilities. 

The Council also supports initiatives by the SEC and 

other agencies to address risks in investment funds 

through various measures, including data collection 

efforts and additional reporting requirements. 

Financial Market Structure 

The extreme volatility in financial markets early in 

the pandemic further emphasized the importance 

of ensuring that appropriate market structures 

are in place so that financial markets can function 

effectively during stress events.

Interlinkages among Dollar Funding Markets:

In the decade since the last financial crisis, 

new regulations on bank capital and liquidity, 

structural reforms in MMFs, and a new operating 

environment for bank-affiliated broker-dealers have 

fundamentally altered how market participants 

interact and the various interlinkages among 

the federal funds market, the repo market, and 

the Eurodollar market. There are benefits from 

interdependencies among markets, including 

enhanced price discovery and more options for 

hedging risks. At the same time, interdependencies 

create transmission risks from volatile or inaccurate 

pricing that have the potential to amplify market 

shocks across different markets.

Pressures on Dealer Intermediation: The financial 

fallout from the pandemic was disruptive in the 

markets for critical securities such as Treasury 

securities, MBS, and corporate bonds. Traditionally, 

market-making and arbitrage mechanisms involving 

securities dealers have helped in the orderly 

functioning of the secondary markets for Treasury 

securities and MBS. However, with the increase in 

issuance volumes (especially for Treasury securities) 

and the implementation of Basel III regulations on 

capital and leverage, major bank-affiliated brokerdealers have reduced the amounts of their balance 

sheets allocated to trading and repo transactions. 

Together, these developments may have contributed 

to episodes of illiquidity in Treasury security and 

MBS markets in March 2020.

Nontraditional Market Participants: Nontraditional market participants, including principal 

trading firms, play an increasingly important role 

in securities and other markets. These firms may 

improve liquidity and investor outcomes under 

normal circumstances, but they may also introduce 

risk. The trading strategies that non-traditional 

market participants employ and the incentives and 

constraints that they operate under may not be as 

well understood, leading to uncertainty concerning 

how these firms might behave during periods of 

market stress.

The Council recommends that member agencies 

conduct an interagency operational review of 

market structure issues that may contribute to 

market volatility in key markets, including shortterm funding, Treasuries, MBS, and corporate bond 

markets, and study the interlinkages between them. 

The Council recommends that financial regulators 

continue to monitor and evaluate ongoing changes 

that might have adverse effects on markets, 

including on market integrity and liquidity. 

Central Counterparties

Although central counterparties (CCPs) provide 

significant benefits to market functioning and 

financial stability, the inability of a CCP to meet 

its obligations arising from one or more clearing 

member defaults could potentially introduce strains 

on the surviving members of the CCP and, more 

broadly, the financial system. At the same time, 
8 2020 FSOC // Annual Report

CCPs’ internal risk management frameworks are 

designed to reduce these risks by imposing liquidity 

and resource requirements on clearing members 

that can increase with market volatility. In addition, 

both the CFTC and SEC maintain active risk 

surveillance programs of CCPs’ and intermediaries’ 

risk management and receive daily or weekly reports 

on positions, risk measures, margins, collateral, and 

default resources. Supervisory stress tests involving 

multiple CCPs can also be an important tool in the 

assessment of risks.

In response to the market volatility in March 2020, 

aggregate margin levels increased significantly, 

but the markets served by the CCPs continued to 

function in an orderly fashion. While the cleared 

derivatives markets functioned as designed, there is 

continued concern about the impact of contingent 

liquidity demands on clearing members and their 

clients related to margin requirements.

The Council recommends that the CFTC, Federal 

Reserve, and SEC continue to coordinate in the 

supervision of all CCPs designated by the Council 

as systemically important financial market utilities 

(FMUs). Relevant agencies should continue 

to evaluate whether existing risk management 

expectations for CCPs are sufficiently robust to 

mitigate potential threats to financial stability. 

The Council also encourages agencies to continue 

to monitor and assess interconnections among 

CCPs, their clearing members, and other financial 

institutions. While margin requirements have 

increased significantly in the aftermath of the 

financial fallout from the COVID-19 pandemic, 

agencies should continue to analyze and monitor the 

impact of regulatory risk management frameworks 

in cleared, uncleared, and related securities 

markets and their impact on systemically important 

intermediaries and their clients. Finally, the Council 

encourages regulators to continue to advance 

recovery and resolution planning for systemically 

important FMUs and to coordinate in designing 

and executing supervisory stress tests of multiple 

systemically important CCPs. 

Alternative Reference Rates

In March 2020, the UK Financial Conduct Authority 

(FCA) stated publicly that, despite the COVID-19 

pandemic, the assumption that firms cannot rely on 

LIBOR (formerly known as the London Interbank 

Offered Rate) being published after the end of 2021 

had not changed. The failure of market participants 

to adequately analyze their exposure to LIBOR and 

transition ahead of LIBOR’s anticipated cessation 

or degradation could expose market participants to 

significant legal, operational, and economic risks 

that could adversely impact U.S. financial markets. 

The Alternative Reference Rates Committee 

(ARRC), a group of private-market participants 

convened by the Federal Reserve and the Federal 

Reserve Bank of New York (FRBNY) in 2014, 

has released the Recommended Best Practices for 

completing the transition from LIBOR. Market 

participants that have determined that the Secured 

Overnight Financing Rate (SOFR) is an appropriate 

rate for their LIBOR transition should not wait for 

the possible introduction of the forward-looking 

SOFR term rates to execute the transition. 

The Council commends the efforts of the ARRC 

and recommends that the ARRC continue its work 

to facilitate an orderly transition to alternative 

reference rates. The Council recommends that 

market participants formulate and execute 

transition plans so that they are fully prepared for 

the anticipated discontinuation or degradation 

of LIBOR. Federal and state regulators should 

determine whether further guidance or regulatory 

relief is required to encourage market participants 

to address legacy LIBOR portfolios. Council 

member agencies should also use their supervisory 

authority to understand the status of regulated 

entities’ transition from LIBOR, including their 

legacy LIBOR exposure and plans to address that 

exposure.

Cybersecurity

Financial institutions continue to invest in and 

expand their reliance on information technology 

and cloud-based computing to reduce costs and to 

increase efficiency and resiliency. The COVID-19 

pandemic may accelerate this trend as financial 

institutions have implemented business continuity 

plans through increased use of teleworking systems 

and dual-work locations. At the same time, financial 

institutions have increased their reliance on third-
Executive Summary 9

party service providers for teleworking systems. 

Greater reliance on technology, particularly across a 

broader array of interconnected platforms, increases 

the risk that a cybersecurity incident may have 

severe consequences for financial institutions. For 

example, recent FRBNY analysis details how the 

impairment of payment systems at any of the five 

most active U.S. banks would result in significant 

spillovers to other banks. Meanwhile, the rapid shift 

towards working from home has also increased 

cybersecurity risks in the financial sector. Market 

participants have observed malicious actors’ use of 

COVID-19 themed phishing attacks to increase their 

success at compromising less secure home networks.

The Council recommends that federal and state 

agencies continue to monitor cybersecurity risks 

and conduct cybersecurity examinations of financial 

institutions and financial infrastructures to ensure, 

among other things, robust and comprehensive 

cybersecurity monitoring, especially in light of new 

risks posed by the pandemic. At the same time, the 

unique and complex threats posed by cyber risks 

require the public and private sectors to cooperate 

to identify, understand, and protect against these 

risks. The Council supports the continued use and 

enhancement of public-private partnerships to 

identify cybersecurity risks and to mitigate them. 

The Council also supports agency efforts to increase 

the efficiency and effectiveness of cybersecurity 

examinations across the regulatory authorities.

Data Gaps and Challenges 

The 2008 financial crisis revealed gaps in the data 

needed for effective oversight of the financial 

system and in internal firm risk management and 

reporting capabilities. Since the crisis, important 

steps have been taken, including developing and 

implementing new identifiers for financial data. 

Significant gaps remain, however, as some market 

participants continue to use legacy processes that 

rely on data that are not aligned to definitions from 

relevant consensus-based standards. Gaps and legacy 

processes inhibit data sharing. 

The Council recommends that regulators and 

market participants continue to work together to 

improve the coverage, quality, and accessibility 

of financial data, as well as improve data sharing 

among relevant agencies. These partnership efforts 

include implementing new identifiers, developing 

and linking data inventories, and implementing 

industry standards, protocols, and security for 

secure data sharing. The Council also recommends 

that member agencies support adoption and use of 

standards in mortgage data, including consistent 

terms, definitions, and data quality controls, which 

will make transfers of loans or servicing rights less 

disruptive to borrowers and investors. The Council 

recommends that member agencies continue to 

work to harmonize domestic and global derivatives 

data for aggregation and reporting, and ensure 

that appropriate authorities have access to trade 

repository data needed to fulfill their mandates.

Financial Innovation

Financial innovation can offer substantial benefits to 

consumers and businesses by meeting unfulfilled or 

emerging needs or by reducing costs, but it may also 

create new risks and vulnerabilities. For example, 

there has been an increase in the number and type 

of digital assets with many increasing in value. Much 

like traditional assets, digital assets can also be 

subject to operational and counterparty risks that 

could prove disruptive to users and the digital asset 

ecosystem as a whole. 

In addition, financial firms’ rapid adoption of 

fintech innovations in recent years may increase 

operational risks associated with financial 

institutions’ use of third-party service providers; if 

critical services are outsourced, operational failures 

or faults at a key service provider could disrupt 

the activities of multiple financial institutions or 

financial markets.

The Council encourages agencies to continue to 

monitor and analyze the effects of new financial 

products and services on consumers, regulated 

entities, and financial markets, and evaluate their 

potential effects on financial stability. The Council 

encourages continued coordination among 

federal and state financial regulators to 

support responsible financial innovation and 

competitiveness, promote consistent regulatory 

approaches, as well as to identify and address 

potential risks that arise from such innovation. 

Financial Developments 11

3 Financial Developments

3.1 Household Finance

Prior to the onset of the COVID-19 pandemic, 

households were generally in sound financial 

condition. In contrast to the lead up to the 2008 

financial crisis, debt levels, both in real terms 

and as a percentage of disposable income, were 

relatively low, and household credit growth was 

concentrated in prime borrowers. Additionally, 

household debt service ratios and delinquency 

rates were low. Disruptions to economic 

activity caused by the pandemic introduced 

considerable stress to households, however. 

The unemployment rate surged from 3.5 

percent in February to a record high of nearly 

15 percent in April. Since then, extraordinary 

measures undertaken by policymakers 

have succeeded in arresting the decline in 

economic conditions, initiating a recovery 

and lowering the unemployment rate to 7.9 

percent as of September. While considerable 

uncertainty remains concerning the path of the 

economic recovery, delinquencies may increase 

significantly as federal aid packages and 

forbearance programs phase out. 

Following a sharp decline between 2008 

and 2011, household debt has since grown 

moderately, totaling $14 trillion in the second 

quarter of 2020. While nominal household debt 

is at record levels, it remains approximately $1 

trillion below 2009 levels when adjusted for 

inflation. In addition, the ratio of household 

debt to disposable personal income has trended 

downward in recent years, as disposable income 

growth has outpaced household debt growth. As 

of the fourth quarter of 2019, household debt 

as a percentage of personal income stood at 97 

percent, well below the peak of 134 percent in 

the fourth quarter of 2007 (Chart 3.1.1). By 

the second quarter of 2020, household debt as 

a percentage of disposable income declined by 

eight percentage points as consumer spending 

0

40

80

120

160

0

40

80

120

160

1995 1998 2001 2004 2007 2010 2013 2016 2019

3.1.1 Household Debt as a Percent of Disposable Personal Income

Percent As Of: 2020 Q2 Percent

Source: BEA, Federal 

Reserve, Haver Analytics

Note: Other Household Credit includes 

debts of both households and nonprofits.

Other Household Credit

Consumer Credit

Mortgages

3.1.1 Household Debt as a Percent of Disposable Personal Income
12 2020 FSOC // Annual Report

40

50

60

70

80

40

50

60

70

80

1990 1994 1998 2002 2006 2010 2014 2018

1990-Present 

Average

3.1.3 Owners’ Equity as Share of Household Real Estate

Percent Percent

Source: Federal Reserve, 

Haver Analytics

As Of: 2020 Q2

Note: Gray bars signify NBER recessions.

3.1.2 Household Debt Service Ratio

Percent As Of: 2020 Q2 Percent

Note: Ratio of debt-service payments to 

disposable personal income. Seasonally 

adjusted. Gray bars signify NBER recessions.

Source: Federal Reserve,

Haver Analytics

8

9

10

11

12

13

14

8

9

10

11

12

13

14

1990 1994 1998 2002 2006 2010 2014 2018

3.1.3 Owners’ Equity as Share of Household Real Estate 

3.1.2 Household Debt Service Ratio fell dramatically and federal aid helped 

support incomes. The personal saving rate—a 

measure of personal savings as a percentage 

of disposable personal income—spiked to 34 

percent in April 2020, exceeding the previous 

record of 17 percent established in 1975. While 

the personal saving rate has since declined to 

14 percent as of September 2020, it remains well 

above the 30-year average of 6.7 percent. 

Rising incomes and years of low interest rates 

helped keep the household debt service ratio—

the ratio of debt service payments to disposable 

personal income—near 30-year lows through 

the first quarter of 2020 and little changed 

since 2018, before falling to record lows in the 

second quarter of 2020 (Chart 3.1.2). The 

share of owners’ equity in household real estate 

continued to increase from its lows in 2012 and 

has returned to the range that prevailed in the 

early 2000s (Chart 3.1.3). 

On net, household net worth has increased notably in the last decade, driven by stock market 

and real estate gains; this has been particularly 

true for high-net-worth and -income households. Between the fourth quarter of 2009 and 

the fourth quarter of 2019, households above 

the 80th percentile saw their net worth increase 

by an annualized rate of 7.4 percent, while 

households below the 80th percentile saw their 

net worth increase by an annualized rate of 4.1 

percent. Households below the 20th percentile 

experienced a decrease in their household net 

worth at an annualized rate of -1.2 percent. 

While household net worth declined by 5.5 percent in the first quarter of 2020, it has since rebounded to pre-pandemic levels, as stock prices 

recovered from pandemic-related economic and 

financial market uncertainty.

In the last decade, consumer credit—which 

primarily consists of credit card debt, student 

loans, and auto loans—has grown at a faster 

pace than mortgage debt, and now accounts 

for about one-quarter of household debt. This 

growth can be attributed to increases in student 

loan and auto loan debt over credit card and 

other household debt. However, in the midst of 

the pandemic, total consumer credit declined 
Financial Developments 13

3.1.5 Change in Inquiries Relative to First Week of March 2020

Source: CFPB

-60

-40

-20

0

20

40

-60

-40

-20

0

20

40

Mar:2020 Apr:2020 May:2020 Jun:2020

New Mortgages

Unspecified and Other

Revolving Credit

Auto Loans

Percent As Of: 26-Jun-2020 Percent

0

250

500

750

1000

1250

1500

1750

0

250

500

750

1000

1250

1500

1750

2003 2006 2009 2012 2015 2018

3.1.4 Components of Consumer Credit

Billions of US$ As Of: 2020 Q2 Billions of US$

Source: FRBNY Consumer Credit 

Panel/Equifax, Haver Analytics

Auto Loans Credit Card Debt

Student Loans

Other Household Debt

Note: Gray bars signify 

NBER recessions.

3.1.5 Change in Inquiries Relative to First Week of March 2020

3.1.4 Components of Consumer Credit as credit card balances fell by an unprecedented 

$110 billion between the fourth quarter of 2019 

and the second quarter of 2020. By contrast, 

auto and student loan balances were little 

changed during this period (Chart 3.1.4). 

Borrowers with prime credit scores have driven 

increases in loan balances over the last ten 

years. As of June 2020, subprime borrowers 

accounted for 12 percent of loan balances, well 

below the fourth quarter of 2009 peak when 

subprime borrowers accounted for 21 percent 

of loan balances. Total loan balances for prime 

borrowers continued to increase throughout 

the pandemic, as the steady growth in 

mortgages more than offset the notable second 

quarter decline in credit card debt for this 

group. Alternatively, total loans for subprime 

borrowers ticked down in the second quarter 

of 2020, with mortgages, auto loans, and credit 

card debt all decreasing. 

Credit standards have tightened since the start 

of the pandemic, impeding credit markets 

access for some. According to the April and 

July 2020 Senior Loan Officer Opinion Survey 

(SLOOS), banks have, on balance, tightened 

standards and terms on all types of consumer 

loans since the onset of the pandemic, and the 

July survey indicated that the levels of standards 

were reportedly at the tighter end of the 2005-

2020 range. In addition, according to a Federal 

Reserve survey of finance companies performed 

in early May, consumer auto lending standards 

at finance companies tightened somewhat 

relative to before the pandemic outbreak. At the 

same time, banks also reported that demand for 

credit weakened substantially in the April and 

July 2020 SLOOS.

Credit inquiries for new mortgages fell 

dramatically starting in the second week of 

March relative to both the first week and the 

trend in previous years. Inquiries for new auto 

loans and credit cards also fell considerably. 

While auto and new mortgage inquiries have 

largely recovered, credit card inquiries remain 

substantially below pre-pandemic levels 

(Chart 3.1.5).
14 2020 FSOC // Annual Report

0.0

0.3

0.6

0.9

1.2

1.5

Feb:19 May:19 Aug:19 Nov:19 Feb:20 May:20

0.0

0.3

0.6

0.9

1.2

1.5

3.1.7 Share of Open Accounts that Transitioned to Delinquent 

Percent Percent

Source: CFPB

As Of: Jun-2020

Student Loans

Auto Loans

First-Lien Mortgages

Credit Cards

0

2

4

6

8

10

0

2

4

6

8

10

Mar:2020 May:2020 Jul:2020 Sep:2020

Nonbanks

Banks

Total

3.1.6 Percentage of Mortgages in Forbearance

Percent Percent

Source: Mortgage Bankers Association

As Of: 27-Sep-2020

The economic impact of COVID-19 caused 

strains on household finances that several 

government actions, including stimulus 

payments, extended unemployment benefits, 

and mortgage payment forbearance, aimed 

to alleviate. The share of mortgage loans in 

forbearance increased sharply at the start of 

the second quarter before flattening and even 

declining in recent months (Chart 3.1.6). 

As of June 2020, credit record data did not 

show evidence of increasing delinquencies on 

major forms of household credit during the 

early months of the pandemic, in contrast to 

the U.S. experience in the Great Recession. In 

fact, delinquencies on household debt declined 

between February and June. Policy interventions 

at the federal, state, and local levels, which 

counteracted income and employment 

shocks, likely contributed to this decline in 

delinquencies. Beyond direct income supports 

such as higher unemployment insurance 

benefits, these policies include programs aimed 

specifically at providing payment assistance 

to consumers with certain types of credit. At 

the same time, the stable delinquency rates 

can be attributed to temporary provisions 

within the CARES Act mandating that loans 

enrolled in forbearance be reported at the 

level of delinquency as of the time of the 

accommodation (Chart 3.1.7). 

The COVID-19 pandemic has led to a sharp 

increase in consumers seeking forbearance 

or loss mitigation assistance from lenders. 

The approximately 17,000 furnishers of 

information to the nationwide consumer 

reporting agencies vary meaningfully in their 

level of sophistication and ability to accurately 

report consumer data through this period of 

financial stress. In addition, as discussed in 

Section 3.4.5, credit scores have not generally 

been negatively affected by COVID-19 as a 

result of certain forbearance provisions in 

the CARES Act. Accurate information on 

consumer creditworthiness is important for the 

functioning of consumer credit markets and 

the broader economy. Inaccurate information 

in consumer credit files may impair the 

3.1.7 Share Of Open Accounts that Transitioned to Delinquent 

3.1.6 Percentage of Mortgages in Forbearance 
Financial Developments 15

1

2

3

4

5

6

0.10

0.15

0.20

0.25

0.30

0.35

1990 1996 2002 2008 2014 2020

Ratio As Of: 2020 Q2 Ratio

Gross Debt / Assets

(left axis)

Gross Debt / EBITDA 

(right axis)

Note: Four-quarter moving average of the median ratio. 

Includes rated and unrated nonfinancial businesses. 

Gray bars signify NBER recessions.

Source: Compustat, Haver

Analytics

3.2.1.2 U.S. Nonfinancial Business Leverage

20

30

40

50

60

20

30

40

50

60

1980 1985 1990 1995 2000 2005 2010 2015 2020

3.2.1.1 Nonfinancial Corporate Credit as Percent of GDP

Percent Percent

Source: Federal Reserve, 

Haver Analytics

As Of: 2020 Q2

Note: Gray bars signify NBER recessions.

functioning of consumer lending and other 

markets reliant on consumer credit report 

information. It may be costly for furnishers 

to improve the accuracy of their reporting, 

however, especially given the stress caused by 

the pandemic. 

In the coming months, federal aid and 

forbearance assistance programs are set to 

expire, with forbearance assistance on federal 

student loans held by the Department of 

Education expiring in December 2020 and 

forbearance assistance for federally backed 

mortgages expiring in the first quarter of 2021. 

These programs, along with analogous state 

government programs and voluntary programs 

set up by private lenders, have helped keep 

delinquencies low in the immediate aftermath 

of the COVID-19 pandemic. The elevated rates 

of forbearance on mortgages and other forms 

of household credit, however, indicate that 

delinquencies may increase significantly as 

programs expire. 

3.2 Nonfinancial Business Finance

3.2.1 Corporate Debt 

Nonfinancial firms entered 2020 with 

increasingly high levels of debt, pushing the 

corporate debt-to-GDP ratio to record high 

levels (Chart 3.2.1.1). Debt levels were also high 

when compared to corporate earnings (Chart 

3.2.1.2). As the economic effects of COVID-19 

unfolded, corporate credit quality deteriorated 

as debt levels increased further and earnings 

declined.

Financial market conditions deteriorated 

sharply after the onset of the COVID-19 

outbreak. Many firms accessed their lines of 

credit to preserve cash and liquidity given the 

heightened uncertainty of future revenues. 

These actions sharply increased bank credit 

exposures to nonfinancial firms in the first half 

of 2020. Several government relief programs 

have helped many businesses obtain credit 

and maintain operations, though considerable 

credit risk remains given the uncertain 

economic outlook. Bank lending increased 

3.2.1.2 U.S. Nonfinancial Business Leverage

3.2.1.1 Nonfinancial Corporate Credit as Percent of GDP
16 2020 FSOC // Annual Report

Trillions of US$

0.0

0.5

1.0

1.5

2.0

2.5

0.0

0.5

1.0

1.5

2.0

2.5

2006 2008 2010 2012 2014 2016 2018 2020

YTD

Investment Grade

High-Yield

3.2.1.5 Gross Issuance of Corporate Bonds

Trillions of US$

Source: Refinitiv, 

SIFMA

As Of: Sep-2020

Note: Includes all non-convertible corporate debt, 

MTNs, and Yankee bonds, but excludes all issues 

with maturities of 1 year or less and CDs.

0

2

4

6

8

10

0

2

4

6

8

10

2005 2007 2009 2011 2013 2015 2017 2019

Hundreds

3.2.1.4 Investment Grade Corporate Bond Spreads

Source: Ice Data Indices, 

ICE BofA US, FRED

Percent As Of: 30-Sep-2020 Percent

Note: The ICE BofA Option-Adjusted Spreads (OASs) are the 

calculated spreads between a computed OAS index of all 

bonds in a given rating category and a spot Treasury curve. 

BBB US Corporate Index 

Single-A US Corporate Index

AA US Corporate Index

-50

-25

0

25

50

75

100

-50

-25

0

25

50

75

100

1992 1996 2000 2004 2008 2012 2016 2020

Easing Tightening

Easing Tightening

Large and Middle-market Firms

Small Firms

3.2.1.3 Bank Business Lending Standards

Percent Percent

Source: Federal Reserve Senior 

Loan Officer Opinion Survey

Note: Represents net percentage of banks reporting 

tightening standards for C&I loans. Large and middlemarket firms are those with annual sales of $50 million 

or more. Gray bars signify NBER recessions.

As Of: 2020 Q2

in the second quarter of 2020 because of 

the increase in small business lending under 

the Small Business Administration’s (SBA’s) 

Paycheck Protection Program (PPP), which 

offset the decline in lending under lines of 

credit. Outside of the PPP, however, the supply 

of bank credit appears to have decreased as 

indicated by the Federal Reserve’s SLOOS. The 

percent of respondents reporting a tightening 

of standards reached the highest level since 

2008 (Chart 3.2.1.3).

At the height of the March 2020 COVID-19 

market stress, corporate bond issuance came 

to a near-halt as secondary market liquidity 

dried up and investment grade corporate credit 

spreads surged to levels not seen since the 

2008 financial crisis (Chart 3.2.1.4). However, 

market conditions improved following the 

announcement of the Federal Reserve’s Primary 

Market and Secondary Market Corporate Credit 

Facilities. These facilities led to a significant 

tightening in credit spreads and bid-ask spreads 

for investment grade corporates. Financing 

conditions were further supported by the 

Federal Open Market Committee’s (FOMC’s) 

decision to reduce the target federal funds rate 

to near zero percent, allowing investment grade 

firms to issue new debt at historically low yields. 

Consistent with more accommodative financing 

conditions, issuances of investment grade 

corporate bonds hit a record $298 billion in 

April, and in the first nine months of 2020, 

gross issuance of investment grade corporate 

bonds totaled $1.6 trillion compared to 

$1.1 trillion for all of 2019 (Chart 3.2.1.5). 

Corporations raising cash buffers, paying down 

drawn revolving credit lines, and refinancing 

existing debt at more favorable interest rates 

were primarily responsible for the record level 

of issuances. While share repurchases and 

dividend distributions still account for a sizeable 

portion of corporations’ use of proceeds, 

during the first half of 2020, nonfinancial 

corporations increased their holdings of 

domestic bank deposits (checking and time 

deposit accounts) and currency by $580 billion, 

3.2.1.5 Gross Issuance of Corporate Bonds

3.2.1.4 Investment Grade Corporate Bond Spreads 

3.2.1.3 Bank Business Lending Standards
Financial Developments 17

0

5

10

15

20

25

0

5

10

15

20

25

2005 2007 2009 2011 2013 2015 2017 2019

3.2.1.6 High-Yield Corporate Bond Spreads

Source: Ice Data Indices, 

ICE BofA US, FRED

Percent As Of: 30-Sep-2020 Percent

Note: The ICE BofA Option-Adjusted Spreads (OASs) are the 

calculated spreads between a computed OAS index of all 

bonds in a given rating category and a spot Treasury curve. 

Single-B US Corporate Index

BB US Corporate Index

3.2.1.6 High-Yield Corporate Bond Spreads a 40 percent increase relative to the fourth 

quarter of 2019.

Spreads on high-yield corporate bonds, which 

were at very low levels prior to the COVID-19 

pandemic, increased significantly during the 

March 2020 market stress (Chart 3.2.1.6). The 

stress observed in the high-yield corporate 

bond market effectively shut down the primary 

market and according to Standard & Poor’s 

Leveraged Commentary & Data (S&P LCD), 

only five bonds were priced in March, raising a 

total of $4.2 billion. This represents a decline 

of 86 percent from February 2020, when 

approximately $30 billion was raised, and a 

decline of 81 percent from March 2019, when 

$22 billion was raised. High-yield spreads have 

since compressed considerably but remain 

above pre-pandemic levels. Nevertheless, 

the decline in risk-free rates has meant that 

effective yields on high-yield corporate bonds 

are now at or near pre-pandemic levels. As of 

September 30, 2020, the effective yield on the 

ICE BofA US High Yield Index was 5.8 percent 

compared to 5.7 percent on September 30, 

2019. With the return of more normal market 

conditions, high-yield borrowers returned to 

the market and in the first nine months of 

2020, gross issuance of high-yield corporate 

bonds totaled $325 billion compared to $279 

billion for all of 2019. Although most highyield bonds are not eligible for the Federal 

Reserve’s programs or facilities, much of the 

improvement in pricing is attributed to the 

implementation of these programs and to the 

low interest rate environment.

After a few years of robust growth, issuance of 

leveraged loans came to a halt in March, and 

spreads widened significantly, peaking at over 

1,000 basis points in late March. Since then, 

spreads have compressed by over 500 basis 

points to 493 basis points as of September 30, 

2020 (Chart 3.2.1.7). In contrast to the record 

level of issuance in the investment grade and 

high-yield corporate bond markets, issuance 

in the leveraged loan market remains subdued 

relative to pre-pandemic levels (Chart 3.2.1.8). 

Demand from collateralized loan obligations 

2.5

5.0

7.5

10.0

12.5

2.5

5.0

7.5

10.0

12.5

2011 2013 2015 2017 2019

HundredsHundreds

3.2.1.7 Leveraged Loan Spreads

Source: S&P LCD

Percent As Of: 30-Sep-2020 Percent

Note: Spread-to-maturity for syndicated loans 

included in the S&P LCD Leveraged Loan Index. 

3.2.1.7 Leveraged Loan Spreads 

Billions of US$

0

100

200

300

400

500

0

20

40

60

80

100

Jan Mar May Jul Sep Nov

2020 Monthly Issuance (left axis)

2016-2019 Average Cumulative 

Issuance (right axis)

2020 Cumulative Issuance 

(right axis)

3.2.1.8 Institutional Leveraged Loan Issuance

Billions of US$

Source: S&P LCD

As Of: 30-Sep-2020

2016-2019 Monthly Average 

Issuance (left axis)

3.2.1.8 Institutional Leveraged Loan Issuance
18 2020 FSOC // Annual Report

(CLOs), which purchased approximately 60 

percent of the syndicated loan issuances in 

2019, waned in 2020. As of September 30, 2020, 

CLO volumes totaled $60 billion year-to-date, 

a 33 percent decline compared to the first nine 

months of 2019.

Some factors mitigate the burden of the debt 

accumulated by corporations. Low interest rates 

support interest coverage ratios for nonfinancial 

firms. In addition, firms have accumulated 

record levels of liquid assets which they can use 

as a buffer against the drop in revenues (Chart 

3.2.1.9). The immediate refinancing risk is 

limited, and the high-yield debt accounts for 

27 percent of U.S. nonfinancial debt maturing 

through 2021 compared to 56 percent of U.S. 

nonfinancial debt maturing in 2024 (Chart 

3.2.1.10). However, nonfinancial corporations 

with lower revenues and additional debt 

outstanding may face increased constraints 

in deleveraging as higher debt servicing 

requirements may constrain future expansion. 

Despite these mitigating factors, the COVID-19 

pandemic has led to a contraction in economic 

activity and corporate profits. This contraction has resulted in a sharp deterioration in 

the credit quality of nonfinancial businesses. 

During the first nine months of 2020, approximately $2 trillion of U.S. nonfinancial corporate debt was downgraded by Standard & Poor’s 

(S&P), with the majority of these downgrades 

occurring in March, April, and May. The COVID-19 pandemic has also negatively impacted 

credit performance. Default rates on leveraged 

loans and corporate bonds have increased notably from the pre-crisis lows, though they are still 

below those observed during the 2008 financial 

crisis. Amid uncertainty about the pandemic 

and future economic growth, downside risks for 

business credit quality and solvency remain. 

3.2.1.9 Nonfinancial Corporations Liquid Assets

Percent of Total Assets Percent of Total Assets

Source: Federal Reserve, 

Haver Analytics

Note: Liquid assets includes foreign deposits, checkable deposits and 

currency, time and savings deposits, money market fund shares, 

security repurchase agreements, debt securities, and mutual fund 

shares. Gray bars signify NBER recessions.

As Of: 2020 Q2

2

3

4

5

6

7

8

9

2

3

4

5

6

7

8

9

1980 1985 1990 1995 2000 2005 2010 2015 2020

Billions of US$

0

200

400

600

800

1000

1200

0

200

400

600

800

1000

1200

2020 2021 2022 2023 2024 2025

3.2.1.10 Maturity Profile of U.S. Nonfinancial Corporate Debt

Source: S&P Global 

Ratings Research

As Of: July-2020 Billions of US$

Speculative Grade

Investment Grade

Note: Includes bonds, loans, and revolving credit 

facilities that are rated by S&P Global Ratings.

3.2.1.9 Nonfinancial Corporations Liquid Assets

3.2.1.10 Maturity Profile of U.S. Nonfinancial Corporate Debt
Box A: Nonfinancial Corporate Credit: Financial Market Fragilities and the COVID-19 Pandemic 19

Prior to the COVID-19 pandemic, U.S. corporate debt 

ratios were elevated, leaving firms more vulnerable 

to an earnings shock. During the early phase of 

the crisis, debt ratios increased even further as 

corporations drew down revolving credit facilities to 

cover emergency liquidity and operating needs, while 

earnings declined.

In response to the crisis, the Federal Reserve and 

Treasury launched a series of corporate lending 

facilities to enable markets to function more effectively. 

Following these extraordinary actions, corporate 

bond issuance surged to record levels, credit spreads 

narrowed, and bid-ask spreads tightened (see 

Section 3.2.1). Looking forward, there is significant 

uncertainty in the corporate sector outlook. In an 

adverse scenario, corporate defaults and bankruptcies 

could increase significantly. Additionally, significant 

debt overhang and an acceleration in credit rating 

downgrades could lead to increased debt servicing 

costs, limiting efficient allocation of capital and 

dragging on the economic recovery. 

Rising defaults and bankruptcies among 

high-yield borrowers

In 2020 an increasing number of high-yield firms 

defaulted on debt obligations and filed for bankruptcy. 

This adverse trend is expected to continue as 

corporate fundamentals weaken further for 

companies in industries that have been particularly 

challenged by COVID-19, such as the retail, airline, 

travel, and hospitality industries.

The trailing four quarter U.S. high-yield corporate 

default rate rose to 8.5 percent in the third quarter 

of 2020, from 3.4 percent a year ago (Chart A.1). In 

October 2020, Moody’s forecasted that the trailing 

twelve month default rate will peak at 10 percent 

in March 2021 under its baseline scenario, lower 

than the 15 percent peak in November 2009. U.S. 

corporate bond and syndicated loan defaults surged 

in the second quarter of 2020, when defaults totaled 

$97 billion, the highest since 2009. These numbers 

do not include defaults of small and medium-sized 

enterprises (SMEs), which employ close to 50 percent 

of U.S. workers, have limited access to capital 

markets, and are more vulnerable to economic 

shocks. 

0

4

8

12

16

20

0

40

80

120

160

200

2007 2009 2011 2013 2015 2017 2019

Default Rate (right axis)

A.1 U.S. Corporate Defaults

Billions of US$ Percent

Source: Moody's 

Investors Service, OFR

As Of: 2020 Q3

Total Defaulted Debt (left axis)

Note: Issuer weighted four quarter trailing default 

rate for speculative grade U.S. corporates. 

A.1 U.S. Corporate Defaults 

Business bankruptcy filings are also increasing, with 

Chapter 11 business filings exceeding 5,500 year-todate through September, compared to 4,100 over the 

same period in 2019 (Chart A.2). While the path of 

the economic recovery remains uncertain, the pace 

of filings may accelerate going forward as some 

federal assistance programs begin to roll-off. 

Count (‘000s)

0

2

4

6

8

10

12

14

16

0

2

4

6

8

10

12

14

16

2000 2003 2006 2009 2012 2015 2018

Jan – Sep

Oct – Dec

Full Year

A.2 Chapter 11 Bankruptcy Filings

Count (‘000s)

Source: ABI, AACER

As Of: Sep-2020

Note: Annual bankruptcy filings from 2000 – 2010. 

Monthly bankruptcy filings from 2011 – 2020.

A.2 Chapter 11 Bankruptcy Filings

Box A: Nonfinancial Corporate Credit: Financial Market Fragilities and

the COVID-19 Pandemic
20 2020 2020 FSOC // FSOC // Annual Report Annual Report

Box A: Nonfinancial Corporate Credit: Financial Market Fragilities and 

the COVID-19 Pandemic

The U.S. bankruptcy system provides important 

benefits, including enabling borrowers to continue 

operating during the bankruptcy process while debts 

are restructured. However, a sudden wave of 

bankruptcy filings could overwhelm the bankruptcy 

system, resulting in congested courts and limited 

access to debtor-in-possession (DIP) financing. In the 

event of a protracted restructuring process, firms 

without access to DIP financing may have insufficient 

cash flows to cover day-to-day operations. A sudden 

spike in liquidations could impede the economic 

recovery through various channels, including 

increased job cuts, reduced capital spending, and a 

tightening in lending standards for business loans due 

to increased creditor losses. 

In response to these challenges, the Federal Reserve 

and Treasury established the Main Street Lending 

Program, a series of business lending facilities, to 

support small and medium-sized businesses. As 

of September 30, 2020, the total amount of loans 

outstanding under this facility was $2.2 billion.

Credit rating downgrades further stress 

corporate bond and CLO markets

Credit ratings downgrades accelerated in the spring 

as corporate credit fundamentals deteriorated. By 

May 2020, the rolling 3-month ratio of nonfinancial 

corporate downgrades to upgrades hit 7.9, the 

highest level on record (Chart A.3). Ratings actions 

stabilized in the summer of 2020, and the ratio of 

downgrades to upgrades fell to slightly above one for 

the three months ending September 2020. 

A large percentage of these recent downgrades 

pertain to “fallen angels,” issuers downgraded from 

investment grade to high-yield. According to the ICE 

BofA U.S. Corporate Index, fallen angels totaled $250 

billion year-to-date as of September, significantly 

exceeding annual levels over all prior years (Chart A.4).

The Federal Reserve and Treasury established the 

Primary and Secondary Market Corporate Credit 

Facilities to provide a funding backstop for eligible 

corporate debt and to support market liquidity for 

0

50

100

150

200

250

0

50

100

150

200

250

2001 2005 2009 2013 2017

A.4 Fallen Angel Debt

Billions of US$ Billions of US$

Source: BofA Global

Research, ICE Data 

Services, OFR

As Of: Sep-2020

Note: Rolling three months beginning in March 2020. Includes 

financial issuers. Fallen angels above refer to issuers 

previously included in the BofA U.S. Corporate Index.

A.4 Fallen Angel Debt

0

2

4

6

8

10

0

2

4

6

8

10

1990 1994 1998 2002 2006 2010 2014 2018

A.3 U.S. Nonfinancial Corporate Downgrade-Upgrade Ratio

Ratio Ratio

Source: Moody’s, 

Haver Analytics, OFR

As Of: Sep-2020

Note: Ratio is trailing 3-month downgrades divided 

by upgrades. Gray bars signify NBER recessions.

A.3 U.S. Nonfinancial Corporate Downgrade-Upgrade Ratio
Financial Developments 212

corporate debt. These facilities were subsequently 

expanded to include certain fallen angel debt, 

which has helped restore investor confidence and 

mitigate disruptions resulting from credit rating 

downgrades. 

Another concern regarding downgrades involves 

corporate borrowers that rely on the syndicated 

leveraged loan market. Loan-only issuers 

represented 63 percent of 2019 syndicated loan 

issuance, according to S&P LCD. In recent years, 

CLOs have been the major purchaser of leveraged 

loans, accounting for approximately 60 percent of 

primary issuance according to S&P LCD. Demand 

from CLOs waned in the spring, however, as 

performance metrics for existing CLOs such as 

over-collateralization ratios, weighted average 

rating factors, and triple-C buckets, have been 

adversely affected by the recent wave of loan 

downgrades. As of June 2020, over 20 percent 

of CLOs were failing junior over-collateralization 

tests, according to Moody’s. Even so, the trailing 

twelve month default rate for syndicated loan 

issuers totaled 4.6 percent as of September 

2020, well below the 8.2 percent default rate 

seen in November 2009. While issuers that can 

access funding via the corporate bond market 

may be less adversely impacted, issuers that rely 

exclusively on the syndicated loan market may 

face a tightening in financing conditions. 

3.2.2 Equities 

The U.S. equity market entered 2020 on the heels of 

one of its best annual gains in the last two decades. 

Despite investor concern over global trade policy and the 

sustainability of the longest U.S. economic expansion on 

record, the S&P 500 climbed 29 percent in 2019. Led by 

a sharp rise in tech stocks, the U.S. index outpaced most 

of its global peers, with benchmarks in Japan, Europe, 

and China rising 18 percent, 25 percent, and 22 percent 

in 2019, respectively. Emerging market stocks also 

gained 15 percent on average. By the end of 2019, market 

analysts widely expected U.S. and global equity markets 

to climb higher, albeit at a slower pace, with anticipated 

support from accommodative Federal Reserve policy 

and progress towards the U.S.-China Phase One trade 

agreement.

Indeed, U.S. stocks continued to hit new highs at 

the start of 2020, with markets reacting positively to 

the official signing of a U.S.-China Phase One trade 

agreement on January 15. However, investors grew 

increasingly attentive to press reports describing a novel 

coronavirus outbreak originating in Wuhan, China. 

With investors citing new risks to global demand and 

supply chains, global stock markets endured substantial 

volatility, beginning in Asia. As COVID-19 intensified 

and spread to Europe—and the economic impact of 

sustained lockdown measures became apparent—risk 

sentiment took a sharply negative turn. 

Selling pressure in global equity markets intensified 

in March as energy producers suffered from a global 

collapse in demand and Saudi Arabia and Russia failed 

to reach an agreement on oil output cuts, sending 

commodity prices sharply lower. Between February 19 

and March 23, the S&P 500 fell by 34 percent, with 

industries most directly affected by the virus, such as air 

carriers, cruise lines, and energy producers, leading the 

decline in U.S. stocks. 

During the March 2020 sell-off, the Chicago Board 

Options Exchange Volatility Index (VIX)—a measure 

of implied stock market volatility conveyed by options 

prices—spiked to a level exceeding that which was seen 

during the 2008 financial crisis, reaching 83 in midMarch after entering the year at 14 (Chart 3.2.2.1). 

Realized stock market volatility also exceeded 2008 

levels, with the S&P 500 falling by nearly 12 percent on 

March 16, its largest one-day drop since 1987. 
22 2020 FSOC // Annual Report

P/E As Of: 30-Sep-2020

3.2.2.2 S&P 500 Forward Price-to-Earnings

10

15

20

25

30

10

15

20

25

30

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

P/E

Source: Bloomberg, L.P.

0

20

40

60

80

100

0

20

40

60

80

100

2008 2010 2012 2014 2016 2018 2020

3.2.2.1 S&P 500 Volatility

Index Index

Source: Bloomberg, L.P.

As Of: 30-Sep-2020

20-Year 

Average

VIX

-50

-25

0

25

50

-50

-25

0

25

50

3.2.2.3 S&P 500 1-Year Price Returns by Sector

Percent Percent

Source: Bloomberg, L.P.

As Of: 30-Sep-2020

The velocity of the selloff triggered market-wide 

circuit breakers for the first time since 1997. 

These circuit breakers, revised in the aftermath 

of the 2010 flash crash, were designed to halt 

trading if price declines reached a level that 

could exhaust market volatility. Under Level 1 

and Level 2 circuit breakers—which are set at 

7 percent and 13 percent of the closing price 

for the previous day—trading pauses for 15 

minutes. Under the Level 3 circuit breaker—

which is set at 20 percent—trading will halt for 

the remainder of the day. Between March 9 

and March 18, the Level 1 circuit breaker was 

triggered four times, three of which occurred 

in the opening minutes of trading. In each 

instance, the resumption of trading after the 

halt was relatively orderly, and the Level 2 and 

Level 3 circuit breakers were not breached. 

During the March 2020 equity market sell-off, 

the S&P 500’s 12-month forward price-toearnings ratio—a popular valuation metric—

fell to a low of 14x, even as analysts penciled 

in sharp downward revisions to expected 

corporate profits (Chart 3.2.2.2). By the end 

of March, risk sentiment began to improve 

amid unprecedented policy easing. In terms 

of monetary policy, the Federal Reserve 

announced open-ended purchases of Treasury 

and MBS and the purchase of corporate 

bonds, among other extraordinary measures, 

after cutting the target federal funds rate to 

near zero. Regarding fiscal policy, Congress 

passed fiscal packages totaling approximately 

$2.6 trillion to support the economy and 

boost investor sentiment. Improved market 

functioning and a rebound in economic activity 

in the third quarter of 2020 helped propel the 

broad-based recovery in global stocks. As of 

September 30, the S&P 500 was up 4.1 percent 

on the year and its forward price-to-earnings 

ratio had risen above 25x. At the sector level, 

the recovery was driven primarily by large-cap 

tech stocks, which analysts viewed as among the 

main beneficiaries of changing consumer and 

business behaviors (Chart 3.2.2.3). 

Outside of the U.S., the aggressiveness 

of countries’ economic and health policy 

3.2.2.2 S&P 500 Forward Price-to-Earnings Ratio

3.2.2.1 S&P 500 Volatility

3.2.2.3 S&P 500 1-Year Price Returns by Sector
Financial Developments 23

Percent As Of: 30-Sep-2020

3.2.2.4 Performance of Global Stock Indices

-30

-15

0

15

30

45

60

-30

-15

0

15

30

45

60

Jan:2019 Jul:2019 Jan:2020 Jul:2020

Percent

Source: Bloomberg, L.P. Note: Indexed to 01-Jan-2019.

Euro Stoxx 50

Nikkei 225

MSCI Emerging Markets Index

Shanghai Composite SE

S&P 500

responses to COVID-19 helped drive 

differentiated price action (Chart 3.2.2.4). 

For example, Asian stock markets generally 

outperformed their global peers, which 

analysts have attributed to the relatively swift 

containment of COVID-19. As of September 30, 

Chinese, South Korean, and Taiwanese indices 

were 5.5 percent, 5.9 percent, and 4.3 percent 

higher, respectively, year-to-date. Meanwhile, 

the benchmark euro area stock index (Euro 

Stoxx 50) was 15 percent lower on the year as of 

September 30, and bourses in Latin America—

where the COVID-19 outbreak has generally 

proved more widespread and economic 

activity remains relatively subdued—have 

underperformed. 

3.2.3 Nonfinancial Non-Corporate Debt

Small businesses were hit particularly hard 

by COVID-19. In the industries most affected 

by COVID-19 (such as restaurants, food and 

beverage, and retail), roughly half of small 

businesses that operated in January were not 

open by mid-April due to shut-down orders, 

according to Homebase. While the share of 

firms in these industries that remain closed has 

declined substantially since then, more than 20 

percent of them are still not open. The share of 

hourly workers working over that same period 

is even lower, suggesting that even among open 

businesses, operations remain reduced relative 

to their pre-COVID-19 levels.

As the uncertainty surrounding COVID-19 

began and small business funding needs 

increased, lenders began tightening standards, 

increasing spreads on loans to small businesses. 

As a result, the SBA’s PPP was essential for the 

survival of many small businesses. PPP has been 

the COVID-19-related relief program most 

utilized by small businesses, and approximately 

two-thirds of PPP loans were originated by small 

and mid-sized banks. According to the SBA’s 

data, the PPP program supported an estimated 

51 million American jobs, covering over 80 

percent of small business payrolls. The funding 

was only designed to cover two and a half 

months of payroll, however. Needs are likely 

to increase further as many businesses remain 

3.2.2.4 Performance of Global Stock Indices
24 2020 FSOC // Annual Report

Trillions of US$ As Of: Sep-2020

3.3.1.2 Publicly Held Treasury Securities Outstanding

0

5

10

15

20

25

0

5

10

15

20

25

2015 2016 2017 2018 2019 2020

Trillions of US$

Source: Federal Reserve, 

Haver Analytics

Bills

Other Marketable Securities

Note: Other marketable securities 

includes notes, bonds, TIPs, and FRNs.

3.3.1.2 Publicly Held Treasury Securities Outstanding

0

25

50

75

100

125

150

175

200

225

0

25

50

75

100

125

150

175

200

225

1940 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050

CBO September 2020 Baseline Projection

3.3.1.1 Federal Debt Held by the Public

Percent of GDP Percent of GDP

Note: Data for fiscal years. 

Source: CBO, Haver Analytics Years after 2019 are projected.

closed or operate at reduced capacity. Recent 

surveys of small businesses indicate that at least 

a quarter of small businesses believe they will 

need additional financial assistance in the next 

six months in order for their business to survive, 

with about a third of firms holding less than 

one month of cash on hand.

Small business loan performance has 

deteriorated through the pandemic. As of 

September 2020, PayNet’s measure of short 

and long-term delinquencies was 18 percent 

higher than in February and stood at levels 

last seen in 2011. Similarly, PayNet’s measure 

of small business defaults was 43 percent 

higher in September than in February. Most 

lenders have indicated that they have modified 

and extended terms for many of their small 

business borrowers; thus, these numbers could 

understate the difficulties that small businesses 

are having in staying current. 

3.3 Government Finance

3.3.1 Treasury Market

In early 2020, the United States was facing its 

deepest recession since the Great Depression. 

In light of this, Congress enacted four rounds 

of fiscal assistance, totaling $2.6 trillion. These 

fiscal packages provided much-needed support 

to households, businesses, municipalities, and 

other entities through the initial lockdowns 

and recovery. However, the additional spending 

is expected to push the 2020 primary deficit 

to 16 percent of GDP, a 70-year high. This 

will lead to a sharp increase in the amount 

of debt outstanding. In September 2020, the 

Congressional Budget Office projected that 

public debt will rise to approximately 110 

percent of GDP in 2030 and 195 percent of GDP 

in 2050 (Chart 3.3.1.1). 

The amount of U.S. Treasury securities 

outstanding grew from $17 trillion in February 

to $20 trillion in September, following the 

additional fiscal spending (Chart 3.3.1.2). New 

issuance has been primarily in the form of 

Treasury bills, which now account for 25 percent 

of outstanding debt compared to 15 percent 

3.3.1.1 Federal Debt Held by the Public
Financial Developments 25

Percent As Of: 30-Sep-2020

3.3.1.4 U.S. Treasury Yields

Source: U.S. Department of the Treasury

0

1

2

3

4

5

0

1

2

3

4

5

2010 2012 2014 2016 2018 2020

Percent

10-Year

2-Year 

Billions of US$ As Of: 30-Sep-2020

3.3.1.3 Treasury General Account Balance

0

250

500

750

1000

1250

1500

1750

2000

0

250

500

750

1000

1250

1500

1750

2000

2015 2016 2017 2018 2019 2020

Billions of US$

Source: Federal Reserve, Haver Analytics

3.3.1.4 U.S. Treasury Yields

3.3.1.3 Treasury General Account Balance at year-end 2019. In addition, the weighted 

average maturity of marketable debt has fallen 

from 70 months at year-end 2019 to 63 months 

as of September 30, 2020. The Treasury General 

Account (TGA) at the Federal Reserve swelled 

to $1,679 billion as of September 30, compared 

to $370 billion at year-end 2019 (Chart 3.3.1.3). 

The record-high TGA balance was driven by 

several factors, including the unprecedented 

size and ongoing uncertainty regarding the 

timing of COVID-19-related outlays.

Between August 2019 and August 2020, foreign 

holdings of U.S. sovereign debt increased by 2.3 

percent to $7.1 trillion. Over this period, Japan 

overtook China as the largest foreign holder of 

U.S. sovereign debt, with $1.3 trillion in holdings 

as of August 2020. While China has reduced its 

holdings of U.S. Treasury securities in recent 

years, they remained fairly stable year-over-year, 

totaling $1.1 trillion as of August 2020. 

Treasury yields declined considerably in 2020 

as investors rapidly reassessed the economic 

outlook in light of the COVID-19 pandemic 

(Chart 3.3.1.4). Between December 31, 2019 

and September 30, 2020, the yield on the 2-year 

Treasury decreased by 145 basis points and the 

yield on the 10-year Treasury decreased by 123 

basis points. Yields fell most dramatically in the 

early days of the COVID-19 market stress, with 

the yield on the 10-year Treasury falling by 98 

basis points between February 20 and March 

9. While the yield on the 10-year Treasury 

stabilized in the following months, it closed at 

a record low of 0.52 percent on August 4, 2020. 

The spread between the 2-year and 10-year 

Treasury yields, which briefly inverted in August 

2019, remained positive in 2020, which can 

largely be attributed to the FOMC’s March 2020 

decision to cut the target range for the federal 

funds rate to the zero lower bound.

Over the past two years, the yield on 10-year 

Treasury Inflation-Protected Securities (TIPS) 

has fallen considerably, from a high of 1.17 

percent in November 2018 to -0.94 percent 

as of September 30, 2020 (Chart 3.3.1.5). 

The 10-year breakeven inflation rate, which 

Percent As Of: 30-Sep-2020

3.3.1.5 Ten-Year TIPS Yield and Breakeven

Source: U.S. Department 

of the Treasury

-2

-1

0

1

2

3

4

-2

-1

0

1

2

3

4

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Percent

10-Year 

Breakeven

Treasury InflationProtected Securities

Note: Breakeven represents the difference 

between the nominal and TIPS yield. 

3.3.1.5 10-Year TIPS Yield and 10-Year Break Even
26 2020 FSOC // Annual Report

Billions of US$ As Of: 03-Oct-2020

3.3.1.6 FRBNY Open Market Operations: Treasury Purchases

Billions of US$

Source: FRBNY

Note: Weekly amount of Treasury securities 

purchased by the Federal Reserve Bank of New York 

in accordance with the FOMC directive.

0

100

200

300

400

0

100

200

300

400

2008 2010 2012 2014 2016 2018 2020

is calculated as the difference between the 

nominal 10-year Treasury yield and the 10-year 

TIPS yield, is widely used to assess financial 

market participants’ inflation expectations. This 

measure of inflation expectations, however, is 

imperfect given that the breakeven inflation rate 

is also influenced by liquidity and inflation risk 

premia. Prior to the COVID-19 market stress, 

breakeven inflation rates had been trending 

downwards, with the 10-year breakeven inflation 

rate falling from 2.1 percent in September 2018 

to 1.6 percent in mid-February 2020. During the 

COVID-19 market stress, the breakeven inflation 

rate fell sharply, hitting a low of 0.50 percent on 

March 19, 2020. The breakeven inflation rate 

has since rebounded, rising to 1.63 percent as 

of September 30, 2020, which can be primarily 

attributed to the continued decline of the 10-

year TIPS yield along with improved market 

functioning.

In March 2020, liquidity in the U.S. Treasury 

market deteriorated rapidly, severely impairing 

market functioning in what is typically the 

deepest and most liquid fixed income market 

in the world (see Box B). In response to 

this extreme stress, the FOMC directed the 

Open Market Trading Desk (the Desk) at 

FRBNY to increase the System Open Market 

Account holdings of Treasury securities to 

support the smooth functioning of markets 

for Treasury securities. The pace of purchases 

was unprecedented, with the Desk purchasing 

nearly $800 billion of Treasury securities in 

the second half of March (Chart 3.3.1.6). 

The Desk has since scaled back its purchases, 

and since mid-June, the Desk has purchased 

approximately $80 billion of Treasury securities 

per month, generally in line with the pace of 

previous large-scale asset purchase programs. 

The credit ratings for U.S. sovereign debt 

published by the three largest credit rating 

agencies were unchanged from the previous year 

at AA+, Aaa, and AAA. While Fitch reaffirmed 

its AAA rating of U.S. sovereign debt, it revised 

its outlook from stable to negative, citing the 

deterioration in U.S. public finances and the 

absence of a credible fiscal consolidation plan. 

3.3.1.6 FRBNY Open Market Operations: Treasury Purchases
Box B: U.S. Treasury Market Liquidity at the Onset of the COVID-19 Pandemic 27

Box B: U.S. Treasury Market Liquidity at the Onset of the COVID-19 Pandemic

As the deepest and most liquid market in the world, 

the U.S. Treasury market plays a critical role in global 

financial markets. In addition to financing the U.S. federal 

government, Treasury securities are used as risk-free 

benchmarks for other financial instruments, to manage 

interest rate risk, and by the Federal Reserve when 

implementing monetary policy. Given the important role 

of U.S. Treasury markets, smooth market functioning 

is critical to broader financial market stability and the 

provisioning of credit to corporations, households, and 

other borrowers. 

Beginning in late February, increased concerns about 

the macroeconomic consequences of the COVID-19 

pandemic drove Treasury yields sharply lower, with the 

10-year end-of-day yield plunging from 1.59 percent on 

February 14 to 0.54 percent on March 9. In the first few 

days of the market reaction, the rapid decline in Treasury 

yields appeared relatively orderly. However, by mid-March 

liquidity conditions had deteriorated rapidly as market 

depth collapsed, volatility surged, and bid-ask spreads 

widened (Charts B.1, B.2).

The deterioration in liquidity conditions was particularly 

acute for longer-dated and off-the-run Treasury securities, 

which led yields on off-the-run securities to deviate 

significantly from a fitted curve. In less than two weeks, 

liquidity conditions in Treasury markets had deteriorated 

to levels not seen since the 2008 financial crisis. In 

addition, the extreme volatility triggered circuit breakers 

for Treasury futures, extreme deviations between Treasury 

Exchange-Traded Fund (ETF) prices and their underlying 

net asset values, and deleveraging by some hedge funds. 

In sum, compressed and massive selling across a broad 

spectrum of Treasury investors strained intermediaries’ 

ability to smoothly handle record trading volumes, 

resulting in a sharp deterioration in market functioning and 

liquidity.

On March 15, the FOMC announced it would increase 

its holdings of Treasury securities by at least $500 billion 

over the coming months to support smooth functioning 

in Treasury markets. In light of the continued strains 

in Treasury markets, the FOMC announced on March 

23 that it would purchase Treasury securities in the 

amounts needed to support smooth market functioning. 

0

10

20

30

40

0

10

20

30

40

Jan:2019 Jun:2019 Nov:2019 Apr:2020 Sep:2020

B.1 Intraday Volatility for 10-Year Treasury Yields

Basis Points Basis Points

Source: Bloomberg, L.P.

As Of: 30-Sep-2020

99th Percentile

95th Percentile

Intraday Volatility

Note: Intraday volatility calculated as daily high yield 

minus daily low yield on 10-year Treasury notes. 

Percentiles based on January 2005 – September 2020. 

B.1 Intraday Volatility for 10-Year Treasury Yields

0

1

2

3

4

5

6

7

0

1

2

3

4

5

6

7

Oct:2019 Jan:2020 Apr:2020 Jul:2020

B.2 Bid-Ask Spread for 30-Year Treasury Bonds

Basis Points Basis Points

Source: Bloomberg, L.P.

As Of: 30-Sep-2020

Off-the-run (2nd)

Off-the-run (1st)

On-the-run

Note: Represents the bid YTM minus the ask 

YTM for on- and off-the-run U.S. Treasury bonds.

B.2 Bid-Ask Spread for 30-Year Treasury Bonds

Subsequently, the Federal Reserve provided temporary 

supervisory relief to help incentivize dealer intermediation 

and to alleviate frictions in Treasury markets (see 

Section 4.1.1). Finally, the FOMC amended permanent 

central bank swap lines, reintroduced temporary central 

bank swap lines, and established the Foreign and 

International Monetary Authority (FIMA) repo facility 

to help relieve selling pressure from foreign accounts 

seeking to raise dollar liquidity (see Section 3.7.1). 

These steps were taken to restore Treasury market 

functioning and avoid exacerbating disruptions in credit 

markets, which could, in turn, impact access to credit 
28 2020 2020 FSOC // FSOC // Annual Report Annual Report

for corporations, households, and other borrowers. 

The speed and scale of Federal Reserve intervention 

stabilized Treasury market functioning by the end of 

spring, and continued purchases have sustained this 

improvement with liquidity conditions returning to 

more normal levels. 

Treasury Market Intermediaries

Bank affiliated broker-dealers are a key source of 

liquidity provision in U.S. Treasury markets. These 

dealers have traditionally acted as short- to mediumterm liquidity providers, often buying or selling from 

customers in large amounts, holding a portion of 

these positions across days, and maintaining a 

large balance sheet to support such positions. In 

addition to traditional dealers, principal trading firms 

(PTFs) and other high-frequency traders (HFTs) play 

a significant role in providing intraday liquidity to 

U.S. Treasury markets, with PTFs accounting for 

roughly 60 percent of trading volume on electronic 

interdealer broker platforms, which are the primary 

sources of price discovery for the critical on-the-run 

segment of the Treasury market. 

Both traditional dealers and PTFs were under stress 

during March 2020. Traditional dealers entered the 

month with already high inventory levels, making it 

difficult for them to absorb customer sales of offthe-run Treasury securities (Chart B.3). Additionally, 

traditional dealers reportedly reduced market-making 

activities in both on- and off-the-run securities after 

hitting internal risk management limits under the 

sudden and intense selling of off-the-run Treasury 

securities from their customers. At the same time, 

PTFs significantly reduced their market-making 

activities in on-the-run securities. The extreme 

volatility, combined with a breakdown in typical crossasset correlations, caused PTFs, in aggregate, to 

lower order book replenishment rates, which lowered 

market depth in Treasury futures and on-the-run or 

benchmark nominal coupon markets. Ultimately, the 

pullback by PTFs in aggregate and dealers’ inability 

or unwillingness to absorb record Treasury overflows 

caused liquidity conditions in Treasury markets 

to deteriorate sufficiently to result in disorderly market 

conditions, necessitating the first official intervention to 

restore Treasury market functioning since 1970. 

Real Money Investors and Leveraged Hedge Funds 

In early March, real money investors began selling off-therun Treasury securities to either raise cash balances or 

rebalance portfolios. Notably, foreign investors (including 

central banks) sold Treasuries to raise dollar liquidity, while 

pension funds and other asset managers sold longerdated securities to rebalance after large price gains in 

Treasury securities and losses in equities. This heavy 

selling pressure by real money investors, in addition to 

putting pressure on the Treasury cash market, likely 

served as a catalyst for the widening in the cash-futures 

basis, which may have precipitated the unwinding of the 

positions of some leveraged investors. 

-50

0

50

100

150

200

250

300

350

-50

0

50

100

150

200

250

300

350

2015 2016 2017 2018 2019 2020

B.3 Primary Dealer Inventories

Billions of US$ As Of: 30-Sep-2020 Billions of US$

Source: FRBNY

Treasury Bills

Treasury Notes and Bonds

B.3 Primary Dealer Inventories 

Box B: U.S. Treasury Market Liquidity at the Onset of the COVID-19 Pandemic
Financial Developments 292

3.3.2 Municipal Bond Market

Municipal bond markets continued to experience strong 

retail investor demand at the start of the year, which 

helped drive steady net inflows into municipal bond 

funds and sent bond prices upward. This changed in 

March 2020 with the onset of the COVID-19 pandemic, 

as individual investors pulled money out of bonds in 

a flight to cash. Pricing became unstable and issuers 

responded by delaying planned bond issuances.

On April 9, 2020, the Federal Reserve announced the 

launch of its Municipal Liquidity Facility (MLF) to buy 

municipal notes from eligible state and local issuers. 

On August 11, 2020, the Federal Reserve extended 

the termination of the MLF from September 30, 2020 

to year-end 2020. While some investors had already 

begun to return to the municipal market, the April 

announcement helped improve investor confidence, 

resulting in stabilized pricing and increased issuance.

As described in Section 3.6.2.5, hedge funds 

increased their exposures to Treasury securities 

in the lead up to the COVID-19 pandemic. A 

significant proportion of this growth has been 

concentrated in relative value hedge funds that 

seek to exploit pricing discrepancies between 

similar products or securities. A popular relative 

value strategy has been the “cash-futures basis 

trade,” whereby funds try to capture the spread 

between the implied repo rate and general 

collateral repo rates over the term of the trade. 

Once the basis began to widen in March and 

Treasury volatility spiked, some leveraged 

investors unwound their positions due to internal 

risk-management stop-outs, increased margin 

requirements for futures, and tightening in 

financing conditions. Leveraged hedge funds 

employing other trading strategies may have 

amplified long-dated Treasury yield volatility 

through positive feedback. 

Given the rapid decline in market liquidity, the 

selling by central banks and real money investors, 

in conjunction with the unwind of certain hedge 

fund positions, contributed to “one-way” pressure 

on the cash market and the widening of the cashfutures basis until late March, when the Federal 

Reserve began to aggressively purchase off-therun Treasury securities, including cheapest-todeliver securities, which are typically excluded 

from purchase operations. 

Further Study Needed

The Federal Reserve’s actions restored market 

functioning, yet the events of March 2020 

exposed fragilities in Treasury markets that will 

require further study with an eye toward making 

future official interventions less likely. Factors that 

likely contributed to the breakdown in market 

functioning include massive selling by real and 

levered investors, dealer risk management and 

balance sheet constraints, and the rapid decline in 

liquidity provisioning by PTFs.
30 2020 FSOC // Annual Report

-6

-3

0

3

6

9

12

-6

-3

0

3

6

9

12

1998 2001 2004 2007 2010 2013 2016 2019

3.3.2.1 Changes in State and Local Government Tax Revenues

Percent Percent

Source: U.S. Census 

Bureau, Haver Analytics

Note: Data represents year-over-year percentage change. Revenue 

measures includes revenues from property, individual income, corporate 

income, and sales taxes. Gray bars signify NBER recessions.

As Of: 2020 Q2

3.3.2.1 Changes in State and Local Government Tax Revenues State and local government tax revenues 

were strong in 2019 and the first quarter of 

2020 compared to 2018. Total state and local 

government tax revenues in the second half 

of 2019 were 6.0 percent higher than in the 

second half of 2018 (Chart 3.3.2.1). However, 

delayed tax filings and business closures due 

to COVID-19 negatively affected tax revenues 

in the second quarter of 2020, with economic 

contraction expected to hold down tax revenues 

for the rest of the year. 

Municipal bond ratings continued to improve 

in 2019, and state and local tax revenues for the 

full year were 7.0 percent higher than in 2018. 

State reserve fund balances across the country 

increased in 2019, with the median rainyday fund balance as a share of general fund 

expenditures rising to 7.8 percent, based on 

data aggregated from all 50 state budget offices. 

However, by the second quarter of 2020, states 

began to draw down rainy-day balances to offset 

falling revenues. 

Municipal bond funds experienced record 

net inflows in 2019 and the first two months 

of 2020. In 2019, net fund inflows totaled $93 

billion, compared to $4.2 billion of net inflows 

for 2018 (Chart 3.3.2.2). In March and April, 

however, investors responded to the COVID-19 

pandemic by withdrawing $45 billion from 

municipal bond funds, with market analysts 

pointing to a substantial flight into money 

market funds. This was followed by a net inflow 

of $43 billion between May and September 2020 

as market conditions stabilized. Cumulative 

net flows totaled $18 billion for the first 

nine months of 2020, a decline of 74 percent 

compared to the first nine months of 2019. 

During the market displacement from midMarch through April, diverging municipal 

bond and Treasury bond prices resulted in the 

ratio of 10-year AAA-rated general obligation to 

10-year Treasury yields spiking to 340 percent 

(Chart 3.3.2.3). By September 25, 2020, this 

municipal-to-Treasury ratio dropped to 124 

percent—still well above the historical norm of 

98 percent.

3.3.2.3 Municipal Bonds to U.S. Treasuries

Source: Municipal Market 

Advisors, Bloomberg, L.P.

0

100

200

300

400

500

600

0

100

200

300

400

500

600

2005 2008 2011 2014 2017 2020

Percent As Of: 25-Sep-2020 Percent

Note: Percentage of municipal yields against equivalent Treasury 

yields. Bloomberg's BVAL AAA Benchmark replaced MMA as the 

provider for municipal yields on September 1, 2010. 

30-Year AAA

10-Year AAA

5-Year AAA 

-50

-40

-30

-20

-10

0

10

20

30

-50

-40

-30

-20

-10

0

10

20

30

2010 2012 2014 2016 2018 2020

3.3.2.2 Municipal Bond Mutual Fund Flows

Billions of US$ Billions of US$

Source: ICI, Haver Analytics

As Of: Sep-2020

Note: Net fund flows.

3.3.2.3 Municipal Bonds to U.S. Treasuries

3.3.2.2 Municipal Bond Mutual Fund Flows
Financial Developments 31

Annual municipal debt issuance was up 

23 percent in 2019 over 2018, and monthly 

municipal bond sales continued at above 

average levels at the start of 2020 (Chart 

3.3.2.4). In March, however, primary market 

issuance fell 53 percent from the previous 

month as issuers withdrew scheduled bond 

sales in response to significantly lower retail 

demand. Municipal debt issuance recovered in 

the following months and as of September 2020, 

year-to-date issuances totaled $347 billion, a 24 

percent increase relative to the same period in 

2019. In particular, taxable issuance increased 

sharply, driven by overall low interest rates and 

changes in the tax code that no longer allow 

tax-exempt advance refundings. 

Over the medium-term, expected impacts of 

the COVID-19 crisis include lower state and 

local revenues and increased debt obligations 

and debt service. Longer-term credit weaknesses 

in the area of pension and retiree health care 

liabilities remain concerns in the municipal 

market. Despite these challenges, credit rating 

agencies have taken relatively few negative 

rating actions against municipal debt. S&P and 

Moody’s only downgraded approximately one 

percent of the municipal borrowers they rate in 

the second quarter of 2020. 

The fiscal crisis of Puerto Rico remains 

distinctive in a sector with few defaults 

historically. The Puerto Rico Oversight, 

Management, and Economic Stability Act 

(PROMESA), enacted in June 2016, provided 

for the establishment of the Financial Oversight 

and Management Board for Puerto Rico 

(the FOMB) and a resolution process for 

Puerto Rico’s $74 billion in public sector debt 

(excluding pension liabilities). In 2017, the 

Commonwealth and four of its instrumentalities 

filed to pursue debt restructuring under 

Title III of PROMESA, followed by a Title III 

filing of the Puerto Rico Public Buildings 

Authority (PBA) in September 2019. The Puerto 

Rico Urgent Interest Fund Corporation—a 

government-owned corporation created to 

securitize Puerto Rican sales and use tax 

Billions of US$

0

100

200

300

400

500

600

0

100

200

300

400

500

600

2006 2008 2010 2012 2014 2016 2018 2020

YTD

Revenue

General Obligation

3.3.2.4 Municipal Bond Issuance

Billions of US$

Source: Thomson 

Reuters, SIFMA

As Of: Sep-2020

Note: Excludes maturities of less than 13 months.

Private Placement

3.3.2.4 Municipal Bond Issuance
32 2020 FSOC // Annual Report

proceeds—is the only Commonwealth entity to have 

reached a resolution of its debt obligations.

In May 2019, the Puerto Rico Electric Power 

Authority (PREPA) entered into a restructuring 

support agreement to restructure $8.9 billion of 

the authority’s bonded debt. As of November 2020, 

court confirmation of the agreement is pending. 

PREPA’s 2020 Fiscal Plan requires it to cede its main 

operating assets to private service providers by the 

second half of 2022. 

In February 2020, the FOMB filed an amended 

Plan of Adjustment to restructure more than $50 

billion of pension liabilities and $35 billion of debt 

and other claims against the Commonwealth, PBA, 

and the Employee Retirement System. If approved, 

the plan would reduce $35 billion of debt and 

other claims by almost 70 percent to approximately 

$11 billion. Weak structural reform execution 

and revenue impacts of COVID-19, however, 

have substantially reduced the Commonwealth’s 

forecasted surplus from the 2019 Fiscal Plan, 

a key input to the Plan of Adjustment. The 

Commonwealth’s 2020 Fiscal Plan requires fiscal 

measures and structural reforms expected to 

contribute to an average annual pre-debt service 

surplus of $578 million over five years, down from an 

expected $2.1 billion in the 2019 Fiscal Plan

In fiscal year 2020, the Commonwealth’s annual 

general fund collections fell 22 percent from the 

previous year. The 2020 Fiscal Plan forecasts that a 

lack of robust structural reforms, rising healthcare 

costs, and the phase-out of federal aid will lead to 

annual deficits starting in 2032—six years earlier 

than projected in the 2019 plan.

While federal disaster-related funds are having an 

ameliorative effect, Hurricane Maria highlighted 

weaknesses in the island’s electric, water, and 

transport infrastructure that undermine the island’s 

manufacturing base and feed outmigration.
Box C: Finances of State and Local Authorities and the COVID-19 Pandemic 33

Most state and local governments entered 2020 with 

increased reserves and record-high rainy-day funds. 

Despite these strengths, municipal markets became 

increasingly volatile as the pandemic worsened 

in March. Mutual fund investors pulled over $41 

billion of assets out of the market in less than three 

weeks. Withdrawals were accompanied by widening 

spreads, hindering state and local governments’ 

ability to borrow in a time of delayed and lower tax 

revenue. Between March 9 and March 20, state 

and local governments sold only $6 billion of the 

$16 billion in bonds they sought to issue, and most 

new issues were canceled due to collapsed investor 

demand. Market functioning deteriorated to the point 

where buyers and sellers had difficulty determining 

prices, and state and local authorities were effectively 

shut out of the primary market.

In response to stressed markets, the Federal 

Reserve extended asset eligibility for the Money 

Market Mutual Fund Liquidity Facility (MMLF) and the 

Commercial Paper Funding Facility (CPFF) to include 

certain short-term municipal securities on March 

23. On April 9, the Federal Reserve announced the 

establishment of the MLF, which would purchase 

up to $500 billion of short-term notes directly from 

eligible state and local issuers. Markets responded 

positively to this announcement; outflows slowed 

in April and municipal mutual funds have received 

consecutive weeks of positive inflows since early May. 

Participation in the MLF remains limited, however, 

with only the state of Illinois and the Metropolitan 

Transportation Authority of New York tapping the 

facility for a total outstanding amount of $1.7 billion as 

of September 30, 2020.

Challenges in the current environment 

Despite improved primary and secondary market 

conditions, municipal fundamentals remain stressed. 

In particular, declining tax revenues and increased 

pandemic-related spending pose challenges for 

state governments. States derive the bulk of their 

tax revenue from individual income and sales taxes, 

and the Tax Policy Center estimates total tax revenue 

shortfalls of $75 billion and $125 billion for fiscal years 

2020 and 2021, respectively. Tourism-dependent 

and oil-producing states face additional headwinds 

given lower tax revenues. Ongoing fiscal negotiations 

also add uncertainty, as federal aid is a significant 

source of state budget funds. Most states have 

balanced budget requirements, making it difficult 

to fund spending obligations and investment during 

times of decreased tax revenue. Pension liabilities, 

which were already underfunded, are under pressure 

as investment portfolios try to recoup losses from 

market volatility. In light of the deteriorating outlook 

for revenues, many states are already looking to cut 

expenditures, tap reserves, and issue debt/notes to 

bridge deficits and address short-term liquidity needs. 

Box C: Finances of State and Local Authorities and the COVID-19 Pandemic 
34 2020 FSOC // Annual Report

In contrast to state governments, local governments 

generate the majority of revenue through property 

taxes, insulating them from immediate declines in 

sales and income tax revenues (Charts C.1, C.2). 

Nevertheless, the potential for declines in property 

tax revenues, as well as potential reductions in 

federal and state aid, constitute a risk for local 

authorities in the coming years, given the inherent 

lag in property tax assessment and collections. 

Moreover, municipalities that are reliant on sales and 

income taxes, such as New York City, are expected 

to see material declines in revenues for fiscal years 

2020 and 2021. According to the National League 

of Cities and the National Association of Counties, 

localities (such as cities, towns, and villages) are 

estimated to see total revenue losses of $134 billion 

and $117 billion in fiscal years 2020 and 2021, 

respectively, while counties are estimated to lose 

$114 billion in revenue from fiscal year 2020 to 2021. 

While the estimated $365 billion in lost revenues 

does not take into account offsets from CARES 

Act funding, it also does not consider additional 

expenditures or the impact of deferring pension 

contributions. 

Some state and local governments are deferring 

or reducing scheduled pension payments in 2020 

to cover budget shortfalls caused by constrained 

budgets. Deferring pension contributions may not 

materially impact creditworthiness or future pension 

payments for those municipalities with well-funded 

pension plans; however, a number of pension funds 

were in materially underfunded positions prior to the 

COVID-19 pandemic, and deferring contributions 

could have serious implications for the sustainability 

of these plans. As of fiscal year 2018, 16 pension 

funds in seven states were less than 50 percent 

funded, with unfunded liabilities totaling nearly $270 

billion (Chart C.3).

Box C: Finances of State and Local Authorities and the COVID-19 Pandemic

47%

C.1 Breakdown of State Tax Revenues

Source: U.S. Census Bureau

38%

Sales

Property

Individual Income

Corporate Income

9%

5%

As Of: 2019

Other

2%

C.1 Breakdown of State Tax Revenues 

C.2 Breakdown of Local Tax Revenues

Source: U.S. Census Bureau

72%

18%

Sales

Corporate Income

Individual Income

Property

5% 5%

As Of: 2019

1%

Other

C.2 Breakdown of Local Tax Revenues

Billions of US$ As Of: 2018

C.3 Liabilities of Severely Underfunded Public Pension Plans

40

50

60

70

80

90

100

0

50

100

150

200

250

300

2001 2003 2005 2007 2009 2011 2013 2015 2017

Percent

Source: publicplansdata.org

Local unfunded liability (left axis)

State unfunded liability (left axis)

Note: Includes state and local pension plans with UAAL below 50 

percent as of 2018. Contribution rate calculated as the weighted 

average contribution as a percent of actuarially required contribution.

Contribution rate 

(right axis)

C.3 Liabilities of Severely Underfunded Public Pension Plans
Financial Developments 35

3.4 Financial Markets 

3.4.1 Wholesale Funding Markets: Unsecured 

Borrowing

Commercial Paper

The commercial paper (CP) market is an 

important source of unsecured funding for 

financial and nonfinancial companies to meet 

current operating needs. CP is a financial 

instrument with maturity up to 270 days, and 

firms generally rollover outstanding balances. 

Thus, companies relying on the CP market for 

funding are susceptible to changing market 

conditions during the rollover period.

Total CP outstanding was $957 billion at the 

end of September 2020, down from $1,075 

billion in September 2019 (Chart 3.4.1.1). CP 

outstanding issued by financial firms declined 

to $533 billion in September 2020, from $552 

billion in September 2019. These issuers 

represent 56 percent of the amount outstanding 

compared to 51 percent outstanding the year 

prior. Nonfinancial firm issuers, which include 

industrial firms, service firms, and public 

utilities, among others, account for 19 percent 

of the balances outstanding as of September 

2020. Nonfinancial issuers saw a $100 billion 

decline, or 35 percent, in CP balances over 

the one-year period. Most of the decline 

occurred in the second quarter of 2020 when 

nonfinancial CP balances fell by $69 billion. 

ABCP, which accounted for the remaining 25 

percent of CP outstanding, rose 0.5 percent over 

the past year, totaling to $241 billion at the end 

of September 2020. Unlike 2007-2009, ABCP 

issuers were able to issue new CP or rollover CP 

balances during the COVID-19 market stress 

(Chart 3.4.1.2). 

Nonfinancial companies have few options other 

than CP and bank revolving credit facilities 

for short-term financing. A freezing of the CP

market for nonfinancial companies is a risk 

for these firms and for the banks that provide 

revolving credit facilities that backstop CP 

programs. 

0

10

20

30

40

50

60

0

10

20

30

40

50

60

Jan:2019 May:2019 Sep:2019 Jan:2020 May:2020 Sep:2020

3.4.1.2 CP Issuance by Issuer Type and Rating

Billions of US$ As Of: Sep-2020 Billions of US$

A2/P2 Nonfinancial

AA Financial

AA ABCP

AA Nonfinancial

Source: Federal Reserve, 

Haver Analytics Note: Monthly average.

0.0

0.5

1.0

1.5

2.0

2.5

0.0

0.5

1.0

1.5

2.0

2.5

2001 2004 2007 2010 2013 2016 2019

3.4.1.1 CP Outstanding by Issuer Type

Trillions of US$ As Of: Sep-2020 Trillions of US$

Domestic Financial

Domestic Nonfinancial

Foreign Financial

Asset-Backed

Other

Foreign Nonfinancial

Source: Federal Reserve, 

Haver Analytics

Note: Not seasonally adjusted; domestic includes CP 

issued in the U.S. by entities with foreign parents.

3.4.1.2 CP Issuance by Issuer Type and Rating

3.4.1.1 CP Outstanding by Issuer Type
36 2020 FSOC // Annual Report

0

20

40

60

80

100

120

0

20

40

60

80

100

120

Jan:2019 Jul:2019 Jan:2020 Jul:2020

3.4.1.5 Weekly CP Issuance by Tenor

Billions of US$ As Of: 25-Sep-2020 Billions of US$

5-9 Days

10+ Days

1-4 Days

Source: Federal Reserve, 

Haver Analytics Note: Weekly average.

0

1

2

3

4

0

1

2

3

4

Jan:2019 Jun:2019 Nov:2019 Apr:2020 Sep:2020

3.4.1.4 Three Month CP Interest Rate Spreads

Percent As Of: 30-Sep-2020 Percent

A2/P2-Rated Nonfinancial 

AA-Rated ABCP

AA-Rated Financial

AA-Rated Nonfinancial

Source: FRBNY, Bloomberg L.P., 

Haver Analytics, OFR

Note: Spread to 3-Month 

Overnight Index Swap (OIS) rate.

Billions of US$ As Of: Sep-2020

3.4.1.3 CP Outstanding & MMF Holdings

150

200

250

300

350

400

450

900

950

1000

1050

1100

1150

1200

Jan:2017 Jan:2018 Jan:2019 Jan:2020

Billions of US$

Source: Federal Reserve, SEC Form N-MFP, Haver Analytics

Money Market Fund Commercial 

Paper Holdings (right axis)

Commercial Paper 

Outstanding (left axis)

In mid-March, the U.S. CP market was severely 

disrupted amid economic uncertainty arising 

from the COVID-19 pandemic. Prime MMFs—

which are significant purchasers of CP—sought 

to reduce CP holdings to raise cash in response 

to actual and expected investor redemptions 

(Chart 3.4.1.3). Dealers faced balance 

sheet limits and were unable or unwilling 

to intermediate in the secondary market. In 

addition, the Risk Management Association’s 

Quarterly Aggregate Data Survey shows that 

securities lending cash collateral reinvestment 

accounts—which are also significant purchasers 

of CP—reduced their holdings by 29 percent 

in the first quarter of 2020 (see Section 3.4.2). 

Survey data does not provide information 

concerning the amount of ABCP held by these 

accounts.

The resulting lack of demand for new 

unsecured exposures, and the forced selling 

of short-term assets, propelled credit spreads 

and absolute yields to rise relative to less-risky 

benchmarks, such as the effective federal funds 

rate, the overnight index swap (OIS) rate, and 

SOFR. LIBOR also widened relative to less-risky 

benchmark rates. The spread between the 90-

day AA Nonfinancial CP rate and the OIS rate 

reached a peak of 210 basis points on March 26, 

a level not seen since the 2008 financial crisis. 

The spread on the 90-day A2/P2 Nonfinancial 

CP rate peaked at 376 basis points on March 20 

(Chart 3.4.1.4).

Many firms reportedly were unable to issue 

CP or to only issue at a very high yield, thus 

increasing their rollover risk and reducing 

the ability of CP to support their short-term 

funding and liquidity needs. Issuances with 

tenors of less than four days also markedly 

increased in March (Chart 3.4.1.5).

 In mid-March, the Federal Reserve took a series 

of actions to address the dislocation in the 

wholesale funding markets by announcing the 

establishment of lending facilities under section 

13(3) of the Federal Reserve Act, including 

the CPFF on March 17 and the MMLF on 

March 18. The former allows highly rated U.S. 

3.4.1.5 Weekly CP Issuance by Tenor

3.4.1.4 Three Month CP Interest Rate Spreads 

3.4.1.3 CP Outstanding & MMF Holdings
Financial Developments 37

CP issuers to sell CP to the Federal Reserve’s 

special purpose vehicle. The latter makes loans 

available to U.S. depository institutions and 

BHCs to finance their purchases of certain 

types of assets from MMFs (see Section 4.1). 

The MMLF helped support liquidity in the 

markets for the assets held by MMFs. 

Outflows from prime MMFs gradually reversed 

following the announcement of the MMLF 

and CPFF, contributing to improvements in 

CP market condition and potentially reducing 

the usage of the bank backstop facilities. 

Outstanding amounts under the MMLF and 

the CPFF were $7.1 billion and $.03 billion, 

respectively, at the end of September 2020. This 

is down from a peak of $54.1 billion on April 6, 

2020, under the MMLF and $4.3 billion on May 

13, 2020, under the CPFF.

Bank Deposits

Deposits can form a stable source of funding 

for banks, although the stability of different 

types of deposits can vary. Brokered certificates 

of deposit and large denominated deposits are 

considered riskier sources of funding because 

they can be more vulnerable to changes in 

short-term interest rates if the customer finds a 

more appealing rate elsewhere. 

In the first nine months of 2020, total deposits 

at U.S. commercial banks grew by $2.5 trillion 

to $16 trillion at the end of September. 

Large time deposits, which include wholesale 

certificates of deposit (CDs), declined 15 

percent in the first nine months of 2020 to 

$1.6 trillion and 11 percent on a year-over-year 

basis (Chart 3.4.1.6). In the first half of 2020, 

estimated insured deposits at domestic office 

banks increased by over $1 trillion, and stood at 

$8.8 trillion at the end of June 2020. 

3.4.2 Wholesale Funding Markets: Secured 

Borrowing

Repo Markets

The repo market is an integral part of the 

STFMs, providing secured, short-term, markedto-market funding against various forms 

of securities collateral. SOFR, the ARRC’s 

-30

-20

-10

0

10

20

30

-30

-20

-10

0

10

20

30

2007 2009 2011 2013 2015 2017 2019

3.4.1.6 Commercial Bank Deposit Growth

Percent As Of: 30-Sep-2020 Percent

Total Deposits

Source: Federal Reserve, 

Haver Analytics Note: Year-over-year percentage change.

Large Time Deposits

3.4.1.6 Commercial Bank Deposit Growth
38 2020 FSOC // Annual Report

500

700

900

1100

1300

1500

0

100

200

300

400

500

2016 2017 2018 2019 2020

Overnight Treasury Repo 

Volume (right axis)

Primary Dealer Treasury 

Inventories (left axis)

3.4.2.3 Overnight Repo Volumes and Dealer Inventories

Billions of US$ As Of: 30-Sep-2020 Billions of US$

Source: FRBNY, Staff 

Calculations, Haver Analytics

Note: Overnight Treasury repo volume 

includes published volumes for SOFR. 

0

1

2

3

4

5

0

1

2

3

4

5

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

3.4.2.2 Primary Dealer Repo Agreements

Trillions of US$ As Of: 30-Sep-2020 Trillions of US$

Source: FRBNY, 

Haver Analytics

Overnight/Continuing

Term

Note: Aggregation method removes missing data when 

occurs due to disclosure edits or non-trading days for 

specific security repo agreements.

Billions of US$ As Of: Sep-2020

3.4.2.1 FICC Repo Balances and MMF Holdings

0

50

100

150

200

250

300

200

300

400

500

600

700

800

Apr:2018 Oct:2018 Apr:2019 Oct:2019 Apr:2020

Billions of US$

Source: FRBNY, SEC Form 

N-MFP, Bloomberg L.P.

Money Market Fund FICC Repo 

Holdings (right axis)

Overnight Treasury FICC 

DVP Repo (left axis)

Note: FICC cleared bilateral excludes term 

repo and repo backed by agency collateral.

preferred alternative to LIBOR, is a broad 

measure of overnight Treasury repo rates, 

furthering the importance of this market. 

Repo borrowing, as reported in the Financial 

Accounts of the United States, totaled nearly 

$4.1 trillion as of the second quarter of 2020, 

down from $4.3 trillion a year earlier. The 

market consists of two segments: tri-party repo, 

in which settlement occurs within the custodial 

accounts of a clearing bank, and bilateral repo, 

which typically refers to all activity not settled 

within the tri-party system, includes repo 

transactions cleared through the Fixed Income 

Clearing Corporation (FICC). Primary dealers, 

which are trading counterparties of FRBNY, are 

active in both segments of the market. Tri-party 

collateral balances declined 9.2 percent from a 

year earlier to $2.2 trillion in September 2020. 

Most of the decline occurred in the second 

quarter of 2020. 

Recently, cleared bilateral repo transaction 

volume has become comparable to, if not larger 

than, the tri-party volume. This is partly due 

to the growth of sponsored repo, which allows 

sponsoring members to minimize balance 

sheet usage by netting their repo lending and 

borrowing. Sponsored repo allows MMFs as 

cash lenders, on one side of the transaction, 

and repo borrowers, on the other side, to 

participate in the FICC-cleared segment, but it 

also increases overall market exposure to FICC 

as a central counterparty (Chart 3.4.2.1). 

Primary dealer cash borrowing in the repo 

market, including borrowing from FRBNY’s 

temporary open market operations, stood at 

$2.5 trillion as of September 30, 2020, relatively 

flat compared to a year earlier but down from 

a peak of $3.0 trillion in the third week of 

March (Chart 3.4.2.2). Increased overnight 

cash borrowing through the first quarter 

can be attributed to, among other things, 

primary dealers’ elevated financing of Treasury 

inventories (Chart 3.4.2.3). The total repo 

volumes reference all tenors and collateral 

types. 

3.4.2.3 Overnight Repo Volumes and Dealer Inventories

3.4.2.2 Primary Dealer Repo Agreements

3.4.2.1 FICC Repo Balances and MMF Holdings
Financial Developments 39

Similarly, cash lending by primary dealers 

in the repo market (reverse repo) decreased 

slightly over the past year, from $2.0 trillion 

on September 26, 2019 to $1.9 trillion on 

September 30, 2020, after reaching $2.3 trillion 

on March 18, 2020. The share of overnight 

reverse repo compared to term reverse repo has 

increased over the past several years, accounting 

for 50 percent of repo lending in September 

2020, up from 39 percent in September 2016 

(Chart 3.4.2.4). Lending at maturities of one 

month or longer continues to account for 

approximately two-thirds of term reverse repo 

lending.

As of September 2020, 93 percent of primary 

dealer repo transactions were collateralized by 

Treasuries or agency MBS, up from 92 percent 

in September 2019 and 86 percent five years 

prior (Chart 3.4.2.5). Within the tri-party 

market, 82 percent of repo transactions were 

backed by Treasuries or agency MBS as of 

September 2020 compared to 83 percent in 

September 2019 and 71 percent in September 

2015 (Chart 3.4.2.6). Median haircuts on 

collateral used in tri-party repo transactions 

were relatively flat for the year across most 

collateral classes. 

0.0

0.5

1.0

1.5

2.0

2.5

3.0

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

3.4.2.6 Collateral in the Tri-Party Repo Market

Trillions of US$ Trillions of US$

Source: FRBNY, 

Haver Analytics

As Of: Sep-2020

Note: Other includes ABS, CDOs, private label 

CMOs, international securities, money markets, 

municipal debt, and whole loans.

Other Agency Securities

Agency MBS

U.S. Treasuries Corporates

Equities

Other

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2014 2015 2016 2017 2018 2019 2020

3.4.2.5 Primary Dealer Repo Collateral

Trillions of US$ Trillions of US$

Source: FRBNY, 

Haver Analytics

As Of: 30-Sep-2020

Equities

Other

Corporates

Agency MBS

Agency Debt

U.S. Treasuries

Note: U.S. Treasuries includes TIPS.

0

1

2

3

4

0

1

2

3

4

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

3.4.2.4 Primary Dealer Reverse Repo Agreements

Trillions of US$ As Of: 30-Sep-2020 Trillions of US$

Source: FRBNY, Haver Analytics

Overnight/Continuing

Term

3.4.2.6 Collateral in the Tri-Party Repo Market

3.4.2.5 Primary Dealer Repo Collateral

3.4.2.4 Primary Dealer Reverse Repo Agreements
40 2020 FSOC // Annual Report

-1

0

1

2

3

4

-1

0

1

2

3

4

Jun:2018 Dec:2018 Jun:2019 Dec:2019 Jun:2020

3 Month GCF Repo – 3 Month OIS

Overnight SOFR – Overnight EFFR

Overnight GCF – Overnight EFFR

3.4.2.7 Repo Rate Spreads

Percent Percent

Source: FRBNY, Bloomberg, L.P.

As Of: 30-Sep-2020

3.4.2.7 Repo Rate Spreads The repo market has experienced two recent 

periods of unexpected major volatility. The 

first was when overnight repo rates spiked in 

mid-September 2019, with SOFR increasing by 

approximately 300 basis points (Chart 3.4.2.7). 

The unexpectedly high volatility in September 

2019 appeared to be attributed to technical 

factors, including an increase in demand for 

funds (for example, to finance new Treasury 

settlements), and a decline in funds available 

from banks and MMFs that was tied to outflows 

as corporations paid taxes in mid-September. 

While the spillover to the fed funds market was 

relatively modest, repo market pressure pushed 

the effective federal funds rate slightly above 

the Federal Reserve’s target range.

Certain dealers may adjust their activity at 

quarter ends to meet regulatory requirements, 

a practice referred to as window-dressing, which 

can result in temporary increases in repo rates 

and may have contributed to repo market stress. 

Balance sheet constraints may also factor into 

repo rate increases observed on some Treasury 

settlement and tax dates, but these periodic 

increases have been small compared to the 

September 2019 spike.

In accordance with the FOMC’s directive, on 

September 17, 2019, FRBNY began to conduct 

a series of overnight and term repo operations 

to help maintain the federal funds rate within 

the target range by adding reserves to the 

banking system. The operations were effective 

in stabilizing conditions in funding markets. 

Additionally, the Federal Reserve commenced 

reserve management purchases of Treasury 

bills in October 2019, at the pace of $60 

billion per month, in order to rebuild reserves 

to a level that is commensurate with policy 

implementation. 

The repo market was strained again because 

of the market dislocations caused by the 

COVID-19 pandemic, with SOFR increasing 

by 29 basis points above the effective federal 

funds rate on March 17. Overnight and term 

repo rates against Treasury collateral spiked 

and term repo market functioning deteriorated 
Financial Developments 41

amid increased dealer holdings and short-term 

policy uncertainty. Investors also began selling 

less-liquid securities to raise cash. To address 

this strain in the market, the Federal Reserve 

stepped in again to purchase Treasury securities 

– initially at a pace of $75 billion per day. The 

Federal Reserve also increased available tenors 

and offering amounts of its repo operations, 

which increased the supply of bank reserves 

and countered some of the pressure in repo 

rates. Federal Reserve purchases of Treasury 

securities reduced the supply of Treasuries in 

the market and alleviated dealer balance sheet 

pressure so dealers could better intermediate 

across all asset classes and between the cash 

and repo markets. Repo rates have been well 

contained since March.

Securities Lending

Securities lenders generally engage in securities 

lending to earn additional income, but 

securities lending may also be used as a source 

of funding by some financial institutions. It is 

an unstable source of funding, however, as most 

arrangements allow the borrower to return the 

borrowed securities on short notice in exchange 

for the collateral posted. Data on the securities 

lending market are estimated based on surveys.

The estimated value of securities on loan 

globally was $2.5 trillion as of the end of 

September, 2020, up from $2.4 trillion in the 

end of September 2019 but down from $2.6 

trillion in early March (Chart 3.4.2.8). The 

estimated U.S. share of the global activity grew 

to 57 percent at the end of September 2020 

from 55 percent a year earlier.

Government bonds and equities continue 

to account for the majority of the estimated 

securities on loan globally. As of September 

30, 2020, the share represented by equities 

was estimated at 40 percent, while government 

securities were estimated to account for 

approximately 47 percent of the total securities 

on loan.

While shares of ETFs were estimated to only 

account for 3.1 percent of securities on loan 

0.5

1.0

1.5

2.0

2.5

3.0

0.5

1.0

1.5

2.0

2.5

3.0

2015 2016 2017 2018 2019 2020

3.4.2.8 Value of Securities on Loan

Trillions of US$ Trillions of US$

Source: Markit

Global Market 

(including U.S.)

U.S. Market

As Of: 30-Sep-2020

Note: Data is based on a 

survey of agent-based lenders.

3.4.2.8 Value of Securities on Loan
42 2020 FSOC // Annual Report

0

20

40

60

80

100

0

20

40

60

80

100

2012 2014 2016 2018 2020

3.4.2.10 U.S. Securities Lending Cash Reinvestment Collateral

Percent of Total Percent of Total

Source: The Risk Management 

Association, OFR

As Of: 2020 Q3

Note: Nongovernment repos have collateral of whole 

loans, equity, and corporate debt. Other includes ABS, 

funding agreements, other funds, and other vehicles. 

Data is based on a survey of agent-based lenders.

Nongovernment Repo

Corporate Securities

Other

Government Repo

Money Market Funds

Commercial Paper

Bank Deposits

0

50

100

150

200

250

300

0.0

0.4

0.8

1.2

1.6

2.0

2.4

2006 2008 2010 2012 2014 2016 2018 2020

3.4.2.9 U.S. Securities Lending Cash Reinvestment

Trillions of US$ Days

Source: The Risk 

Management Association

Mean WAM (right axis)

Median WAM (right axis)

As Of: 2020 Q3

Note: Data is based on a 

survey of agent-based lenders.

Total Cash Reinvestment 

(left axis)

3.4.2.10 U.S. Securities Lending Cash Reinvestment Collateral

3.4.2.9 U.S. Securities Lending Cash Reinvestment globally, the amount of shares of ETFs on loan 

has increased by approximately 40 percent 

for the twelve months ended September 30, 

2020. One potential reason for this increase in 

demand could be that ETFs are an efficient way 

for hedge funds to gain short exposure. As with 

the trend for securities lending overall, however, 

the estimate of the value of ETF shares on loan 

decreased after peaking in early March. 

Reinvestment of cash collateral from 

securities lending in the U.S. was estimated 

at approximately $600 billion as of the third 

quarter of 2020, down $20 billion from the 

previous year (Chart 3.4.2.9). A growing number 

of the cash reinvestment managers surveyed 

have shortened portfolio duration amid market 

uncertainty. The median weighted average 

maturity (WAM) of cash reinvestment portfolios 

decreased to 54 days in the third quarter of 2020 

compared to 67 days in the third quarter of 2019, 

while the mean WAM dropped from 86 days to 

63 days over the same period. 

As noted in Box D, cash collateral is often 

invested in the short-term funding markets 

(STFMs). The estimated share of cash 

reinvestment portfolios allocated to repos 

backed by non-government collateral recorded 

a decline during the first quarter of 2020 from 

28 percent to 17 percent, before increasing to 27 

percent during the third quarter of 2020. The 

share of bank deposit and government repo rose 

to 18 percent and 13 percent respectively before 

declining to 16 percent and 11 percent in the 

third quarter. The share of CP used as collateral 

in repo transactions declined to 5.8 percent in 

the first quarter, before increasing to 9.2 percent 

in the third quarter (Chart 3.4.2.10). 
Box D: Recent Stress in Short-Term Wholesale Funding Markets 43

STFMs are the $10 trillion network of markets 

and entities that help provide short-term credit for 

corporations, governments, and financial institutions. 

These include secured borrowing markets such 

as those for repos and securities lending, as well 

as unsecured borrowing markets such as bank 

deposits and CP. Since some of the intermediaries 

that participate in the federal funds market also 

participate in other STFMs, well-functioning STFMs 

are critical not only for financial stability but also for 

the implementation of monetary policy. 

Amid escalating concerns about the economic 

impact of the COVID-19 pandemic, market 

participants rapidly reduced their tolerance for risk 

and generally shifted their risk preferences toward 

cash and other highly liquid instruments. This rapid 

shift in investor sentiment placed stress on both the 

secured and unsecured components of STFMs and 

the intermediaries operating in these markets. 

Unsecured Funding

Bank Funding

With sources of market liquidity drying up, businesses 

drew heavily on bank lines of credit. Several factors 

have helped banks meet this surge in liquidity 

demand. First, post-crisis regulation has required that 

banks maintain strong capital and liquidity positions 

while reducing their reliance on short-term wholesale 

funding. Second, deposit inflows surged because 

businesses deposited their precautionary credit-line 

withdrawals, businesses and consumers deposited 

government stimulus payments, and investors moved 

away from risky illiquid assets into cash. Third, 

some banks increased discount window borrowing 

and Federal Home Loan Bank (FHLB) advances to 

manage the surge in liquidity demand. The FHLBs 

generally expanded eligible categories of collateral to 

reflect the new funding programs and facilities of the 

SBA and Federal Reserve, reduced rates, extended 

grants to members, and waived fees for certain 

products. For its part, the Federal Reserve lowered 

the discount rate by 150 basis points and was 

successful in encouraging and destigmatizing the use 

of its discount window. 

Money Market Mutual Funds

Market conditions for unsecured short-term debt 

instruments, such as CP and negotiable certificates 

of deposit (NCDs), began to deteriorate rapidly in 

the second week of March. Spreads for money 

market instruments began widening sharply, and 

new issuance of CP and NCDs declined markedly 

and shifted to short tenors. Stress among MMFs 

likely contributed to these problems, as prime funds 

reduced their holdings of CP disproportionately 

compared to other holders. At the end of February 

2020, prime MMFs offered to the public owned 

approximately $215 billion of CP, or about 19 percent 

of the $1.1 trillion outstanding CP at that time. From 

March 10 to March 24, these funds cut holdings 

of CP by $35 billion, and this reduction accounted 

for 74 percent of the $48 billion overall decline in 

outstanding CP over those two weeks. 

Conditions in the short-term municipal debt markets 

also worsened rapidly in mid-March. On March 

18, the Securities Industry and Financial Markets 

Association (SIFMA) Municipal Swap Index yield—a 

benchmark rate in these markets—rose to 520 basis 

points, a 392 basis point increase from the prior 

week. The spike in the SIFMA index yield caused 

drops in market-based net asset values (NAVs) of taxexempt MMFs (which mostly still have stable, rounded 

NAVs) and likely contributed to outflows from these 

funds. Stress among tax-exempt MMFs also likely 

contributed to worsening market conditions. A period 

of unusually heavy redemptions from tax-exempt 

MMFs began on March 12, and outflows accelerated 

over the next week. Tax-exempt funds reduced their 

holdings of variable-rate demand notes (VRDNs) by 

about 16 percent ($15 billion) in the two weeks from 

March 9 to 23. Primary dealer VRDN inventories 

nearly tripled in the week ending March 18. Stress in 

Box D: Recent Stress in Short-Term Wholesale Funding Markets
44 2020 2020 FSOC // FSOC // Annual Report Annual Report

Box D: Recent Stress in Short-Term Wholesale Funding Markets

municipal markets also contributed to strains on taxexempt MMFs. 

As part of the general deterioration in STFM 

conditions, prime and tax-exempt MMFs experienced 

heavy redemptions beginning in the second week 

of March 2020. Outflows increased quickly, peaking 

on March 17 for prime funds (the day the Federal 

Reserve announced the CPFF) and on March 23 for 

tax-exempt funds (one business day after the MMLF 

was expanded to include tax-exempt securities).

Among institutional prime MMFs offered to the public, 

outflows as a percentage of fund assets exceeded 

those in the September 2008 crisis. Over the twoweek period from March 11 to 24, net redemptions 

from publicly offered institutional prime funds totaled 

30 percent (about $100 billion) of the funds’ assets. 

For comparison, in September 2008, the worst 

outflows from these funds over a two-week period 

were about 26 percent (about $350 billion) of assets.

For retail prime funds, outflows as a share of assets 

in March 2020 exceeded those that occurred during 

the 2008 crisis, although heavy redemptions began a 

couple of days after those for institutional funds. Net 

redemptions totaled 9 percent (just over $40 billion) 

of assets over the two weeks from March 13 to 26. 

In September 2008, the heaviest retail outflows over 

a two-week period totaled 5 percent of assets. Retail 

prime funds had about 60 percent more assets in 

2008 than earlier this year, so outflows were similar in 

dollar terms in both crises.

Outflows from tax-exempt MMFs, which are largely 

retail funds, were 8 percent ($11 billion) of assets 

during the two weeks from March 12 to 25. In 2008, 

when tax-exempt MMF assets were more than four 

times larger than earlier this year, such funds had 

outflows of 7 percent (almost $40 billion) of assets in 

one two-week period.

Outflows from MMFs abated fairly quickly after the 

Federal Reserve’s announcement of its support 

for the STFMs, including support for MMFs in midMarch. Market conditions began to improve after 

the launch of the MMLF. The share of CP issuance 

with overnight maturity began falling on March 24, and 

spreads to OIS for most types of term CP began falling 

a few days later. After the expansion of the MMLF to 

include municipal securities on March 20 (and VRDNs 

on March 23), tax-exempt MMF outflows eased and 

conditions in the short-term muni markets improved. 

While stress affected a variety of money-market 

instruments and investment vehicles, the availability of 

secondary-market liquidity for MMFs’ assets via the 

MMLF appears to have had a broad calming effect on 

STFMs. For example, although assets of other funds, 

including European dollar-denominated MMFs, could not 

be financed through MMLF loans, outflows from these 

funds abated shortly after the MMLF began operations 

on March 23.

Secured Funding

Repurchase Agreements

The market for repos consists of many different 

participants that provide or demand secured shortterm funding against securities (typically Treasury and 

agency MBS) posted as collateral. It is a critical source 

of liquidity for a variety of market participants, many of 

whom depend predominantly on this market for their 

funding. 

Broker-dealers, many of whom are subsidiaries of large 

BHCs, play a key role in the U.S. repo market as they 

intermediate funds between ultimate cash lenders, 

such as MMFs, and ultimate cash borrowers (such 

as hedge funds). Other market participants include 

asset managers, such as mutual funds and ETFs, who 

borrow from as well as lend to the repo market. Certain 

leveraged participants, such as hedge funds and 

mortgage REITs, typically fund themselves using shortterm repo funding. 

With economic prospects declining at the onset of the 

pandemic, many investors and market participants 

increased their demand for liquidity. Investors sought to 

sell traditionally liquid securities with minimal credit risk, 

such as Treasuries and agency MBS, to obtain cash. In 
Box D: Recent Stress in Short-Term Wholesale Funding Markets 454

the case of Treasuries, there had been significant 

selling pressure from foreign investors and foreign 

central banks (see Box B). As noted in Section 

5.5, these selling pressures likely stressed balance 

sheets of the securities dealers that intermediate in 

the repo market. 

Securities Lending

Securities lending supports the orderly operation 

of capital markets, principally by enabling the 

establishment of short positions and thereby 

facilitating price discovery and hedging. This lending 

typically is secured by cash or other securities. As 

noted in Section 3.5.2, it is estimated that at the 

end of September 2020 the global securities lending 

volume outstanding was $2.5 trillion, with around 57 

percent of it attributed to the U.S. 

The key interconnection between this market and 

the broader financial system stems from the fact that 

a large portion of cash collateral is reinvested in the 

STFMs. The fall in asset prices in March 2020 led 

to deleveraging by market participants that typically 

borrow securities, and the lower asset prices and 

lower demand for new securities lending in general 

reduced the amount of cash collateral reinvested 

in the STFMs. This deleveraging limited the supply 

of capital available in the STFMs, making it more 

difficult for issuers in the real economy to access 

capital.

Interconnection of STFMs and Other Financial 

Markets

The STFMs are a complex ecosystem that involve 

significant daily flows through a network of highly 

interconnected market segments and the economy 

more generally. Depository institutions can 

participate in the secured (repo) and the unsecured 

(federal funds) market. For example, depository 

institutions have participated as cash lenders in 

the repo market when the repo rates exceeded the 

interest on excess reserves. In addition, other market 

participants, such as the FHLBs, also participate 

in both markets. While MMFs cannot participate in the 

federal funds market, some MMFs invest in closely related 

certificates of deposit issued outside the U.S., known as 

Eurodollar instruments. Similarly, securities dealers are 

major participants in the secured (repo) market. Given 

these interconnections, stress in one market can be 

readily transmitted to another and more generally, to the 

broader financial markets. 
46 2020 FSOC // Annual Report

0

5

10

15

20

25

30

35

0

5

10

15

20

25

30

35

2015 2016 2017 2018 2019 2020

3.4.3.3 U.S. Futures Markets Open Interest

Trillions of US$ Trillions of US$

Source: CFTC

Note: Futures contracts are dollarized using prices 

from contract definitions and other relevant data.

As Of: Jun-2020

0

30

60

90

120

150

0

30

60

90

120

150

Sep:2019 Dec:2019 Mar:2020 Jun:2020 Sep:2020

3.4.3.2 3-Month Implied Volatility

Percent Percent

Source: Bloomberg, L.P., CFTC

Crude Oil

S&P 500

Corn

Gold

As Of: 30-Sep-2020

46 2020 FSOC // Annual Report

3.4.3.3 U.S. Futures Markets Open Interest

3.4.3.2 3-Month Implied Volatility 

3.4.3 Derivatives Markets

3.4.3.1 Futures

U.S. futures markets generally performed 

well through the March and April COVID-19 

market stress, providing price formation, price 

discovery, and risk management functions 

for market participants during a period of 

increased uncertainty. Commercial participants 

such as farmers, ranchers, producers, service 

providers, and intermediaries as well as noncommercial participants such as asset managers, 

hedge funds, market makers, and various retail 

and other investors contributed to record levels 

of activity across multiple futures markets. 

During the first seven months of 2020, volume 

levels across U.S. futures exchanges rose by over 

15 percent on an annualized basis compared 

to 2019, due to higher volatility, an increase of 

short-term trading activities, and significant 

hedging and investment needs (Chart 3.4.3.1). 

The pandemic’s impact on the U.S. futures 

markets was most significant during March and 

April when various fundamental and market 

risk factors drove implied volatility to extreme 

levels (Chart 3.4.3.2). At the same time, futures 

liquidity, as represented by top-of-book depth, 

declined and the steep drop in asset prices 

drove volumes higher, while the notional 

amount of open interest decreased (Chart 

3.4.3.3). The pace of the global news flow and 

the accompanying sell-offs triggered limit down 

in various asset classes. For example, e-mini 

S&P 500 futures hit the 5 percent limit down 

band in five overnight sessions in March and hit 

the 5 percent limit up band in another three 

overnight sessions.

Exchanges took various emergency actions 

to address operational concerns and enable 

efficient price discovery and price transparency. 

The CFTC also issued no-action letters 

providing temporary, targeted relief to futures 

commission merchants (FCMs), introducing 

brokers, floor brokers, certain designated 

contract markets, and other market participants 

to help facilitate orderly trading and liquidity 

while market participants operated away from 

their normal business sites. 

0

1

2

3

4

5

6

0

1

2

3

4

5

6

2015 2016 2017 2018 2019 2020 (JanJul)

3.4.3.1 U.S. Futures Markets Volume

Billions of Contracts Billions of Contracts

Source: CFTC

As Of: Jul-2020

Note: 2020 volume annualized. 

3.4.3.1 U.S. Futures Markets: Volume
Financial Developments 47

0

1

2

3

4

0

1

2

3

4

2015 2016 2017 2018 2019 2020

Currencies

Metals

Stock Indices

Energy

3.4.3.4 Micro Futures Open Interest

Billions of US$ Billions of US$

Source: CFTC

Note: Futures contracts are dollarized using prices 

from contract definitions and other relevant data.

As Of: Jun-2020

3.4.3.4 Micro Futures: Open Interest Over the past year, open interest in “micro” 

futures contracts has increased significantly, 

totaling $3 billion as of June 2020 (Chart 

3.4.3.4). Micro contracts are designed to 

make futures trading more accessible to retail 

investors and are typically one-tenth of the size 

of benchmark futures contracts. Micro equity 

futures, which were first introduced in May 

2019, have driven much of the recent growth in 

micro contracts. Micro metals contracts have 

also driven the recent growth, and open interest 

in micro metals has more than quadrupled 

since 2018. Despite this growth, micro futures 

account for a small share of open interest. For 

example, the notional amount outstanding for 

the micro e-mini S&P 500 index is less than 

1 percent of that for the benchmark e-mini 

futures contract. 

As discussed in Box B, open interest in U.S. 

Treasury futures indicated a significant shift in 

positioning by asset managers and leveraged 

funds (Chart 3.4.3.5). The asset managers, 

which include pension and other long-only 

unleveraged funds, are long futures across 

the Treasury curve, while leveraged funds are 

short futures across the curve. In 2018 and 

the first half of 2019, leveraged funds and 

asset managers significantly increased their 

net exposures in Treasury futures, peaking 

at around $600 billion in the third quarter 

of 2019. Since the pandemic and given the 

current interest rate environment and outlook, 

the aggregate level of open interest across all 

Treasury futures contracts has nearly halved. 

This reduction in net positions has primarily 

been in the 2-year and 10-year Treasury futures. 

3.4.3.2 Options

Equity Options

In early 2020, the COVID-19 pandemic 

impacted the operations of the five equity 

options exchanges that maintain a physical 

trading floor, causing each of them to transition 

to fully-electronic trading as social distancing 

restrictions came into effect. Trading returned 

to the physical floors as they began to reopen 

at the end of the second quarter of 2020, but 

floor volumes remain below pre-pandemic 

-900

-600

-300

0

300

600

900

-900

-600

-300

0

300

600

900

Jan:2016 Jan:2017 Jan:2018 Jan:2019 Jan:2020

Billions of US$ As Of: 29-Sep-2020

3.4.3.5 U.S Treasury Futures Open Interest

Billions of US$

Source: CFTC

Note: Net notional amount of open interest by trader type. 10Y 

includes 10Y and 10Y Ultra Treasury Note Futures; 30Y 

includes Treasury Bond and Ultra Treasury Bond Futures.

5Y

2Y

30Y

10Y

5Y

2Y

30Y

10Y

Asset 

Managers

Leveraged 

Funds

3.4.3.5 U.S. Treasury Futures: Open Interest
48 2020 FSOC // Annual Report

0.0

0.5

1.0

1.5

2.0

2.5

3.0

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2015 2016 2017 2018 2019 2020

ThousandsThousands

3.4.3.8 Options on Futures: Open Interest

Trillions of US$ Trillions of US$

Source: CFTC

Currencies

Energy

Metals

Stock Indices

Treasury Futures

Agriculture

Note: Excludes Eurodollar futures on options.

As Of: Jun As Of: Jun-2020

Millions of Contracts As Of: 30-Sep-2020

3.4.3.7 Call Option Volume for Select Technology Stocks

0

2

4

6

8

10

12

14

0

2

4

6

8

10

12

14

2016 2017 2018 2019 2020

Millions of Contracts

Source: Bloomberg, L.P.

Note: Includes daily call option volume for TSLA, 

AAPL, NFLX, GOOG, FB, and MSFT. 

Daily Volume

20-Day Moving Average

Millions of Contracts As Of: Sep-2020

3.4.3.6 Exchange-Traded Equity Option Volume

0

5

10

15

20

25

0

5

10

15

20

25

Jan:2019 Jul:2019 Jan:2020 Jul:2020

Millions of Contracts

Source: The OCC

Note: Average daily volume. Excludes index 

and ETF options. 

Put Options

Call Options

3.4.3.8 Options on Futures: Open Interest

3.4.3.7 Call Option Volume for Select Technology Stocks

3.4.3.6 Exchange-Traded Equity Option Volume levels. At the same time, overall options volume 

has dramatically increased, with average daily 

volumes for exchange-traded equity options 

reaching a record 20 million contracts in 

September 2020 (Chart 3.4.3.6). 

The recent growth of option volumes has been 

concentrated in call options on technology 

stocks. For example, the average daily volume 

for call options on six large technology stocks 

has roughly tripled over the past year, peaking 

at over 6 million contracts in August (Chart 

3.4.3.7). Some reports indicate that the 

increase in volume has been driven, in part, 

by an increase in retail investor participation 

as broker-dealers have enhanced their 

options trading offerings and have lowered or 

eliminated their trading commissions. 

Exchange-Traded Options on Futures

Over the past five years, open interest for U.S. 

exchange-traded options on futures averaged 

approximately $40 trillion on a non-delta 

adjusted basis. Notional exposures to options 

on futures are concentrated in the highly liquid 

benchmark CME 3-month Eurodollar interest 

rate contract. Excluding Eurodollars, open 

interest for options on futures contracts stood 

at approximately $2.2 trillion in non-delta 

adjusted notional value in 2019 (Chart 3.4.3.8). 
Financial Developments 49

0

5

10

15

20

0

5

10

15

20

2015 2016 2017 2018 2019 2020

3.4.3.10 Options on Futures: Delta Adjusted Open Interest

Trillions of US$ Trillions of US$

Source: CFTC

Note: Delta adjusted open interest as of June 30 of 

each year. Includes Eurodollar futures on options.

As Of: Jun-2020

0

250

500

750

1000

1250

0

250

500

750

1000

1250

2015 2016 2017 2018 2019 2020

3.4.3.9 Options on Futures: Volume

Millions of Contracts Millions of Contracts

Source: CFTC

Other Options

Eurodollar Options

As Of: Jun-2020

3.4.3.10 Options on Futures: Delta Adjusted Open Interest

3.4.3.9 Options on Futures: Volume Option volumes across all markets increased 

between 2014 and 2019; over one billion option 

contracts traded in 2019 (Chart 3.4.3.9). Over 

the past five years, Eurodollar options volume 

has accounted for approximately 35 percent of all 

volume on exchange-traded options on futures.

Between 2015 and 2019, the delta-adjusted 

notional amount of options on futures nearly 

tripled, from $6.9 trillion in June 2015 to $18 

trillion in June 2019 (Chart 3.4.3.10). Much of 

this growth could be attributed to increased 

open interest in Eurodollar options contracts. 

Open interest for options on futures fell to $13 

trillion in June 2020 as interest in Eurodollar 

contracts declined given the reduced 

uncertainty in the outlook for short-term 

interest rates. 

Excluding Eurodollar instruments, options 

referencing financial futures account for 

approximately 58 percent of outstanding, with 

options on equity indices, Treasury futures, 

and currencies accounting for 31 percent, 23 

percent, and 4.3 percent of delta-adjusted open 

interest, respectively (Chart 3.4.3.11). Within 

the commodity space, options on metals, 

energy, and agriculture futures account for 

22 percent, 12 percent, and 8 percent of deltaadjusted open-interest, respectively. 

Options on Treasury futures are considered to 

be among the most liquid options on futures 

contracts, with significant activity in low-delta, 

or deep-out-of-the-money options. Low-delta 

options (less than 0.2) have strike prices far 

away from prevailing futures prices and provide 

protection against tail-risk events. Consequently, 

trading and open interest in low delta options 

tend to pick up during periods of increased 

uncertainty or volatility in the rates market. 

The ratio of puts to calls is a good indicator of 

the overall bias of the marketplace. Higher puts 

relative to calls may indicate increased hedges 

against rising rates (in yield terms) and lower 

puts relative to calls may indicate a bias towards 

falling rates. After the put-call ratio on 10-year 

Treasury futures spiked in March 2020, those 

$81.3B

$29.7B

$16.3B

$83.9B

$44.4B

$115.7B

$0.7B

3.4.3.11 Delta Adjusted Options on Futures by Asset Class

Source: CFTC

As Of: Jul-2020

Agriculture

Metals

Treasuries

Energy

Currencies

Stock Index

Other

Note: Delta adjusted open interest. 

Excludes Eurodollar options.

3.4.3.11 Delta Adjusted Options on Futures by Asset Classes
50 2020 FSOC // Annual Report

-1

0

1

2

3

4

-1

0

1

2

3

4

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

3.4.3.14 OTC Options: BHC Net Notional Outstanding

Trillions of US$ As Of: 2020 Q2 Trillions of US$

Foreign Exchange

Equity

Interest Rate

Other

Note: Other includes credit, 

commodity, and other OTC options.

Source: FR Y-9C, Staff 

Calculations

93

94

95

96

97

98

99

100

0

10

20

30

40

50

60

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

3.4.3.13 OTC Options: BHC Gross Notional Outstanding

Trillions of US$ Percent

Source: FR Y-9C, Staff 

Calculations

As Of: 2020 Q2

Foreign Exchange (left axis)

Equity (left axis)

Interest Rate (left axis)

Other (left axis) Percent Held by 6 Largest 

BHCs by Total Assets (right 

axis)

Note: Other includes credit, 

commodity, and other OTC options.

0

1

2

3

4

5

6

7

8

9

0

1

2

3

4

5

2016 2017 2018 2019 2020

Put / Call Ratio (right axis)

3.4.3.12 Options on 10-Year Treasury Futures

Millions of Contracts Ratio

Source: CFTC

As Of: 28-Jul-2020

Tail Risk Puts (left axis)

Tail Risk Calls (left axis)

3.4.3.14 OTC Options: BHC Net Notional Outstanding

3.4.3.13 OTC Options: BHC Gross Notional Outstanding

3.4.3.12 Options on 10-Year Treasury Futures ratios declined to more normal levels (Chart 

3.4.3.12). 

OTC Options

According to the Bank for International 

Settlements (BIS), the global gross notional 

amount outstanding of over-the-counter (OTC) 

options remained relatively steady at around $56 

trillion as of December 2019. Interest rate option 

contracts represent the bulk of that figure, 

ending 2019 at just under $40 trillion in notional 

outstanding, which is down slightly from 2018. 

The notional amount of OTC equity options as 

of the fourth quarter of 2019 was approximately 

$3.7 trillion, remaining below the peak of $8.5 

trillion in the second quarter of 2008. 

At the end of the second quarter of 2020, BHCs 

held $39 trillion in OTC options, a decline from 

earlier years (Chart 3.4.3.13). This decrease 

is primarily attributable to a reduction in 

exposures at certain large BHCs. As a result, the 

share of option exposures attributed to the six 

largest BHCs fell from 98 percent in the fourth 

quarter of 2018 to 95 percent in the second 

quarter of 2020. Over the same period, BHC net 

notional exposures to options—as measured 

by written minus purchased options—fell from 

$3.2 trillion to $2.5 trillion, though they are 

still well above levels observed between 2011 

and 2016 (Chart 3.4.3.14).

3.4.3.3 OTC Derivatives

Activity in the OTC derivatives market 

increased sharply during the March 2020 

market stress. In March 2020, interest rate 

swap trading volumes hit record levels, with 

weekly volumes peaking at over $20 trillion 

for the week ending March 6, 2020. Volumes 

in CDS markets roughly doubled from the 

previous year but remained below their peak 

weekly volume in 2016. The increase in trading 

volumes is largely related to market participants 

repositioning portfolios in response to central 

bank interest rate cuts and increased economic 

uncertainty. Additionally, some reports suggest 

that institutional investors relied on CDS 

markets due to the rapid deterioration of 

liquidity conditions in the underlying corporate 
Financial Developments 51

0

3

6

9

12

15

0.0

0.2

0.4

0.6

0.8

1.0

2015 2016 2017 2018 2019 2020

3.4.3.15 Derivatives Notional Volume

Trillions of US$ Trillions of US$

Source: CFTC

As Of: 25-Sep-2020

Note: 12-week moving-averages. 

Excludes security-based swaps.

Credit Default Swaps

(left axis) Interest Rate Swaps

(right axis)

3.4.3.15 Derivatives Notional Volume bond markets. OTC activity has since decreased 

to pre-pandemic levels (Chart 3.4.3.15). 

Concurrently, the notional amount of OTC 

derivatives outstanding rose during the 

COVID-19 market stress but have since returned 

to pre-pandemic levels (Chart 3.4.3.16). The 

notional amount of index CDS outstanding 

peaked at $5.7 trillion in the last week of March, 

a nearly 50 percent increase from year-end 

2019; interest rate swaps outstanding peaked at 

over $300 trillion in the first week of March, a 

20 percent increase from year-end 2019. By the 

end of September 2020, the notional amount of 

index CDS and interest rate derivatives declined 

to $4.4 trillion and $250 trillion, respectively. 

As discussed in Box A of the Council’s 2018

annual report, the size of the interest rate 

swaps market can also be expressed on an 

entity-netted notional (ENN) basis, which 

attempts to risk-adjust notional amounts by (1) 

expressing the notional amount of each swap 

in 5-year equivalents; and (2) netting offsetting 

positions for every pair of counterparties. While 

the notional amount of interest rate swaps has 

decreased to pre-pandemic levels, risk-adjusted 

ENN exposures remain elevated, indicating the 

increased market risk transfer in the interest 

rate swaps markets (Chart 3.4.3.17). 

0

100

200

300

400

500

0

2

4

6

8

10

12

2014 2015 2016 2017 2018 2019 2020

3.4.3.16 Derivatives Notional Amount Outstanding

Trillions of US$ Trillions of US$

Source: CFTC

Interest Rate Swaps

(right axis)

Credit Default Swaps

(left axis)

As Of: 25-Sep-2020

Note: Weekly Swaps Report not issued between Dec. 22, 

2018 and Jan. 26, 2019 due to a lapse in government 

funding. Excludes security-based swaps.

3.4.3.16 Derivatives Notional Amount Outstanding

Trillions of US$

13

14

15

16

17

18

180

200

220

240

260

280

Mar:2018 Sep:2018 Mar:2019 Sep:2019 Mar:2020

Notional Amounts 

(left axis)

3.4.3.17 Size of Interest Rate Swap Market

Trillions of US$

Source: CFTC Office of 

Chief Economist

As Of: 2020 Q2

Entity-Netted Notional 

(right axis)

Note: Total notional amount and entity-netted notional 

amount as reported in “Introducing ENNs: A Measure 

of the Size of Interest Rate Swap Markets.” 

3.4.3.17 Size of Interest Rate Swap Market
52 2020 FSOC // Annual Report

0

20

40

60

80

100

0

20

40

60

80

100

Aug:2019 Nov:2019 Feb:2020 May:2020

3.4.3.20 Commodity Index Swaps: Monthly Open Interest

Billions of US$ Billions of US$

Source: CFTC

As Of: Jul-2020

Note: Month-end notional exposure of 

commodity index swaps.

0

10

20

30

40

50

60

70

0

10

20

30

40

50

60

70

2015 2016 2017 2018 2019 2020

3.4.3.19 Commodity Index Swaps: Annual Open Interest

Billions of US$ Billions of US$

Source: CFTC

As Of: Jun-2020

Note: Notional exposure of commodity index swaps.

Trillions of US$

0

10

20

30

40

0

200

400

600

800

1,000

2000 2003 2006 2009 2012 2015 2018

Notional Amounts 

(left axis)

3.4.3.18 Global OTC Positions

Trillions of US$

Source: BIS, Haver Analytics

As Of: 2020 Q2

Gross Market Values 

(right axis)

Gross Credit Exposures 

(right axis)

3.4.3.20 Commodity Index Swaps: Monthly Open Interest

3.4.3.19 Commodity Index Swaps: Annual Open Interest

3.4.3.18 Global OTC Positions The notional amount of global OTC derivative 

positions totaled $607 trillion as of June 2020, 

a 5.2 percent decrease compared to June 2019 

(Chart 3.4.3.18). This decline was largely driven 

by a decline in the amount of outstanding OTC 

interest rate and FX derivatives contracts, which 

fell by $29 trillion and $4.8 trillion respectively. 

In contrast, the gross market value of 

outstanding OTC derivatives, which provides a 

measure of amounts at risk, rose to $15 trillion 

as of June 2020, a $3.4 trillion increase over the 

year. Interest rate derivatives saw the largest 

increase in gross market value, as the decline 

in central bank policy rates lifted the market 

value of outstanding interest rate derivatives. 

Gross credit exposures, which adjust gross 

market values for legally enforceable bilateral 

netting agreements (but not for collateral), also 

increased, from $2.7 trillion as of June 2019 to 

$3.2 trillion as of June 2020. 

Commodity Index Swaps

During the past five years, the use of commodity 

index swaps has expanded significantly, with 

approximately $62 billion outstanding in 2019 

versus $27 billion in 2015 (Chart 3.4.3.19). The 

overall exposure of commodity index swaps, 

however, declined during the pandemic months 

as investors reduced exposures to commodities. 

Commodity index swap exposures, which fell to 

as low as $35 billion, have since rebounded to 

$50 billion as of June 2020 (Chart 3.4.3.20). 
Financial Developments 53

0

250

500

750

1000

1250

1500

0

250

500

750

1000

1250

1500

2015 2016 2017 2018 2019 2020

3.4.3.21 Commodity Swaps: Open Interest

Billions of US$ Billions of US$

Source: CFTC

As Of: Jun-2020

Note: Average month-end notional 

exposure across 25 key contracts.

3.4.3.21 Commodity Swaps: Open Interest Similarly, the use of single commodity swaps 

has increased significantly over the past five 

years (Chart 3.4.3.21). This growth can be 

attributed largely to an increase in commercialdriven activity, particularly with customization 

of commodity swaps. Energy-based swaps are 

the most popular category of single commodity 

swaps, with natural gas- and crude oil-based 

swaps accounting for 31 percent and 28 percent 

of total single commodity swaps outstanding 

over the past five years, respectively (Chart 

3.4.3.22). 

3.4.3.4 Futures Commission Merchants

FCMs collect funds from customers to margin 

centrally cleared futures, options on futures, 

and swap transactions. In addition to managing 

the deposit and withdrawal of customer 

margin funds with CCPs, FCMs guarantee the 

performance of their customers to the CCP. 

Concerning centrally cleared futures and 

options on futures, the level of customer 

margin funds held by FCMs remained fairly flat 

prior to the pandemic, but has since increased 

significantly (Chart 3.4.3.23). In March 2020, 

the amount of required client margin for U.S. 

and foreign futures spiked to $318 billion, 

a $104 billion increase from February 2020. 

Similarly, the amount of required client margin 

for swaps increased by $33 billion to $153 

billion in March. Increased trading volumes, 

along with increases in CCP and FCM margin 

requirements, caused a sharp increase in 

required client margin. While market volatility 

has since subsided, the total amount of required 

client margin held by FCMs remained elevated 

through the summer, totaling $439 billion in 

September 2020.

Over the last two decades, the number of 

FCMs holding customer funds has declined 

considerably, with the number of FCMs clearing 

futures for clients falling from over 100 in 

2002 to 53 as of September 2020; 26 of these 

are bank-affiliated. The number of FCMs that 

report holding segregated client funds for the 

centrally cleared swaps business decreased 

from 23 at year-end 2014 to 16 (of which 14 

$189B

$204B

$43B

$59B

$56B

$57B

$59B

3.4.3.22 Commodity Swaps by Asset Class

Source: CFTC

As Of: Jul-2020

Natural Gas

Crude

Metals

Grains

Other Energy

Oil Seeds

Other Softs

Note: 5-year average notional contribution 

of the major commodity categories.

3.4.3.22 Commodity Swaps by Asset Class

0

100

200

300

400

500

0

100

200

300

400

500

2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

3.4.3.23 Margin Funds Held at CFTC Registered FCMs

Billions of US$ Billions of US$

Source: CFTC

Foreign Futures

Swaps

U.S. Futures

As Of: Sep-2020

3.4.3.23 Margin Funds Held at CFTC Registered FCMs 
54 2020 FSOC // Annual Report

3.4.3.26 Concentration of Swap Positions for Registered SDs

Source: CFTC

0

10

20

30

40

50

60

70

0

10

20

30

40

50

60

70

Q3 2014 Q3 2015 Q3 2016 Q3 2017 Q3 2018 Q3 2019 Q3 2020

Percent As Of: 2020 Q3 Percent

Top 10 Top 5 Top 3

Note: Positions between two Swap Dealers (SDs) in the same 

category (e.g., Top 3 or Top 5) are double-counted (i.e., a trade 

between the #1 SD and #3 SD would be counted twice).

3.4.3.25 FCM Concentration: Customer Swap Balances

Source: CFTC

0

25

50

75

100

0

25

50

75

100

2014 2015 2016 2017 2018 2019 2020

Percent Percent

As Of: 2020 Q3

Top 10 Top 5 Top 3

Note: Represents the amount of funds an FCM is required 

to segregate for customers who trade cleared swaps.

3.4.3.24 FCM Concentration: Customer Futures Balances

Source: CFTC

0

25

50

75

100

0

25

50

75

100

2014 2015 2016 2017 2018 2019 2020

Percent As Of: 2020 Q3 Percent

Top 10 Top 5 Top 3

Note: Represents total amount of funds that an FCM is 

required to segregate on behalf of customers who are 

trading futures and options on futures at US exchanges. 

3.4.3.26 Concentration of Swap Positions for Registered SDs

3.4.3.25 FCM Concentration: Customer Swap Balances

3.4.3.24 FCM Concentration: Customer Futures Balances are bank-affiliated) as of September 2020. The 

pace of consolidation in the FCM industry has 

slowed since 2015, however, and the number of 

FCMs clearing swaps and futures for customers 

remained relatively consistent over the last 

several years.

Between the first quarter of 2014 and the third 

quarter of 2020, the top five clearing members 

at futures exchanges held between 48 and 60 

percent of client margin for futures products, 

and the top five swap clearing members held 

between 68 and 78 percent of client margin for 

swaps products (Charts 3.4.3.24, 3.4.3.25). 

3.4.3.5 Swap Dealers

Swap dealers (SDs) began registering with the 

CFTC in December 2012; as of October 2020, 

there were 109 registered SDs, an increase from 

the 80 provisionally registered SDs at the end 

of 2013. Between 2014 and 2018, registered SD 

activity remained concentrated, with the top 

three SDs accounting for over 30 percent of 

swap positions and the top ten SDs accounting 

for over 55 percent of swap positions. Since 

2018, the concentration of swap contracts with 

the largest SDs has declined slightly. As of the 

third quarter of 2020, the share of contracts 

held by the top three SDs totaled 27 percent, 

while the share of contracts held by the top ten 

SDs totaled 50 percent (Chart 3.4.3.26).

3.4.3.6 Swap Execution Facilities

Certain interest rate swaps and index CDS have 

been “made available to trade,” and therefore 

are required to be executed on a Swap 

Execution Facility (SEF), an exempt SEF, or a 

designated contract market. Combined with 

mandatory central clearing, these regulated 

trading platforms have increased pre-trade 

price transparency, reduced operational risk, 

and improved end-to-end processing. 

The level of U.S.-regulated swaps executed 

on SEFs has continued to rise and SEF trade 

volumes picked up considerably during the 

COVID-19 market volatility. In March 2020, 

the notional amount of interest rate swaps 

traded on-SEFs averaged $689 trillion, down 
Financial Developments 55

slightly from its January 2020 peak, but 13 

percent higher compared to March 2019 (Chart 

3.4.3.27). Nonetheless, the share of interest 

rate swaps trading that occurred on SEFs fell to 

below 50 percent in February and March 2020, 

as off-SEF trading hit record levels. The share 

of interest rate swaps traded on SEFs has since 

rebounded to 62 percent in September 2020. 

The average daily volume for index CDS SEF 

trading surged to $78 billion in March 2020, 

well above the previous monthly record set 

in February 2018 and a 115 percent increase 

from March 2019 (Chart 3.4.3.28). In recent 

years, the share of index CDS swaps trading 

that occurred on SEFs has remained relatively 

stable at around 70 to 80 percent. During the 

COVID-19 market stress, the share of index 

CDS trading that occurred on SEFs increased 

slightly to 82 percent in March 2020. SEF 

trading volumes have since declined, but the 

share of index CDS executed on SEFs has 

remained elevated, totaling 81 percent in 

September 2020. 

3.4.4 Commodities Market

The U.S. commodity derivatives markets cover 

energy, agricultural, and metals industries 

through various products, including futures, 

options, swaps (both single commodity and 

commodity index), and a growing commodity 

ETF and exchange-traded notes (ETN) market. 

The U.S. commodity derivatives markets serve 

important price formation and price discovery 

functions, allowing both U.S. and global 

participants to hedge, invest, and manage risk. 

These markets also provide a basis for global 

trade to be priced in U.S. dollars, contributing 

to the U.S. dollar’s status as the world’s reserve 

currency.

Billions of US$ As Of: Sep-2020

3.4.3.28 Credit Default Swap SEF Trading Volumes

Source: CFTC

50

60

70

80

90

100

0

20

40

60

80

100

Jan:17 Jan:18 Jan:19 Jan:20

On-SEF CDS Volume

(left axis)

Share of Total CDS 

Volume (right axis)

Percent

Note: Average daily notional volume. 

Excludes security-based swaps.

3.4.3.28 Credit Default Swap SEF Trading Volumes

Billions of US$ As Of: Sep-2020

3.4.3.27 Interest Rate Swap SEF Trading Volumes

Source: CFTC

30

40

50

60

70

80

0

250

500

750

1000

1250

Jan:17 Jan:18 Jan:19 Jan:20

On-SEF Interest Rate 

Swap Volume (left axis)

Share of Total Interest Rate 

Swap Volume (right axis)

Percent

Note: Average daily notional volume. 

3.4.3.27 Interest Rate Swap SEF Trading Volumes
56 2020 FSOC // Annual Report

Index As Of: 30-Sep-2020

3.4.4.3 Metals Indices

 50

 75

 100

 125

 150

 175

50

75

100

125

150

175

2015 2016 2017 2018 2019 2020

Index

Source: Bloomberg, L.P. Note: Indexed to 01-Jan-2015.

Bloomberg Precious 

Metals Index

Bloomberg Industrial 

Metals Index

0

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40

60

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100

120

140

160

0

20

40

60

80

100

120

140

160

2015 2016 2017 2018 2019 2020

Billions of US$ As Of: Sep-2020

3.4.4.2 Total Net Asset Value: Commodity ETFs

Billions of US$

Source: Morningstar, Inc.

Note: Data are as of end of September in 

each given year.

3.4.4.3 Metals Indices

3.4.4.2 Total Net Asset Value – Commodity ETFs

Over the past five years, the notional amount 

of U.S. futures and options outstanding has 

averaged approximately $1.5 trillion (Chart 

3.4.4.1). Commodity exchange-traded products 

(ETPs), which provide retail investors with 

a vehicle to gain exposures to commodity 

markets, saw significant growth in net AUM 

during the first nine months of 2020 (Chart 

3.4.4.2). Commodity ETP growth has been 

driven by inflows into bullion-backed gold 

ETFs, as investors sought to gain portfolio 

diversification in a low-yield environment. 

Precious and Industrial Metals

Between 2015 and 2019, gold and other precious 

metals traded in a relatively narrow price band. 

During the extreme volatility observed in March 

2020, precious metals sold off substantially. 

Despite gold’s typical position as a safe haven 

asset, gold prices fell by approximately 12 

percent between March 9 and March 19 as 

investors and central banks sought to raise 

dollars amid the global flight to liquidity. Since 

then, precious metals have rallied considerably 

(Chart 3.4.4.3). Gold and silver have driven 

this recovery in precious metals prices, with 

gold futures reaching an all-time high of $2,089 

per troy ounce on August 7 and silver futures 

rising to a seven-and-a-half-year high of almost 

$30 per troy ounce on the same day. Physicallybacked ETF holdings for gold and silver have 

also surged in 2020, as investors use these 

instruments to gain exposure to rising prices. 

While platinum and palladium prices have 

recovered from their March 2020 lows, as of 

September 30, 2020, they were still 13 percent 

and 19 percent, respectively, below their prepandemic highs, which can be attributed to 

increased uncertainty around future demand 

given that these metals are used in automotive 

catalysts to reduce emissions. 

Similar to other commodities, industrial 

metals prices dropped steeply in March and 

April 2020 as COVID-19 lockdowns depressed 

demand from the manufacturing and 

construction industries. Global markets have 

since rebounded on strong China demand, 

government stimulus efforts, and a lower U.S. 

0.0

0.5

1.0

1.5

2.0

2.5

0.0

0.5

1.0

1.5

2.0

2.5

2015 2016 2017 2018 2019 2020

Trillions of US$

3.4.4.1 Commodities Futures & Options: Open Interest

Trillions of US$

Source: CFTC

Note: Notional amount outstanding. Options are 

not delta-adjusted

Options

Futures

As Of: Jul-2020

3.4.4.1 Commodities Futures & Options: Open Interest 
Financial Developments 57

dollar. Iron ore prices increased significantly 

since April due to a reduction of stocks, which 

were impacted by a slowdown in seaborne 

supply during the first quarter, and Chinese 

steelmakers ramping up production in the 

second quarter. Helping to support aluminum 

prices, U.S. tariffs were re-imposed on 

unalloyed, unwrought aluminum imports from 

Canada on August 16.

Gold markets experienced significant price 

dislocations at the height of the COVID-19 

market stress. For example, the New York 

COMEX gold futures price diverged materially 

from the London spot price, which can largely 

be attributed to supply chain disruptions and 

contract specifications. Typically, if there is a 

shortage of gold at COMEX, gold refineries 

will recast 400 ounce London bullion bars 

into the 100-ounce bars that are required to 

settle futures contacts in New York. Increased 

demand for gold coupled with disruptions in 

air travel and shutdowns at major refineries, 

however, raised concerns that there could be a 

shortage of 100-ounce COMEX bars at the time 

of settlement. At the height of the COVID-19 

crisis, the spot and futures price spread widened 

to over $50 per ounce (Chart 3.4.4.4). 

Agriculture Markets

COVID-19 impacted the agricultural markets 

in numerous ways, including multiple price 

distortions, increased volatility, and significant 

dislocations. Some agricultural products, like 

milk and bacon, faced a supply glut due to the 

sharp drop off in purchases from restaurants 

and other commercial end-users, while others, 

such as ground beef, saw shortages due to 

rolling shutdowns of meatpacking factories with 

COVID-19 infections. Temporary government 

payment programs have helped stave off farm 

bankruptcies, but the outlook for the sector is 

uncertain. 

Most agricultural commodity prices fell sharply 

with the pandemic, declining by anywhere from 

10 percent to 35 percent in March and April 

(Chart 3.4.4.5). Agricultural markets were 

also down before the pandemic due to trade 

60

70

80

90

100

110

120

60

70

80

90

100

110

120

Dec:2019 Feb:2020 Apr:2020 Jun:2020 Aug:2020

3.4.4.5 Agriculture Prices

Index Index

Source: Bloomberg, L.P., CFTC

Sugar

Cotton

As Of: 24-Sep-2020

Soybeans

Corn

Lean Hogs

Live Cattle

Wheat

Note: Indexed to year-end 2019.

3.4.4.5 Agriculture Prices

-50

-25

0

25

50

75

1200

1400

1600

1800

2000

2200

Jan:2020 Mar:2020 May:2020 Jul:2020

3.4.4.4 Cash-Futures Spread: Gold

Price Per Ounce (US$) Spread Per Ounce (US$)

Source: Bloomberg, L.P., CFTC

As Of: 31-Jul-2020

Spread (right axis)

Cash: London Bullion (left axis)

Futures: COMEX (left axis)

Note: London 4:00pm fix minus COMEX 

10:00am volume weighted average price.

3.4.4.4 Cash-Futures Spread: Gold
58 2020 FSOC // Annual Report

0

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175

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2011 2012 2013 2014 2015 2016 2017 2018 2019 2020F

3.4.4.7 Net Farm Income

Billions of US$ Billions of US$

Source: USDA

As Of: 2-Sep-2020

COVID-19 Programs

Net Income (excl. Direct Farm Programs)

Other Direct Farm Programs

Market Facilitation Program

Note: The Market Facilitation Program provides direct payments to 

help producers who have been directly impacted by illegal retaliatory 

tariffs. COVID-19 Programs include $16 billion in Coronavirus Food 

Assistance Program payments and $5.8 billion in PPP payments.

70

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120

130

140

150

0

100

200

300

400

500

Jan:2020 Mar:2020 May:2020 Jul:2020 Sep:2020

3.4.4.6 Cash-Futures Spread: Cattle

Price Per 100lbs Price Per 100lbs

Source: Bloomberg, L.P., CFTC

As Of: 30-Sep-2020

Cash: Boxed Beef (left axis)

Spread (left axis)

Note: Box beef choice cut prices 

minus live cattle front month contract

Futures: Live Cattle 

(right axis)

3.4.4.7 Net Farm Income 

3.4.4.6 Cash-Futures Spread: Cattle disruptions with China and bearish supply and 

demand fundamentals. The gradual lifting 

of virus restrictions, a pick-up in Chinese 

purchases, and a weaker U.S. dollar relative 

to the April 2020 peak, have all provided 

support to most agricultural markets. By the 

end of September, prices for most agricultural 

products have returned to pre-pandemic 

levels. However, livestock prices were still down 

approximately 10 percent year-to-date through 

September 30, 2020. Price volatility, which 

declined over the summer, remained elevated 

relative to pre-pandemic levels. 

In March 2020, the shutdown in economic 

activity and the rapid change in consumer 

behavior led to dislocations between futures 

and underlying cash markets for various 

commodities. During this period, retail beef 

and pork prices spiked due to an increase 

in consumer demand related to stockpiling, 

coupled with a decline in supply due to 

COVID-19 outbreaks at meat processing plants. 

By mid-May, beef and pork production was 

40 percent below 2019 levels. As processing 

plants struggled to remain open, demand for 

live cattle and lean hogs fell, which pushed 

futures prices lower, and by mid-May, the spread 

between choice boxed-beef (cash markets) and 

live cattle (futures) in particular was driven 

to historical highs (Chart 3.4.4.6). Given the 

unprecedented challenges facing the livestock 

industry, the CFTC has formed a Livestock 

Taskforce to monitor events in the agriculture 

market. 

According to the September 2020 United States 

Department of Agriculture (USDA) forecast, 

net farm income is projected to increase to $103 

billion in 2020, which can largely be attributed 

to a significant increase in direct government 

payments (Chart 3.4.4.7). Direct government 

payments are projected to total $37 billion in 

2020, or 36 percent of net farm income. These 

programs have helped offset the decline in 

cash receipts for all commodities, which are 

projected to decrease to $358 billion in 2020, 

down $12 billion from 2019. The bulk of 2019 

and 2020 direct federal government payments 
Financial Developments 59

can be attributed to the Market Facilitation 

Program, which provides temporary assistance 

to farmers in response to trade disruptions, and 

COVID-19 disaster assistance programs. 

Prior to the COVID-19 pandemic, the 

agricultural sector faced stress due to low 

commodity prices, U.S.-China trade tensions, 

and the severe flooding in the Midwest. Federal 

assistance programs and forbearance programs 

have helped keep family farms afloat through 

the COVID-19 pandemic. In fact, the number 

of family farms filing for bankruptcy under 

Chapter 12 fell to 284 in the first six months of 

2020 compared to 294 in the first six months of 

2019. Nevertheless, the outlook for the sector 

remains uncertain. 

Energy Markets

The U.S energy futures markets are critical 

for the U.S. economy, spanning petroleum 

products, natural gas, and electricity (Charts 

3.4.4.8, 3.4.4.9). These markets are central 

to price formation and price discovery for 

various producers, refiners, storage providers, 

intermediaries, and distributors, and serve 

as key benchmarks to price-related cash 

transactions and associated swap, ETF, and 

commodity index products that attract a 

broader set of investors.

In the months leading up to the COVID-19 

pandemic, crude oil prices were trending 

upwards due to more positive economic 

conditions and a thawing in global trade 

tensions. By year-end 2019, the West Texas 

Intermediate (WTI) spot price was $61 per 

barrel, up from $54 per barrel on September 

30, 2019. In late-January, crude oil prices began 

trending lower, as investors anticipated lower 

Chinese demand amid the COVID-19-related 

lockdowns and travel restrictions. The decline 

in crude oil prices rapidly accelerated in March 

as global demand collapsed and Saudi Arabia 

and Russia failed to reach an agreement on 

production cuts. By March 30, WTI fell to a 

seventeen-year low of $14 per barrel. By April 

2020, global demand for liquid fuel fell to an 

estimated 81 million barrels per day, while 

0

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40

60

80

100

0

20

40

60

80

100

2015 2016 2017 2018 2019 2020

3.4.4.9 Energy Futures & Options by Product

Percent Percent

Source: CFTC

As Of: Jul-2020

Electricity Natural Gas Petroleum

0

500

1000

1500

2000

0

500

1000

1500

2000

2015 2016 2017 2018 2019 2020

3.4.4.8 Energy Futures & Options: Open Interest

Billions of US$ Billions of US$

Source: CFTC

As Of: Jul-2020

Options

Futures

3.4.4.9 Energy Futures & Options by Product

3.4.4.8 Energy Futures & Options: Open Interest
60 2020 FSOC // Annual Report

0

1000

2000

3000

4000

5000

0

1000

2000

3000

4000

5000

2017 2018 2019 2020

Weekly Natural Gas Inventories

5-Year Average

Billions of Cubic Feet As Of: 25-Sep-2020

3.4.4.12 Natural Gas Inventories

Billions of Cubic Feet

Source: U.S. Energy 

Information Administration

5-Year Range

Note: The shaded area and dotted line indicate 

the rolling 5-year range and average.

Price Per Barrel (US$) As Of: 30-Sep-2020

3.4.4.11 WTI Crude Oil Futures

-50

-25

0

25

50

75

100

-50

-25

0

25

50

75

100

2016 2017 2018 2019 2020

Price Per Barrel (US$)

Source: U.S. Energy Information Administration

WTI 3rd Month

WTI Front Month

Millions of Barrels As Of: Sep-2020

3.4.4.10 Global Petroleum Consumption and Production

-30

-20

-10

0

10

20

30

75

85

95

105

115

2015 2016 2017 2018 2019 2020

Consumption (left axis)

Production (left axis)

Millions of Barrels

Source: U.S. Energy 

Information Administration

Note: Millions of barrels per day. Change in 

inventories represents the difference between 

production and consumption. 

Change in Inventories 

(right axis)

3.4.4.12 Natural Gas Inventories

3.4.4.11 WTI Crude Oil Futures

3.4.4.10 Global Petroleum Consumption and Production global production remained fairly constant at 

100 million barrels per day (Chart 3.4.4.10). 

The resulting growth in crude oil inventories 

led to concerns that oil production in the U.S. 

midcontinent could overwhelm storage capacity 

in the trading hub of Cushing, Oklahoma. In 

light of these storage constraints, the frontmonth WTI oil futures contract began trading 

negative for the first time in history, settling to 

a record low -$38 per barrel on April 20, 2020 

(Chart 3.4.4.11). WTI futures quickly returned 

to positive levels, however, as it became clear 

that regional facilities were likely adequate to 

manage near-term oil storage needs. 

In May, WTI oil prices rebounded sharply 

and have since stabilized around $40 per 

barrel amid sustained production cuts by 

the Organization of Petroleum Exporting 

Countries (OPEC) and its partner countries, 

declining U.S. crude supplies, and recovering 

demand. In April 2020, OPEC and Russia 

(OPEC+) agreed to reduce oil production by 

about 9.7 million barrels per day from October 

2018 production levels in order to address the 

challenge of global oversupply. OPEC+ has 

maintained significant cuts into the second half 

of 2020, with some adjustments. The decline in 

production while global economies reopened 

ultimately helped rebalance markets, although 

demand for refined products remains well 

below seasonal levels. 

Prior to the COVID-19 pandemic, natural gas 

inventories were elevated as the relatively mild 

winter led to lower consumption during the 

2019-2020 heating season. The pandemic led to 

a sharp decline in commercial and industrial 

demand for natural gas, with a delayed 

production response leading to the highest 

seasonal inventory levels in five years 

(Chart 3.4.4.12). 

Similar to natural gas inventories, the natural 

gas futures curve typically exhibits seasonality, 

with summer contracts trading at a discount 

relative to winter contracts. Beginning in midMarch, this spread widened considerably, as 

the reduction in demand and high inventory 
Financial Developments 61

levels put downward pressure on the front of 

the futures curve, while anticipated production 

cuts kept the back end of the curve relatively 

stable. A summer to winter differential of greater 

than 60 cents is rarely seen in natural gas, and 

yet the spread between the July 2020 contract 

and January 2021 contract exceeded $1.30 per 

million British thermal units in the week prior to 

the July 2020 contract expiration 

(Chart 3.4.4.13). 

3.4.5 Residential Real Estate Markets

3.4.5.1 Residential Housing Finance

Real estate markets and home prices continued 

their steady, upward long-run path during 

the first quarter of 2020, just prior to the 

COVID-19 crisis. Nationally, house prices rose 

by 6.1 percent between the first quarter of 2019 

and the first quarter of 2020, according to 

the seasonally adjusted, purchase-only FHFA 

House Price Index® (HPI). Across census 

divisions, gains were highest in the Mountain 

division, which posted an 8.8 percent year-overyear price increase. The majority of the U.S., 

including all of the top 100 largest metropolitan 

statistical areas, experienced positive growth. In 

general, prices were buoyed by a combination of 

historically low interest rates, a healthy economy 

characterized by low unemployment (until the 

spring), and a constrained supply of houses 

available for sale. Although not unaffected by 

the COVID-19 pandemic, housing has been 

remarkably resilient in part due to substantial 

government support of both renters and 

homeowners. 

Between August 2019 and August 2020, FHFA’s 

HPI increased 8.0 percent for the nation, while 

census division gains ranged from a low of 7.2 

percent in the West North Central division to 

a high of 9.7 percent in the Mountain division 

(Chart 3.4.5.1). The monthly decline of 0.2 

percent from April to May likely reflected the 

muted impact of the COVID-19 pandemic 

on the housing market. During this spring 

period, many states were under broad stay-athome orders and many individuals engaged in 

voluntary social distancing efforts to combat 

the spread of COVID-19. These actions led 

Index As Of: Aug-2020

3.4.5.1 House Prices by Census Division

Source: Federal Housing 

Finance Agency

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100

150

200

250

300

350

400

450

50

100

150

200

250

300

350

400

450

1991 1995 1999 2003 2007 2011 2015 2019

Index

Mountain

Pacific

West South Central

South Atlantic

West North Central

Total U.S.

New England

East South Central

Middle Atlantic

East North Central

Note: Purchase-only, seasonally adjusted, nominal, 

constant-quality price index. January 1991 = 100.

3.4.5.1 House Prices by Census Division

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1.2

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Sep:2019 Dec:2019 Mar:2020 Jun:2020

Spread (right axis)

3.4.4.13 Natural Gas Forward Curves

Price Per MMBtu (US$) Spread per MMBtu (US$)

Source: Bloomberg, L.P.

January 2021 Futures Contract 

(left axis)

As Of: 26-Jun-2020

July 2020 Futures Contract 

(left axis)

3.4.4.13 Natural Gas Forward Curves
62 2020 FSOC // Annual Report

-15

-10

-5

0

5

10

15

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1.0

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2.0

2.5

2000 2003 2006 2009 2012 2015 2018

House Price Changes

(right axis)

3.4.5.3 New Housing Starts and Price Changes

Millions of Housing Units Percentage Change

Source: U.S. Census 

Bureau, FHFA, HUD

As Of: Aug-2020

Note: Data are seasonally adjusted annual rates. House 

Price Changes series is the year-over-year percentage 

change of the FHFA National House Price Index. 

Housing Starts

(left axis)

3.5

4.0

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6.0

6.5

0.4

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0.8

1.0

1.2

2015 2016 2017 2018 2019 2020

Existing Home Sales 

(right axis)

New Home Sales 

(left axis)

3.4.5.2 Home Sales

Millions of Sales Millions of Sales

Source: NAR, Census 

Bureau, HUD

As Of: Aug-2020

Note: Series are seasonally adjusted annual rates and 

are expressed in millions of single-family housing units. 

3.4.5.3 New Housing Starts and Price Changes

3.4.5.2 Home Sales to a decrease in overall economic activity, 

including the temporary halting or slowing of 

many activities like construction, real estate 

showings, interior appraisals, and in-person 

closings. Together these factors appear to have 

temporarily dampened sales activity. 

As a result of the pandemic, existing home 

sales fell from 5.8 million sales in February to 

3.9 million in May on a seasonally adjusted, 

annualized basis. Existing home sales have since 

rebounded to 6.0 million in August 2020 (Chart 

3.4.5.2). Similarly, new home sales fell markedly 

in March and April, but have since rebounded 

to over 1 million in August 2020, well above prepandemic levels. Low interest rates and strong 

growth in purchase mortgage applications and 

pending home sales in the third quarter suggest 

that this rebound will continue in the near 

term. Beyond this time frame, the path of the 

employment recovery and limitations on the 

supply of homes for sale could constrain sales 

growth. 

According to Realtor.com, the inventory of 

existing homes for sale was lower in September 

by nearly 40 percent compared to the prior 

year. In the face of this tight housing supply, 

new home sales rose to the highest levels 

observed since 2006 as demand spilled over 

into new construction. In response, singlefamily housing starts are expected to increase 

during the remainder of the year, so long as 

land for building permits remains available and 

demand is sustained. Creating new housing 

supply continues to remain a challenge for the 

U.S., with new starts only sluggishly responding 

since the last housing crisis despite persistent 

increases in home prices (Chart 3.4.5.3). 

According to the Census Bureau, the national 

homeownership rate rose from 64 percent in 

the first quarter of 2019 to 65 percent in the 

first quarter of 2020. While this is down from 

the all-time high of 69 percent in 2004, the June 

reading was above the average homeownership 

rate for the preceding 30 years. Following the 

Great Recession, the homeownership rate fell 

to a low of 63 percent in the second quarter of 
Financial Developments 63

2016 – the lowest rate in decades. Rental vacancy 

rates have also improved, falling from the fiveyear average of 6.9 percent to 6.6 percent in the 

first quarter of 2020 (Chart 3.4.5.4). 

Mortgage Originations, Servicing, and 

Loan Performance

According to the Freddie Mac Primary 

Mortgage Market Survey®, the average 30-

year fixed mortgage rate dropped 81 basis 

points during 2019 and has continued to 

decline through 2020. In the first nine months 

of 2020, the average 30-year fixed mortgage 

rate decreased a further 84 basis points to 2.9 

percent as of September 2020. This decline in 

rates has helped to sustain borrower demand 

and increase the attractiveness of both 

purchase and refinance mortgages. Primary 

mortgage rates, which often track 10-year U.S. 

Treasury yields, have not declined as much as 

10-year U.S. Treasury yields, which fell by 123 

basis points year-to-date through September 30, 

2020. The economic uncertainty surrounding 

the COVID-19 pandemic and the growth in 

origination volumes due to lower rates have left 

primary mortgage to Treasury yield spreads 

somewhat elevated, though the spread has 

narrowed compared to early in the COVID-19 

crisis as a result of Federal Reserve market 

interventions. 

Based on the National Mortgage Database 

(NMDB®), refinance originations remained 

robust in 2020, rising to $396 billion in the 

second quarter of 2020 as mortgage rates 

reached their lowest levels in decades (Chart 

3.4.5.5). This was an increase in refinance 

originations of $191 billion from the second 

quarter of 2019. Over the same time period, 

home purchase originations decreased from 

$315 billion to $215 billion. 

The market share of different types of mortgage 

originators has changed over time. Nondepository institutions have been expanding 

their share of the mortgage origination market 

in recent years. As tracked in Home Mortgage 

Disclosure Act data, the non-depository share 

of mortgage originations was approximately 60 

5

6

7

8

9

62

63

64

65

66

2015 2016 2017 2018 2019 2020

Homeownership Rate

(left axis)

Rental Vacancy Rate

(right axis)

3.4.5.4 Homeownership and Vacancy Rates

Percent Percent

Source: U.S. Census Bureau, Current 

Population Survey/Housing Vacancy Survey

As Of: 2020 Q1

Note: Data are non-seasonally 

adjusted quarterly percentages.

3.4.5.4 Homeownership and Vacancy Rates

2

3

4

5

6

0

200

400

600

800

2015 2016 2017 2018 2019 2020

30-Year Mortgage 

Rate (right axis)

3.4.5.5 Mortgage Originations and Rates

Billions of US$ Percent

Source: NMDB®, Freddie Mac 

Primary Mortgage Market Survey®

As Of: 2020 Q2

Refinance (left axis)

Purchase (left axis)

Note: Quarterly originations represent all 

1-4 family homes with first-lien, closedend residential mortgages.

3.4.5.5 Mortgage Originations and Rates
64 2020 FSOC // Annual Report

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0

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100

2000 2002 2004 2006 2008 2011 2013 2015 2017 2019

3.4.5.7 Shares of Mortgages by Equity Percentage

Percent Percent

Source: NMDB®

As Of: 2020 Q2

Note: Quarterly percentage of all mortgage 

loans that are not closed or terminated.

Percentage of mortgages with 

20% or more equity

5 to <20%

0 to <5%

<0%

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100

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2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

3.4.5.6 Purchase Origination Volume by Credit Score

Percent of Originations Percent of Originations

Source: NMDB®

As Of: 2020 Q2

Note: Based on first-borrower VantageScore 3.0 for 

first-lien, closed-end residential purchase mortgages.

<601

601-660

661-780

>780

3.4.5.7 Shares of Mortgages by Equity Percentage

3.4.5.6 Purchase Origination Volume by Credit Score percent in 2019 compared to approximately 30 

percent in the years prior to the 2008 financial 

crisis. In recent years, depository institutions 

with assets between $100 billion and $1 trillion 

have increased their share of originations, 

from 11 percent of total depository originations 

in 2016 to 18 percent in the first half of 2020 

according to Inside Mortgage Finance. The 

share of depository institution originations by 

banks with assets between $10 and $100 billion 

has increased from 16 percent in 2016 to 26 

percent in the first half of 2020. Over that time, 

the market shares of the largest depositories 

(over $1 trillion in assets) and the smallest 

depositories (less than $10 billion in assets) 

have decreased. 

Credit quality of new purchase mortgages 

remained relatively strong through the first 

half of 2020 (Chart 3.4.5.6). The percentage 

of borrowers with scores in the middle of the 

credit spectrum (VantageScore 3.0 scores 

between 661 and 780) remained relatively 

stable at approximately 50 percent for the last 

two decades. The highest credit quality group, 

borrowers with scores at or above 781, saw their 

share gain steadily since the 2008 financial 

crisis, and represented around 30 percent of 

the market as of the second quarter of 2020. 

The percentage of borrowers in the lowest score 

categories (below 661) declined from a high 

of 36 percent in the first quarter of 2006 to a 

low of 8.8 percent in the third quarter of 2012 

before increasing to 15 percent in the second 

quarter of 2020. 

Positive equity continued to strengthen, with 

90 percent of active mortgages having 20 

percent or more of positive equity in the home, 

and over 99 percent of mortgages having at 

least 5 percent of positive equity as of the 

second quarter of 2020 (Chart 3.4.5.7). Recent 

improvement to borrower equity positions has 

been driven in part by more than eight years 

of house price appreciation, providing a stark 

contrast with the bottom of the last housing 

cycle. Over the last two decades, positive equity 

reached its lowest point in the third quarter of 
Financial Developments 65

2012, with only 61 percent of borrowers holding 

equity of 20 percent or more. 

In response to the unprecedented level of 

unemployment claims caused by the pandemic, 

federal and state governments enacted a 

series of public assistance policies to support 

household incomes, suspend foreclosures and 

evictions, and offer flexibility in home purchase 

and mortgage acquisition processes. Under 

the CARES Act, borrowers with a federally 

backed mortgage are able temporarily to 

request mortgage payment forbearance, and 

the CARES Act specifies that loans that were 

current when they entered forbearance must 

be subsequently reported as current even when 

borrowers are not making payments. As a 

result, mortgage performance, as reported to 

the credit bureaus and reflected in the NMDB, 

differs from mortgage performance reported 

directly by mortgage servicers; for example, in 

Mortgage Bankers Association surveys, loans in 

forbearance are reported as delinquent if the 

payment was not made based on the original 

terms of the mortgage. 

As a potential consequence of these policies, 

the percentage of borrowers who were reported 

to the credit bureaus as being in the process 

of foreclosure, bankruptcy, or deed-in-lieu 

remained stable at 0.3 percent from the fourth 

quarter of 2019 to the second quarter of 2020 

(Chart 3.4.5.8). Following the CARES Act, the 

percentage of borrowers reported to the credit 

bureaus as 30 or 60 days past due dropped 

from 2.0 percent in the first quarter of 2020 

to 1.0 percent in the second quarter. Similarly, 

the percentage of borrowers reported as 90 

to 180 days past due dropped from 0.9 to 0.7 

percent in the same time period. However, as 

noted above, some of this decline may be due 

to the CARES Act reporting requirements, and 

thus may not be reflective of borrowers’ true 

economic circumstances. The Mortgage Bankers 

Association’s National Delinquency Survey, for 

example, estimated a 7.7 percent delinquency 

rate in the third quarter of 2020, an increase of 

3.7 percentage points from a year ago. 

0

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3

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5

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1

2

3

4

5

6

2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

3.4.5.8 Mortgage Delinquency

Percent As Of: 2020 Q2 Percent

Note: Quarterly percentage of all mortgage 

Source: NMDB® loans that are not closed or terminated.

In process of 

foreclosure, 

bankruptcy or 

deed-in-lieu

90 to 180 Days 

Past Due

30 or 60 Days 

Past Due

3.4.5.8 Mortgage Delinquency
66 2020 FSOC // Annual Report

0

4

8

12

16

0

4

8

12

16

Mar:2020 Apr:2020 May:2020 Jun:2020 Jul:2020 Aug:2020 Sep:2020

3.4.5.9 Forbearance Rates by Investor Type

Percent As Of: Sep-2020 Percent

Note: Rates are the weekly percentage of servicing 

Source: NMDB® portfolio volume in forbearance by investor type over time.

FHA, VA, and RHS

Total

GSE

Other (PLS, Portfolio, etc.)

3.4.5.9 Forbearance Rates by Investor Type Forbearance rates were relatively low prior to 

COVID-19, with total single-family forbearance 

rates at just 1.1 percent in March 2020. After 

the passage of the CARES Act, forbearance 

rates jumped quickly to 6.1 percent in April and 

peaked at 7.2 percent in May (Chart 3.4.5.9). 

Forbearance rates were higher for certain 

investor products and programs. 

Not all borrowers that have requested 

forbearance have actually missed payments, and 

not all delinquent borrowers that are eligible 

for forbearance have entered forbearance 

programs. Nonetheless, forbearances had 

an immediate and significant benefit for 

borrowers; more than half of borrowers in 

forbearance did not make their June mortgage 

payment but were reported as current. 

Overall, this represents about 3.4 percent of 

all outstanding mortgages which, if treated as 

being late with payments, would have more than 

doubled the national mortgage delinquency 

rate. The path of the economic recovery and 

the impact on servicers of the additional costs 

of non-paying loans remains uncertain. The 

refinance boom, however, has simultaneously 

provided servicers with a temporary source of 

liquidity to help sustain operations. 

The average credit score (VantageScore 3.0) 

of mortgage borrowers increased by about 9 

points in July 2020 compared to December 

2019. Credit score decreases of 20 points or 

more were only seen in about 10 percent of 

borrowers. The absence of a negative COVIDeffect on credit scores may be in part due to the 

CARES Act’s provision for creditors to continue 

to report borrowers granted a COVID related 

workout according to their pre-pandemic 

payment status. For borrowers with mortgage 

forbearance, decreasing credit scores may 

indicate growing problems with their nonmortgage obligations, though forbearance is 

available in some instances for other credit 

obligations, such as auto loans. 
Financial Developments 67

3.4.5.2 Government-Sponsored Enterprises and the 

Secondary Mortgage Market

The federal government continues to back 

the majority of new mortgages either directly 

through the Federal Housing Administration 

(FHA), the U.S. Department of Veterans Affairs 

(VA), and the USDA, or indirectly through 

Fannie Mae and Freddie Mac (the Enterprises). 

The federal government share of mortgage 

originations—which averaged 77 percent over 

the past decade—was 73 percent at the end of 

2019 (Chart 3.4.5.10). However, this share has 

increased since the onset of COVID-19, as the 

government has performed its countercyclical 

role of maintaining the flow of credit. 

The COVID-19 pandemic resulted in a 

contraction of both portfolio lending and 

private-label securitizations. New mortgages 

not securitized by Ginnie Mae (GNMA) or the 

Enterprises continue to be held mostly in lender 

portfolios rather than securitized in the privatelabel market. Non-agency RMBS issuance 

totaled $63 billion in 2019, but only $12 billion 

in the first half of 2020. This is the second 

consecutive year with an over 60 percent decline 

compared to the same period during the prior 

year (Chart 3.4.5.11). In contrast, agency RMBS 

issuance totaled $1.3 trillion in the first six 

months of 2020, almost double that of the same 

period in 2019, and reached $2.3 trillion by 

September 2020.

A notable change in early 2020 has been 

the early and persistent federal response to 

the COVID-19 pandemic. The FHFA, CFPB, 

and HUD have worked together to provide 

assistance under the CARES Act in the form 

of temporary mortgage relief, payment 

suspensions, protection for renters, remittance 

transfers, and informational resources (see 

Section 4.5). Also, as it had done during the 

2008 financial crisis, the Federal Reserve 

quickly restarted its open market operations 

to stabilize financial markets when volatility 

began to increase in the middle of March 2020. 

The Federal Reserve’s agency MBS purchases 

totaled approximately $560 billion through 

the end of April and $1.1 trillion by the end of 

0.0

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2004 2006 2008 2010 2012 2014 2016 2018 2020

3.4.5.11 RMBS Issuance

Trillions of US$ Trillions of US$

Source: FHLMC, FNMA, GNMA, NCUA, FDIC, 

Bloomberg, L.P., Dealogic, Thomson Reuters, SIFMA

As Of: Sep-2020 

Nonagency

Agency

YTD

0

20

40

60

80

100

0

20

40

60

80

100

1998 2001 2004 2007 2010 2013 2016 2019

3.4.5.10 Mortgage Originations by Product

Percent of Originations As Of: 2019 Q4 Percent of Originations

FHA, VA & RHS 

GSE

Private Portfolio 

and Securitized

Note: Quarterly data for first-lien, 

Source: NMDB closed-end residential mortgages. ®

3.4.5.10 Mortgage Originations by Product

3.4.5.11 RMBS Issuance
68 2020 FSOC // Annual Report

0

250

500

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1000

1250

0

250

500

750

1000

1250

Mar:2020 Apr:2020 May:2020 Jul:2020 Aug:2020 Sep:2020

3.4.5.12 Cumulative MBS Purchases by the Federal Reserve

Billions of US$ Billions of US$

Source: FRBNY

As Of: 30-Sep-2020 

UMBS

GNMA

Note: Cumulative 2020 purchases. Weekly series are aggregated 

from daily Agency MBS operations in the TBA pool.

3.4.5.12 Cumulative MBS Purchases by the Federal Reserve September 2020 (Chart 3.4.5.12). The pace of 

Federal Reserve purchases has slowed as market 

functioning stabilized. 

Fannie Mae and Freddie Mac

The Enterprises, currently in their thirteenth 

year of conservatorship, are an important 

source of liquidity to the mortgage market 

and of stability to the housing market. After 

the onset of the pandemic, the Enterprises 

took numerous actions at the direction of 

FHFA to support borrowers and renters, such 

as suspending foreclosures and evictions. 

While the full costs of the pandemic are yet 

to be realized, the Enterprises continue to be 

profitable. The Enterprises reported net income 

of $3.4 billion during the second quarter of 

2020, an increase from $1.1 billion in income 

during the first quarter of 2020. 

The Enterprises’ single-family and multifamily 

books of business increased over the last year. 

The Enterprises’ single-family guaranty book of 

business increased to $5.1 trillion as of June 30, 

2020, a 5 percent increase from June 30, 2019. 

This was partially driven by the Enterprises’ 77 

percent increase in new business activity in the 

second quarter of 2020 compared to the first 

quarter of 2020. The Enterprises’ multifamily 

portfolios increased to $639 billion, or by 

12 percent, in the second quarter of 2020, 

compared to the same period in 2019. 

The Enterprises have been transitioning 

financial instruments to SOFR and away from 

LIBOR. LIBOR may not be published after yearend 2021, requiring a transition of all financial 

instruments referencing the rate. FHFA worked 

with the Enterprises to develop parameters for a 

SOFR adjustable-rate mortgage (ARM) along 

with fallback language for replacement 

rates. Transition announcements were 

released in February 2020 and a transition 

playbook was issued in May. Fannie Mae 

and Freddie Mac will each cease issuance of 

single-family and multifamily LIBOR-based 

credit risk transfer (CRT) transactions 

in December 2020. LIBOR-based ARMs 
Financial Developments 69

will no longer be purchased with maturities 

beyond 2021. 

The Enterprises have continued to transfer 

risk to private capital in the mortgage market 

and reduce taxpayer risk through their CRT 

transactions. Fannie Mae has primarily 

transferred risk through its issuance of 

Connecticut Avenue Securities and Credit 

Insurance Risk Transfer transactions. In 

2019, Fannie Mae transferred a portion of 

the credit risk on single-family mortgages 

with unpaid principal balance (UPB) of 

$488 billion and risk-in-force of $15 billion. 

Since inception of its risk transfer programs, 

Fannie Mae has transferred a portion of the 

credit risk on single-family mortgages with 

UPB of nearly $2.1 trillion through 2019. 

Fannie Mae has not entered into a new CRT 

transaction, however, since the first quarter 

of 2020. Freddie Mac transferred a portion 

of the credit risk on $220 billion in UPB of 

single-family mortgage loans in 2019 with 

risk-in-force of $8.8 billion, primarily through 

its issuance of Structured Agency Credit Risk 

securities and through its Agency Credit 

Insurance Structure transactions. Through the 

first three quarters of 2020, Freddie Mac has 

transferred $12 billion of risk-in-force on $309 

billion of UPB. Since it began undertaking 

CRTs, Freddie Mac has executed transactions 

covering over $1.7 trillion in UPB for singlefamily mortgages through September 2020. 

In September 2019, Treasury and the FHFA 

agreed to modifications to the Preferred 

Stock Purchase Agreements (PSPAs) that 

permit Fannie Mae and Freddie Mac to retain 

$25 billion and $20 billion in earnings, 

respectively. Net worth in excess of these 

limits would be paid out to the Treasury as 

dividends. Through June 30, 2020, dividends 

to the Treasury have totaled $301 billion, with 

cumulative dividends paid by Fannie Mae and 

Freddie Mac totaling $181 billion and $120 

billion, respectively. 

Federal Home Loan Banks 

The FHLBs continued to serve as an important source 

of liquidity for the mortgage market and to exhibit 

strong financial performance. From June 30, 2019 

to June 30, 2020, the FHLBs reported aggregate net 

income of $2.9 billion, which is moderately down 

compared to recent years. 

Total assets decreased $130 billion over the same 

12-month period, but there were significant 

fluctuations in 2020. The total assets of the FHLBs 

have decreased from $1.3 trillion on March 31, 2020 to 

$1.0 trillion as of June 30, 2020. Advances, the largest 

component of FHLB assets, are a loan product FHLBs 

extend to their members to help them meet short 

and long-term liquidity and housing finance needs. 

Advances increased by 26 percent in the first quarter 

of 2020 and reached their post-2008 crisis peak of 

$807 billion as a result of the market crisis caused by 

the pandemic. As market volatility subsided and FHLB 

members’ liquidity needs decreased, advances fell by 31 

percent, to $558 billion, by June 30, 2020. 

While assets decreased primarily due to a decline in 

advances, mortgage holdings purchased from FHLB 

members continued to increase at the FHLBs. From 

June 30, 2019, to June 30, 2020, mortgages increased 

$6.4 billion to $73 billion. Additionally, retained 

earnings continued to grow at the FHLBs, increasing 

to $21 billion on June 30, 2020, an all-time high for the 

FHLB System.

3.4.6 Commercial Real Estate Market

With the onset of the global pandemic, commercial 

real estate (CRE) experienced significant challenges in 

the first three quarters of 2020 stemming from public 

health measures taken in response to COVID-19. In 

particular, pandemic-imposed travel restrictions and 

mandatory and voluntary social distancing efforts 

accelerated the decline in brick and mortar retail and 

adversely impacted occupancy of hotel CRE properties. 

The CRE loan delinquency rate has increased 

significantly for those loans whose underlying 

properties experienced severe pandemic-induced 

cash flow disruptions. The percent of seriously 

delinquent loans in non-agency conduit CMBS deals—

as measured by loans that have been delinquent 

for 60 days or more, as well as those in collateral 
70 2020 FSOC // Annual Report

0

5

10

15

20

0

5

10

15

20

2017 2018 2019 2020

3.4.6.2 Conduit CMBS Delinquency Rates by Industry

Percent As Of: Sep-2020 Percent

Source: JPMorgan, Trepp Note: 60+ delinquency rate; includes FC/REO. 

Industrial

Office

Retail

Lodging

Multifamily

0

2

4

6

8

10

0

2

4

6

8

10

2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

3.4.6.1 Conduit CMBS Delinquency and Foreclosure Rate

Percent As Of: Sep-2020 Percent

Source: JPMorgan, Trepp

Foreclosure / 

Real Estate 

Owned

60+ Days 

Delinquent

Note: Delinquency rate includes FC/REO. 

3.4.6.1 Conduit CMBS Delinquency and Foreclosure Rate

3.4.6.2 Conduit CMBS Delinquency Rates by Industry

foreclosure—increased from 2.2 percent in 

May to 6.9 percent in September. The rate of 

seriously delinquent loans peaked at 7.1 percent 

in July, its highest level since 2013 (Chart 

3.4.6.1). 

Loan delinquencies vary widely across property 

sectors (Chart 3.4.6.2). As of September 2020, 

loans in conduit CMBS deals collateralized by 

lodging properties, such as hotels, represent the 

highest percentage of seriously delinquent loans 

at 19 percent, followed by loans collateralized 

by retail properties at 11 percent. Industrial, 

multifamily, and office loans have the lowest 

CRE delinquency rates of 1.2 percent, 2.1 

percent, and 2.2 percent, respectively. Though 

office loans have relatively low delinquency 

rates, there is a high degree of uncertainty 

with respect to the long-term impact of the 

pandemic on office properties, due to large 

numbers of people teleworking. 

Pursuant to the CARES Act, FHFA and HUD 

announced that they would offer forbearance 

to multifamily property owners affected by 

COVID-19, to help ease the financial burden 

stemming from public health measures. 

Lenders may not charge borrowers under 

a forbearance any late fees or proceed with 

evictions for tenants for the duration of their 

forbearance. Not all multifamily renters and 

owners, however, are eligible for this assistance. 

Fannie Mae and Freddie Mac have provided 

explicit guidance that renters are permitted 

to receive eviction moratoria during the 

forbearance period, while the property owners 

can seek temporary mortgage relief if the 

loan qualifies for forbearance. At the end of 

September, 95 percent of renters had made 

their monthly rent payments according to 

the National Multifamily Housing Council’s 

analysis of data collected on approximately 11 

million rental units, compared to 96 percent 

for September 2019. As of September 2020, the 

percentage of Enterprise multifamily loans in 

forbearance remains low—about 1.3 percent for 

Fannie Mae and 2.2 percent for Freddie Mac. 

The pace of growth in forbearance appears to 

have slowed down for both Fannie Mae and 
Financial Developments 71

Freddie Mac as the market has improved, but 

warrants continued monitoring. In addition, 

student and senior housing properties, as well 

as multifamily properties with smaller units, 

have been negatively impacted by the COVID-19 

crisis, as evidenced by a higher percentage of 

loans in forbearance. 

According to the Federal Reserve’s Financial 

Accounts of the United States, as of the second 

quarter of 2020, outstanding CRE loans totaled 

$4.7 trillion, a 6.6 percent increase year-overyear. The total amount of CRE loans outstanding 

equates to approximately 24 percent of GDP, 

and has consistently increased since the fourth 

quarter of 2013, similar to the high reached in 

the second quarter of 2009. The government 

agencies, including Fannie Mae, Freddie Mac, 

and Ginnie Mae (collectively the agencies) 

continue to be major players in multifamily 

lending and fund or guarantee about 46 percent 

of total outstanding multifamily mortgages. 

CRE loans held by life insurance companies 

continued to increase, with year-over-year CRE 

loan growth at insurance companies outpacing 

that of banks. As of the second quarter of 2020, 

CRE loans outstanding at U.S. chartered banks 

were $2.3 trillion (a 5.7 percent increase yearover-year) and the corresponding total for life 

insurers was $574 billion (a 6.4 percent increase 

year-over-year). In the Federal Reserve’s July 

SLOOS, banks reported tightened standards and 

weaker demand for CRE loans. 

Overall CMBS issuance totaling $178 billion 

through the third quarter of 2020 was roughly 

flat compared to the same period in 2019. 

However, agency and non-agency CMBS issuance 

trends diverged in 2020, with non-agency CMBS 

issuance declining by 18 percent and agency 

CMBS issuance increasing by 27 percent yearto-date through September (Chart 3.4.6.3). 

Non-agency CMBS issuance came to a near 

halt in the second quarter of 2020, when only 

$9.5 billion of non-agency CMBS was issued. 

Non-agency CMBS issuance picked up in the 

third quarter of 2020, but remained below prepandemic levels. Agency CMBS issuance, which 

is predominantly collateralized by multifamily 

0

50

100

150

200

250

300

0

50

100

150

200

250

300

2004 2006 2008 2010 2012 2014 2016 2018 2020

YTD

3.4.6.3 CMBS Issuance

Billions of US$ Billions of US$

Source: Inside Mortgage Finance

As Of: 2020 Q3

Agency

Non-Agency

3.4.6.3 CMBS Issuance
72 2020 FSOC // Annual Report

-30

-20

-10

0

10

20

-30

-20

-10

0

10

20

2005 2007 2009 2011 2013 2015 2017 2019

3.4.6.4 Commercial Property Price Growth

Percent Percent

Source: Real Capital Analytics, 

Bloomberg, L.P.

Apartment

Industrial

Office

Retail

National

As Of: Sep-2020

Note: Year-over-year price change.

3.4.6.4 Commercial Property Price Growth properties, experienced modest disruption 

in March but issuance resumed subsequently 

in April, benefiting in part from the agency 

guarantee. Agency CMBS issuance accounted 

for 70 percent of total CMBS issuance in the 

first nine months of 2020 compared to 60 

percent of total CMBS issuance in 2019. 

The emergency actions taken by the Federal 

Reserve and Treasury have contributed to the 

stabilization of CMBS market conditions. In 

particular, the inclusion of agency CMBS in the 

Federal Reserve’s direct purchase operation 

has supported the return of normal market 

conditions. In addition, the establishment of 

the Term Asset-Backed Securities Loan Facility 

(TALF) and inclusion of legacy conduit CMBS 

in the facility appears to have contributed to 

significant tightening of CMBS spreads, thereby 

improving market conditions.

As of September 2020, national CRE prices 

increased by 1.4 percent year-over-year versus 

6.7 percent the previous year. Prices of retail 

and office properties declined for the first 

time since 2011, while prices of industrial 

and apartment properties held up relatively 

well (Chart 3.4.6.4). There is a high degree 

of ongoing uncertainty regarding the longterm impact on office properties as companies 

re-examine office space needs in the postpandemic working environment. 

CRE capitalization rates—the ratio of a 

property’s annual net operating income to 

its price—remain low by historical standards 

(Chart 3.4.6.5). However, one measure of the 

risk premium in CRE—the spread between 

CRE capitalization rates and the 10-year 

Treasury yield—increased rapidly in 2020 as 

the Treasury yield declined by about 125 basis 

points through September. 

According to Real Capital Analytics, the 

volume of CRE property sales peaked in 

2019 at over $550 billion. The strong growth 

trend was sustained in January and February 

of 2020. However, the unprecedented speed 

of the COVID-19-induced economic distress 

0

2

4

6

8

10

12

0

2

4

6

8

10

12

2001 2004 2007 2010 2013 2016 2019

Average Cap Rate

Average Cap Rate Spread

3.4.6.5 Capitalization Rates and Spreads

Percent Percent

Source: Real Capital Analytics, 

Bloomberg, L.P.

As Of: Sep-2020

3.4.6.5 Capitalization Rates and Spreads
Financial Developments 73

relative to prior downturns caused a sharp 

decline in commercial real estate transactions. 

Transaction volumes declined approximately 

40 percent in the first three quarters of 2020 

relative to the first three quarters of 2019. 

The decline in transaction volumes were 

concentrated in the second and third quarters 

of 2020, when year-over-year transaction 

volumes dropped by about 65 percent and 

55 percent, respectively. Property types more 

directly impacted by public health measures 

in response to the pandemic, such as retail, 

lodging, and office, experienced larger declines 

in transaction volumes of 44 percent, 71 

percent, and 46 percent, respectively, in the first 

three quarters of 2020. 
74 2020 2020 FSOC // FSOC // Annual Report Annual Report

Box E: Potential Risks in Commercial Real Estate

0

20

40

60

80

100

120

0

20

40

60

80

100

120

Jan:2020 Mar:2020 May:2020 Jul:2020 Sep:2020

Office

Industrial

Lodging

E.1 Sector Equity REIT Indices

Percent Percent

Source: NAREIT, Bloomberg, L.P.

As Of: 30-Sep-2020

Note: Indexed to February 14, 2020.

Apartment

Retail

E.1 Sector Equity REIT Indices

The COVID-19 pandemic shock has created 

significant distress for firms and households 

throughout the economy, leading to reductions in 

the cash flows generated by commercial real estate 

(CRE). The shock to CRE has been large, with the 

hotel and retail sectors suffering the most significant 

near-term losses. Considerable uncertainty remains 

regarding the long-term recovery prospects for a 

wider range of property types. 

Certain features of the current CRE financing 

environment may raise the potential for spillovers. 

Hotel and retail loans are concentrated in non-agency 

CMBS; servicing frictions may drive distressed 

property sales, potentially triggering price declines. 

Additionally, small and mid-sized regional banks are 

highly exposed to CRE; losses on CRE loans at these 

banks could drive a broader contraction in credit. 

Furthermore, potential spillover effects from CRE 

lending exposures may be greater in areas that are 

more dependent on local sources of funding. 

The Nature of the Shock

If equity REIT indices are broken out by property 

type (Chart E.1), the ordering of the price impact 

is consistent with the pandemic’s impact on cash 

flows by sector. Industrial properties have generally 

performed well, as the shift to online retail has 

increased demand for warehouses. Fiscal policy 

measures such as extended unemployment benefits 

supported rent payments for apartments through 

the summer, mitigating income losses in this sector 

to date. Although widespread work-from-home 

policies have driven an increase in office vacancy 

rates, tenants in long-term leases are largely making 

their rent payments. The hardest-hit properties have 

been in the lodging and retail sectors, as travel has 

sharply contracted and retail stores have closed due 

to stay-at-home orders. Even as parts of the economy 

have reopened, COVID-19 has resulted in increased 

operational costs for hotel and retail sectors due to 

enhanced focus on cleaning, sanitation, and security 

measures. 

Mortgage delinquency rates across sectors tell 

a similar story. Based on survey data from the 

Mortgage Bankers Association, as of August, the 

share of loans at any stage of delinquency remains 

near pre-pandemic levels for industrial and office 

properties. However, mortgage delinquencies 

on hotels and retail properties have surged to 

23 percent and 15 percent, respectively, and the 

same survey showed 16 percent and 8 percent of 

respective hotel and retail mortgages in forbearance. 

As of August, properties on Morningstar’s CMBS 

servicer watchlist, a more forward-looking measure 

of distress, suggest ongoing stress in the hotel and 

retail sectors, with 37 percent and 22 percent of 

loans outstanding on the watchlist compared to 18 

percent and 11 percent in August last year. 
Box E: Potential Risks in Commercial Real Estate 757

Spillover Risks from Stress in CRE

Stress in CRE markets can exacerbate economic 

downturns because CRE debt represents a large 

source of credit exposure for the financial system – 

about $4.7 trillion as of the second quarter of 2020, 

according to data from the Financial Accounts of 

the United States. Regulations and frameworks 

regarding capital and liquidity, resolution planning, 

and stress testing implemented after the 2008 

financial crisis have lowered the potential for the 

failure of large, interconnected banks exposed to 

CRE. Two additional important pathways may cause 

spillovers, however. First, declining cash flows in 

certain CRE sectors could increase distressed 

property sales, which in turn could reduce property 

values and create price-spirals, though lenders may 

work with borrowers to prevent distressed sales 

during a market downturn. Second, if lenders accrue 

large losses on CRE loans, they could further tighten 

CRE underwriting standards, potentially hampering 

economic growth. 

The funding mechanism for CRE carries implications 

for how likely spillovers are to materialize. Factors 

influencing spillover risk include institutions’ ability 

to manage losses from CRE and their importance 

as a source of credit. According to data from the 

Financial Accounts of the United States, about half 

of outstanding CRE mortgages are funded by banks; 

Fannie Mae, Freddie Mac, and other government 

entities fund or guarantee about 17 percent; life 

insurance companies fund about 13 percent; and 

about 9 percent are securitized into non-agency 

CMBS. These institutions’ exposure to pandemicdriven mortgage distress varies widely. For example, 

retail and lodging loans account for about 40 percent 

of loans securitized into non-agency CMBS; whereas 

they make up only about a quarter of CRE loans 

held by large banks and insurance companies. Small 

and mid-sized regional banks account for over half 

of outstanding bank-held CRE loans, but data are 

limited on sector-specific exposures.

CRE lenders may prevent distressed property sales 

during downturns and avoid losses from price declines 

either by modifying the terms of delinquent mortgages 

or by executing other effective workout plans until 

CRE markets stabilize. But, institutions vary in their 

willingness and ability to take these steps. In general, 

banks, life insurance companies, and government 

entities have wide discretion over loans’ terms and 

are more likely to offer mortgage modifications 

than are servicers of non-agency CMBS, which are 

bound by servicing contracts and who do not directly 

face losses. Similarly, large banks, large insurance 

companies, and government entities may manage the 

timing of property sales to minimize pricing spillovers 

better than servicers of non-agency CMBS and smaller 

banks.

Financial institutions can also transmit losses on CRE 

loans to the broader economy if they are an important 

source of non-CRE credit. This summer, the Federal 

Reserve’s stress testing regime for large banks 

included a scenario involving a sharp contraction in 

the values of retail and lodging properties, and the 

banks had enough capital to maintain the flow of credit 

assuming a V-shaped recovery. Several firms, however, 

would approach minimum capital ratios under a more 

severe U or W-shaped scenario, which may result in 

a sustained tightening of underwriting standards or 

contraction of credit. Small and mid-sized regional 

banks, however, are more highly exposed to CRE than 

the stress-tested banks on average. For example, 

as of the second quarter of 2020, CRE accounts for 

about 40 percent of non-CCAR banks’ loan portfolios 

and about 10 percent of CCAR banks’ loan portfolios, 

according to bank FR Y9-C or Call Report filings. 

These smaller banks are also an important source of 

credit to small business and retail borrowers. Sharp 

losses on CRE-backed loans at small and mid-sized 

banks could drive a broad contraction in credit, 

particularly in the sectors of the economy that rely on 

local sources of financing.
76 2020 2020 FSOC // FSOC // Annual Report Annual Report

Temporary vs. Permanent Declines in Cash 

Flows across Sectors

Considerable uncertainty remains about which 

CRE sectors may recover completely following 

the pandemic and which sectors face permanent 

shifts in demand. Segments of the retail sector have 

experienced years of decline as consumers have 

gradually shifted toward online shopping and away 

from shopping in physical stores; the pandemic may 

have accelerated this trend. The changes facing 

office and apartment properties are likewise unclear. 

A permanent shift toward teleworking may reduce 

demand for office space, driving economic activity 

away from city centers where many apartments, 

retail, restaurants/food outlets, and offices are 

located. A permanent shift toward teleworking may 

also shift demand toward single-family housing 

and away from apartments. Once the shock fully 

subsides, however, there may be a reversion to prepandemic business practices, in which case recent 

trends in apartment and office vacancies would 

likely reverse. 

Permanent downward changes in cash flows will 

lead to permanent declines in valuations in certain 

sectors, and eventually, holders of CRE will realize 

losses. But, as long as these losses accumulate 

gradually, they are unlikely to trigger large 

disruptions to the financial system.

Box E: Potential Risks in Commercial Real Estate
Financial Developments 77

3.5 Financial Institutions

3.5.1 Bank Holding Companies and 

Depository Institutions

3.5.1.1 Bank Holding Companies and Dodd-Frank 

Act Stress Tests 

BHCs—inclusive of financial holding 

companies—are companies registered under 

the Bank Holding Company Act that control 

at least one commercial bank. Subsidiaries 

of BHCs may also include nonbanks such 

as broker-dealers, investment advisers, or 

insurance companies. According to rules 

recently adopted by federal banking agencies to 

tailor the regulatory framework for enhanced 

prudential standards and the U.S. Basel III 

capital and liquidity standards to more closely 

match the risk profiles of domestic and foreign 

banks (Tailoring rules), the largest BHCs with 

total consolidated assets above $100 billion 

are grouped in four risk-based categories for 

determining the applicability of regulatory 

capital and liquidity requirements. Under 

the final rule, such requirements increase in 

stringency based on measures of size, crossjurisdictional activity, weighted short-term 

wholesale funding, nonbank assets, and offbalance sheet exposures. There are currently 

eight U.S. global systemically important banks 

(G-SIBs) (Category I BHCs) and two groups 

of large BHCs: large complex (Category II and 

III BHCs) and large noncomplex (Category IV 

BHCs) (Chart 3.5.1.1). Other BHCs with total 

consolidated assets less than $100 billion are 

not subject to the annual stress test exercise 

or liquidity requirements. Foreign banking 

organizations (FBOs) with sizeable operations 

in the United States must hold all non-branch 

interests in U.S. subsidiaries in an intermediate 

holding company (IHC). 

As of the second quarter of 2020, BHCs in the 

United States (excluding IHCs) held about 

$20 trillion in assets. U.S. G-SIBs account for 

66 percent of this total. Large complex BHCs 

account for 10 percent. Large noncomplex 

BHCs account for 7 percent. All other BHCs 

account for the remaining 17 percent of assets. 

The 13 IHCs operating in the U.S.—BBVA, 

3.5.1.1 Categorization of Large U.S. BHCs

Source: Federal Reserve

Description U.S. Domestic Banking Org.

Category I

(U.S. G-SIBs)

Bank of America JPMorgan Chase

Bank of New York Mellon Morgan Stanley

Citigroup State Street

Goldman Sachs Wells Fargo

Category II

(Large complex, ≥$700b Total assets, or ≥ 

$75b in Cross-Jurisdictional Activity)

Northern Trust

Category III

(Large complex, ≥$250b Total assets or ≥ $75b 

in NBA, wSTWF, or Off-balance sheet exposure)

Capital One Truist Financial

Charles Schwab U.S. Bancorp

PNC Financial

Category IV

(Large noncomplex, other firms with $100b 

to $250b Total assets)

Ally Financial Huntington

American Express KeyCorp

Citizens Financial M&T Bank

Discover Regions Financial

Fifth Third Synchrony Financial

Note: Northern Trust is in Category II due to its cross-jurisdictional activity. 

3.5.1.1 Categorization of Large U.S. BHCs
78 2020 FSOC // Annual Report

BMO, BNP Paribas, MUFG, Credit Suisse, 

Deutsche Bank, HSBC, TD Group, RBC, 

Santander, UBS, Barclays, DWS—have more 

than $2 trillion in consolidated domestic assets 

(Chart 3.5.1.2). 

Capital Adequacy

Equity capital provides a buffer to absorb losses 

from defaulting loans, declines in market 

value of securities and trading portfolios, 

counterparty defaults, and operational and 

legal risks. Capital adequacy in an economic 

downturn determines banks’ ability to continue 

lending and serve as a source of strength to 

the rest of the economy. Due to enhanced 

prudential regulation and robust economic 

growth, equity capital increased significantly, 

and the loss-absorbing capacity of the banking 

sector stood at historically high levels at the end 

of 2019. Following the disruptions in economic 

activity caused by the COVID-19 pandemic, the 

strengthened capital positions allowed BHCs 

to honor large drawdowns on credit lines and 

to absorb the significant increases in loan loss 

provisions in anticipation of deteriorating credit 

quality.

Bank capital adequacy is evaluated using 

risk-based capital requirements and non-riskbased leverage requirements combined with 

an annual stress test exercise for Category I-III 

firms, and biennially for Category IV firms. 

Common equity tier 1 (CET1) ratio is a riskbased capital requirement, defined as the ratio 

of CET1 capital to the total risk-weighted assets 

(RWAs). CET1 ratios decreased for all U.S. 

G-SIBs as well as for large complex and large 

noncomplex BHCs in the first quarter of 2020, 

before rising slightly in the second quarter. The 

declines in CET1 ratios at U.S. G-SIBs were 

in large part due to increases in RWAs and to 

a lesser degree due to contraction in CET1 

capital (Chart 3.5.1.3). A primary driver for the 

increases in RWAs were significant drawdowns 

on credit lines, which materially increased 

following the onset of the COVID-19 crisis, 

that became on-balance sheet commercial and 

industrial (C&I) loans. This resulted in higher 

risk-weighted assets than an undrawn off4

6

8

10

12

14

16

4

6

8

10

12

14

16

2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

3.5.1.3 Common Equity Tier 1 Ratios

Percent of RWA As Of: 2020 Q2 Percent of RWA

Source: FR Y-9C, 

Haver Analytics

Note: Tier 1 common capital is used as the numerator of the CET1 ratio 

prior to 2014:Q1 for G-SIBs and large complex BHCs, and prior to 

2015:Q1 for large noncomplex and other BHCs. The denominator is 

risk-weighted assets (RWA). Shaded areas indicate NBER recessions.

G-SIBs

Large Complex

Large Noncomplex

Other

0

2

4

6

8

10

12

14

0

2

4

6

8

10

12

14

G-SIBs Large

Complex

Large

Noncomplex

Other IHCs

3.5.1.2 Total Assets by BHC Type

Trillions of US$ Trillions of US$

Source: FR Y-9C

As Of: 2020 Q2

3.5.1.3 Common Equity Tier 1 Ratios

3.5.1.2 Total Assets by BHC Type
Financial Developments 79

balance sheet credit line commitment. Market 

volatility, particularly for trading portfolios, also 

contributed to the increase in RWAs. CET1 ratios 

rose for the U.S. G-SIBs in the second quarter 

as RWA fell on commercial credit line paydowns 

and reductions in credit card balances.

On net, risk-based regulatory capital ratios 

declined in the first half of 2020. However, U.S. 

G-SIBs continue to meet Basel III standards 

for the minimum risk-based weighted capital 

requirement ratios including the G-SIB 

surcharge and capital conservation buffer (Chart 

3.5.1.4). Furthermore, U.S. G-SIBs as well as 

other large or small BHCs maintained sizeable 

voluntary capital buffers above minimum 

requirements, allowing those banks to continue 

to lend. The Federal regulatory banking 

agencies issued a joint statement in March 2020 

encouraging banks and other regulated lenders 

to use their available capital and liquidity to 

continue to provide credit to consumers and 

small businesses affected by COVID-19.

In March 2020, the Federal Reserve adopted 

the stress capital buffer (SCB) rule that came 

into effect for the 2020 stress test cycle. The SCB 

rule simplified the Board’s capital framework by 

integrating non-stress and stress-based capital 

requirements with the introduction of the SCB 

requirement. In particular, the SCB replaced 

the static 2.5 percent capital conservation 

buffer with an SCB requirement. The SCB 

requirement is floored at a minimum of 2.5 

percent of risk-weighted assets and is calculated 

as the difference between starting and minimum 

projected CET1 capital ratios under the severely 

adverse scenario in the supervisory stress test, 

plus four quarters of planned common stock 

dividends as a percentage of risk-weighted 

assets. The final SCB rule did not include a 

stress leverage buffer requirement. A BHC or 

IHC subject to the rule whose regulatory capital 

ratios are at or below its regulatory minimum 

plus its SCB requirements, any applicable G-SIB 

surcharge, or countercyclical capital buffer, 

would be subject to automatic restrictions on 

capital distributions and certain discretionary 

bonus payments.

0

4

8

12

16

20

0

4

8

12

16

20

JPM C MS BAC GS WFC BK STT

2020 Q1 Minimum including U.S. G-SIB 

surcharge (2020)

Source: FR-Y9C

2019 Q2

3.5.1.4 Common Equity Tier 1 Ratios at U.S. G-SIBs

Percent of RWA As Of: 2020 Q2 Percent of RWA

2020 Q2

3.5.1.4 Common Equity Tier 1 Ratios at U.S. G-SIBs
80 2020 FSOC // Annual Report

0

5

10

15

20

0

5

10

15

20

JPM BAC STT WFC C MS GS BK

3.5.1.6 Supplementary Leverage Ratios at U.S. G-SIBs

Percent As Of: 2020 Q2 Percent

Source: FR Y-9C, 

Call Report

Note: Enhanced supplementary leverage ratio is only required for the G-SIBs. 

The ratio for 2019 Q4 is equal to tier 1 capital divided by total assets plus offbalance sheet exposures. The modified ratio for 2020 Q2 is equal to tier 1 

capital divided by total assets minus Treasury securities and reserves.

2020 Q2 (modified)

2019 Q4

2020 Q2 (non-modified)

Minimum

3.5.1.5 Payout Rates at U.S. G-SIBs

Source: FR Y-9C

0

20

40

60

80

100

120

140

0

25

50

75

100

125

150

175

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Percent of NIAC As Of: Billions of US$ 2020 Q2

NIAC (right axis)

Common Stock Cash Dividends (left axis)

Stock Repurchases (left axis)

Note: Payout rates are the ratios of stock repurchases plus cash dividends to 

net income available to common shareholders (NIAC). NIAC is net income 

minus preferred dividends. 2020 data represents YTD data through Q2.

3.5.1.5 Payout Rates at U.S. G-SIBs

3.5.1.6 Supplementary Leverage Ratios at U.S. G-SIBs

The overall payout rates at U.S. G-SIBs, defined 

as the sum of stock repurchases and common 

stock dividends, were close to 100 percent of 

the net income available to common equity in 

2018 and exceeded 100 percent in 2019. Payouts 

to shareholders fell slightly in the first quarter 

of 2020 compared to the 2019 historic highs 

(Chart 3.5.1.5). However, net income available 

to common shareholders fell sharply in the 

first quarter of 2020, and, subsequently, payout 

rates were substantially above 100 percent of 

net income. At the beginning of the COVID-19 

crisis, all U.S. G-SIBs announced voluntary 

suspension of share buybacks through at least 

the first half of 2020. Following the release 

of stress test results in June 2020, the Federal 

Reserve temporarily halted stock repurchases 

and capped dividends payments for all BHCs. 

As a result, firms made dividend payments 

based on a formula tied to recent net income.

The supplementary leverage ratio (SLR) is 

a non-risk-based capital adequacy measure 

defined as the ratio of tier 1 capital to 

total assets, plus certain off-balance sheet 

exposures. The SLR applies to large complex 

BHCs and an enhanced version of the SLR 

applies to U.S. G-SIBs. Since the start of the 

COVID-19 pandemic, the depository institution 

subsidiaries of BHCs have experienced large 

inflows of deposits and significant balance 

sheet expansion that reduced leverage ratios of 

BHCs. In addition, borrowers’ drawdowns on 

credit lines contributed to further balance sheet 

increases and reductions in leverage ratios. The 

Federal Reserve, FDIC, and OCC introduced 

a temporary modification to the SLR rule that 

allows BHCs to exclude Treasury securities 

and reserves at the Federal Reserve from the 

denominator of the ratio until March 31, 

2021. Those temporary modifications provide 

flexibility to certain banks to continue to 

expand their balance sheets and provide credit 

to households and businesses. The enhanced 

SLRs under the temporary rule increased 

substantially for some U.S. G-SIBs (Chart 

3.5.1.6). 
Financial Developments 81

Profitability

Bank profitability as measured by return 

on assets fell sharply across the four BHC 

categories in the first half of 2020 and for some 

BHCs net income became negative (Chart 

3.5.1.7). This contraction in profitability 

was mostly driven by increases in loan loss 

provisions and to a lesser degree by declines 

in other components of net income. In 

particular, banks with significant credit card 

loan portfolios experienced large increases 

in loan loss provisions—following the change 

to Current Expected Credit Losses (CECL) 

accounting and deteriorating economic 

conditions—and reported large contractions 

in net incomes in the first half of 2020. Other 

components of net income, such as net interest 

margins (NIMs), declined across all four BHC 

groups that file FR Y-9Cs (Chart 3.5.1.8). 

Funding Sources

During and prior to the 2008 financial crisis, 

BHCs relied heavily on short-term wholesale 

funding, and disruptions in interbank markets 

exposed BHCs to significant liquidity and 

solvency risks. Since then, the ratio of such 

unstable funding to total assets has declined 

substantially below its 2007 level. At the 

same time, BHCs attracted large inflows of 

more stable sources of funding such as core 

deposits. BHCs also maintained a steady share 

of long-term debt in recent years, including 

at U.S. G-SIBs, for purposes of meeting the 

minimum long-term debt requirement under 

TLAC (Chart 3.5.1.9). As a result of this more 

stable funding mix, BHCs did not experience 

significant disruptions in their funding during 

the COVID-19 crisis. Furthermore, the Federal 

Reserve established a number of credit and 

liquidity facilities that helped stabilize STFMs. 

0

10

20

30

40

50

60

70

0

10

20

30

40

50

60

70

2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

3.5.1.9 Sources of Funding at G-SIBs and Large-Complex

Percent of Total Liabilities As Of: 2020 Q2 Percent of Total Liabilities

Long-Term Funding

Core Deposits

Source: 

FR Y-9C

Note: ST funding: liabilities with maturities =< 1 yr, trading liabilities, repos, CP, and foreign deposits. 

LT funding: other borrowed money, subordinated notes and large time deposits with maturities > 1 yr. 

Core deposits: demand deposits, noninterest-bearing balances, transaction

accounts, money market deposits and time deposits <$250,000.Gray bars signify NBER recessions.

Short-Term Funding

1

2

3

4

5

6

1

2

3

4

5

6

2010 2012 2014 2016 2018 2020

Other

Large Noncomplex

Large Complex

G-SIBs

3.5.1.8 Net Interest Margins

Percent As Of: 2020 Q2 Percent

Source: FR Y-9C

Note: Quarterly, seasonally-adjusted annual rate. Net 

interest margin is equal to net interest income divided 

by the quarterly average of interest-earning assets. 

-1

0

1

2

3

-1

0

1

2

3

2010 2012 2014 2016 2018 2020

3.5.1.7 Return on Assets

Percent As Of: 2020 Q2 Percent

Source: FR Y-9C

Note: Quarterly, seasonally-adjusted annual rate. Return on 

assets is equal to net income divided by average assets.

Other

Large Noncomplex 

Large Complex

G-SIBs

3.5.1.9 Selected Sources of Funding at U.S. G-SIBs

3.5.1.8 Net Interest Margins

3.5.1.7 Return on Assets
82 2020 FSOC // Annual Report

0.00

0.25

0.50

0.75

1.00

1.25

1.50

0.00

0.25

0.50

0.75

1.00

1.25

1.50

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

3.5.1.11 Effective Deposit Rates by BHC Category

Rates As Of: 2020 Q2 Rates

Source: Call Report

Note: Effective deposit rates are defined as the ratio of the annualized 

quarterly-average interest expense on deposits and the one-quarter lag 

of the quarterly-average deposit balances.

Other

Large Noncomplex

Large Complex

G-SIBs

0

5

10

15

20

25

0

5

10

15

20

25

2001 2004 2007 2010 2013 2016 2019

3.5.1.10 Deposit Growth, All Commercial Banks

Percent As Of: Sep-2020 Percent

Source: Federal Reserve, 

Haver Analytics 

Note: Statistical Release H.8, “Assets and Liabilities of 

Commercial Banks in the United States.” Seasonally adjusted 

values. Year-over-year percentage change.

3.5.1.11 Effective Deposit Rates by BHC Category

3.5.1.10 Deposit Growth, All Commercial Banks The unfolding of the COVID-19 pandemic 

triggered flight-to-safety dynamics that led to 

increases in bank deposits, while other sources 

of funding remained mostly stable (Chart 

3.5.1.10). A significant share of deposit inflows 

was also due to corporations drawing on their 

bank credit lines and depositing the proceeds 

with banks, as well as payments from fiscal 

programs.

Following the normalization of monetary 

policy in December 2015, effective deposit rates 

gradually increased through 2019 with the rise 

in federal funds rates. The interest rate cuts in 

2019 and the more recent return of the federal 

funds rate to its effective lower bound resulted 

in deposit rates nearly falling back to their 2015 

levels (Chart 3.5.1.11).

Asset Quality

Overall delinquency rates remained low and 

stable in 2019, in part due to low delinquency 

rates for real estate loans (Chart 3.5.1.12). 

Mortgage lending following the 2008 

financial crisis has been predominantly to 

households with prime credit scores and 

lenders have applied significantly more 

conservative underwriting standards. In 

0

4

8

12

16

20

0

4

8

12

16

20

2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

3.5.1.12 Delinquency Rates on Real Estate Loans

Percent As Of: 2020 Q2 Percent

Source: FR Y-9C

Note: Includes all loans in domestic and foreign 

offices. Gray bars signify NBER recessions.

Commercial 

Real Estate

Residential 

Real Estate

3.5.1.12 Delinquency Rates on Real Estate Loans
Financial Developments 83

contrast, delinquency rates for consumer loans 

such as credit cards and auto loans increased 

slightly in 2019, consistent with higher shares 

of originations to subprime borrowers (Chart 

3.5.1.13). 

The adverse effects of the COVID-19 pandemic 

on economic activity resulted in significant 

deterioration of liquidity positions and debt 

servicing capacity of household and business 

borrowers, leading to a reassessment of credit 

policies by banks. In the responses to the July 

2020 SLOOS, banks indicated on balance that 

the levels of underwriting standards for most 

loan categories were relatively tighter than the 

mid-points of the ranges of those standards 

since 2005. Banks reported weaker demand for 

all commercial loan categories, and stronger 

demand for all residential real estate loans 

categories.

Despite disruptions in economic activity 

caused by the pandemic, delinquency rates 

in the first two quarters of 2020 did not 

increase substantially from their existing 

trends. Loan forbearance programs, along 

with government stimulus and deferred tax 

payments, contributed to better-than-expected 

credit performance in the first two quarters of 

2020. Mortgage forbearance programs provided 

household borrowers with greater liquidity and 

increased capacity to pay down other debt such 

as credit cards and auto loans. However, BHCs 

significantly increased their loan loss provisions 

in the first half of 2020 (Chart 3.5.1.14).

The introduction of the CECL accounting 

standard has, for those institutions that have 

implemented CECL, changed how these 

institutions provision for loan losses, from 

using incurred losses under the previous 

accounting standard to estimating losses over 

the financial asset’s contractual term adjusted 

for prepayments. Because the adoption of 

CECL could lead to one-time reductions in 

regulatory capital ratios, banks were given 

the option to phase in the regulatory capital 

effects of the updated accounting standard 

over a period of three years. In addition, the 

0

2

4

6

8

10

12

0

2

4

6

8

10

12

2013 2014 2015 2016 2017 2018 2019 2020

3.5.1.14 Provisions to Loans Ratios at BHCs

Percent As Of: 2020 Q2 Percent

Credit Cards

Other Consumer

Residential Real Estate

Commercial Real Estate

C&I

Source: FR Y-9C Note: Excludes Barclays, Credit Suisse, DB, and UBS.

0

2

4

6

8

0

2

4

6

8

2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

3.5.1.13 Delinquency Rates on Selected Loans

Percent As Of: 2020 Q2 Percent

Source: FRY-9C, 

Call Report 

Note: Seasonally adjusted. Includes all loans in domestic 

and foreign offices. Auto loans became available in 2011 

Q1. Gray bars signify NBER recessions.

Credit Card

Auto

C&I

3.5.1.14 Provisions to Loans Ratios at BHCs

3.5.1.13 Delinquency Rates on Selected Loans
84 2020 FSOC // Annual Report

0

2

4

6

8

10

12

0

2

4

6

8

10

12

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

3.5.1.16 Loans to Nondepository Financial Institutions

Percent of Total Loans Percent of Total Loans

Source: FR Y-9C

As Of: 2020 Q2

Other

Large Noncomplex

Large Complex

G-SIBs

-30

-20

-10

0

10

20

30

40

-30

-20

-10

0

10

20

30

40

2001 2004 2007 2010 2013 2016 2019

3.5.1.15 C&I Loan Growth, All Commercial Banks

Percent As Of: Sep-2020 Percent

Source: Federal Reserve, 

Haver Analytics 

Note: Statistical Release H.8, “Assets and Liabilities 

of Commercial Banks in the United States.” Yearover-year percentage change.

3.5.1.15 C&I Loan Growth, All Commercial Banks

3.5.1.16 Loans to Nondepository Financial Institutions

supervisory stress test modeling framework 

as it relates to projecting loan allowances and 

provisions would not be revised to account for 

CECL in the 2020 and 2021 cycles. To allow 

banking organizations to better focus on 

supporting lending to creditworthy households 

and businesses in light of recent strains on the 

U.S. economy as a result of COVID-19, while 

also maintaining the quality of regulatory 

capital, the federal banking regulators issued 

a final rule on August 26, 2020, that allowed 

the option to delay for two years an estimate 

of CECL’s effect on regulatory capital, relative 

to the incurred loss methodology’s effect on 

regulatory capital, followed by a three-year 

transition period. 

Corporate borrowers, especially in industries 

directly impacted by the pandemic, drew 

their credit lines to meet current—and hedge 

against future—liquidity and funding needs. 

The drawdowns on credit lines resulted in 

significant increases in outstanding C&I loans. 

In addition, PPP loans outstanding, which were 

mostly C&I loans and amounted to $484 billion 

as of June 30, drove this increase. The average 

year-over-year growth of C&I loans exceeded 20 

percent from April through July 2020 (Chart 

3.5.1.15).

Lending to nondepository financial institutions 

has increased since 2010, significantly 

outpacing the growth rates in commercial loans 

to nonfinancial firms. The growth in loans to 

nonbank financials accelerated notably at the 

end of 2019 and in the first quarter of 2020. A 

large part of the increase in the first quarter 

of 2020 was due to drawdowns of credit lines 

that were subsequently paid down in the second 

quarter of 2020 (Chart 3.5.1.16). 

Liquidity Management

In 2019, all BHCs subject to the liquidity 

coverage ratio (LCR) reduced their holdings 

of high-quality liquid assets (HQLA) and, in 

particular, their reserves (Chart 3.5.1.17). 

HQLA began to increase in the last quarter 

of 2019 mostly due to increases in reserves 

following interventions of the Federal 

5

10

15

20

25

30

5

10

15

20

25

30

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

3.5.1.17 High-Quality Liquid Assets by BHC Type

Percent of Assets Percent of Assets

Source: FR Y-9C

As Of: 2020 Q2

Note: HQLA is estimated by adding excess reserves to an 

estimate of securities that qualify for HQLA. Haircuts and 

level 2 asset limitations are incorporated into the estimate.

Other

Large Noncomplex

Large Complex

G-SIB

3.5.1.17 High-Quality Liquid Assets by BHC Type
Financial Developments 85

Reserve in repo markets in September 

2019. The increase in reserves significantly 

accelerated with the influx of deposits and the 

establishment of the asset purchase programs 

by the Federal Reserve in the first half of 2020 

(Chart 3.5.1.18). 

Deposit inflows and inflows of more stable 

insured retail deposits helped alleviate liquidity 

pressures from the large credit line drawdowns. 

U.S. G-SIBs continued to maintain liquidity 

ratios well above the 100 percent requirement in 

the first two quarters of 2020 (Chart 3.5.1.19). 

LCR ratios rose for six of the eight U.S. G-SIBs 

in the second quarter of 2020. The Tailoring 

rules exempted BHCs with total consolidated 

assets below $100 billion from the LCR and 

reduced LCR requirements for Categories III 

and IV, based on their reliance on short-term 

wholesale funding.

There was a large shift of held-to-maturity 

investment securities to available-for-sale 

status at the end of 2019, which reflected 

re-optimization by banks after the Tailoring 

rules went into effect on December 31, 2019. 

The rules allowed large complex and large 

noncomplex BHCs to opt-out of including 

accumulated other comprehensive income 

from available-for-sale accounts in their capital 

calculation. Most large complex and some large 

noncomplex BHCs shifted their entire holdings 

of securities from held-to-maturity into 

available-for-sale accounts (Chart 3.5.1.20).

The duration gap between the timing of cash 

inflows from assets and the timing of cash 

outflows from liabilities at U.S. G-SIBs and 

large BHCs remained on balance unchanged in 

2020, whereas the duration gap at other BHCs 

increased slightly. Duration gaps are measures 

of interest rate risk at BHCs. The flattening 

of the yield curve and expectations for lower 

interest rates are likely to negatively impact 

profitability and capital at BHCs with smaller 

duration gaps (Chart 3.5.1.21).

0

50

100

150

200

0

50

100

150

200

JPM C MS BAC GS WFC BK STT

3.5.1.19 Liquidity Coverage Ratios at U.S. G-SIBs

Percent As Of: 2020 Q2 Percent

Source: LCR Disclosures 

from each banks’ websites

Note: The solid line represents the 

regulatory minimum.

2020 Q1

2020 Q2

2019 Q4

0

2

4

6

8

10

12

0

2

4

6

8

10

12

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

3.5.1.18 Selected Liquid Assets at All BHCs 

Percent of Assets Percent of Assets

Source: FR Y-9C, FR 2900

As Of: 2020 Q2

Reserve Balances

Fannie Mae and Freddie Mac MBS

Treasury Securities

Ginnie Mae MBS

Note: Quarterly, NSA. 

3.5.1.19 Liquidity Coverage Ratios at U.S. G-SIBs

3.5.1.18 Selected Liquid Assets at All BHCs

0

10

20

30

40

0

10

20

30

40

1997 2001 2005 2009 2013 2017

3.5.1.20 Held-to-Maturity Securities 

Percent of Investment 

Securities

Percent of Investment 

As Of: 2020 Q2 Securities

Source: Call Report, 

Haver Analytics

Note: Investment securities are held-to-maturity 

securities plus available-for-sale securities. Gray 

bars signify NBER recessions.

Other

Large Noncomplex

Large Complex

G-SIB

3.5.1.20 Held-to-Maturity Securities 
86 2020 FSOC // Annual Report

Index As Of: 29-Jun-2020

3.5.1.22 Bank Stock Performance

Source: Yahoo Finance!, 

Bloomberg, L.P. 

50

75

100

125

150

175

50

75

100

125

150

175

Jan:2019 Apr:2019 Aug:2019 Dec:2019 Apr:2020

Large Noncomplex

Large Complex

G-SIBs

Index

Note: January 2, 2019 = 100. EU Bank Stock Index created from 

stock prices for the following banks: BCS, BNPQY, CS, ACA, DB, 

SAN, UBS. All indexes are created by equally weighting banks.

S&P 500

EU Bank Stock Index

Other

3.5.1.21 Duration Gap

Source: Call Report, 

Haver Analytics

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

Years As Of: 2020 Q2 Years

Note: Duration gap is the approximate weighted-average 

time of cash inflows less the approximate weighted-average 

time of cash outflows. Gray bars signify NBER recessions.

Other

Large Noncomplex

Large Complex

G-SIBs

3.5.1.22 Bank Stock Performance

3.5.1.21 Duration Gap Market Perception of Value and Risk

Investor expectations for significantly lower 

bank profitability were reflected in sharp 

declines in bank stock valuations and market 

capitalization in March 2020. Even though bank 

stock prices partially recovered in April through 

June 2020, bank stocks performed notably 

worse than the S&P 500 stock index (Chart 

3.5.1.22).

Price-to-book ratios of the U.S. G-SIBs followed 

similar patterns to their stock performance. 

Despite the partial recovery of market 

valuations, most U.S. G-SIBs’ price-to-book 

ratios remained below or around 100 as of June 

2020. Low market-based capital and price-tobook ratios limit BHCs’ ability to raise equity 

capital externally (Chart 3.5.1.23).

Percent As Of: Jun-2020

3.5.1.23 Price-to-Book for Select U.S. G-SIBs 

Source: SNL

0

50

100

150

200

250

300

0

50

100

150

200

250

300

2008 2010 2012 2014 2016 2018 2020

Percent

Note: Month-end values.

Wells Fargo 

JPMorgan Chase

Morgan Stanley

Goldman Sachs

Citigroup

Bank of America

3.5.1.23 Price-to-Book of Select U.S. G-SIBs
Financial Developments 87

CDS spreads of U.S. G-SIBs, a measure of 

default risk, increased notably in the spring 

but have since tightened. Some U.S. G-SIBs’ 

CDS spreads rose by more than 100 basis 

points, exceeding the increases in CDS spreads 

observed in February 2016 when markets were 

concerned about a global economic slowdown 

and the possibility of a low-for-long interest rate 

environment. Nonetheless, the increases in CDS 

spreads in 2020 were significantly smaller than 

those observed during the 2008 financial crisis. 

In large part, the lower CDS spreads at the 

onset of the COVID-19 crisis reflect the much 

better liquidity and capital positions of BHCs 

(Chart 3.5.1.24). CDS spreads of foreign G-SIBs 

performed similarly to U.S. G-SIBs with the 

exception of Deutsche Bank, which experienced 

the largest increase in CDS spreads among 

foreign G-SIBs, exceeding 200 basis points 

(Chart 3.5.1.25).

Dodd-Frank Act Stress Tests and the 

Assessment of Bank Capital during 

COVID-19 Event

The CCAR is an annual exercise by the Federal 

Reserve to assess whether the largest BHCs 

operating in the United States have sufficient 

capital to continue operations throughout times 

of economic and financial stress and that they 

have robust, forward-looking capital-planning 

processes that account for their unique risks.

As part of this exercise, the Federal Reserve 

evaluates institutions’ capital adequacy, 

internal capital adequacy assessment processes, 

and their individual plans to make capital 

distributions, such as dividend payments or 

stock repurchases. Dodd-Frank Act stress 

testing (DFAST)—a complementary exercise 

to CCAR—is a forward-looking exercise that 

evaluates the capital adequacy of BHCs and 

IHCs to absorb losses over a nine-quarter 

period resulting from stressful economic and 

financial market conditions in hypothetical 

supervisory scenarios. The stress test is 

conducted by the Federal Reserve and the 

supervisory stress scenarios are designed by the 

Federal Reserve. The Federal Reserve consults 

Basis Points As Of: Jun-2020

3.5.1.25 5-Year CDS Premiums Select Foreign Banks

Source: Markit

0

100

200

300

400

500

0

100

200

300

400

500

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Basis Points

RBS

Santander

Barclays

Note: Monthly averages.

Deutsche Bank

Société Générale

Credit Suisse

BNP Paribas

Basis Points As Of: Jun-2020

3.5.1.24 5-Year CDS Premiums Select U.S. G-SIBs

Source: Markit

0

100

200

300

400

500

0

100

200

300

400

500

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Basis Points

Note: Monthly averages.

Wells Fargo 

JPMorgan Chase

Morgan Stanley

Goldman Sachs

Citigroup

Bank of America

3.5.1.25 5-Year CDS Premiums of Select Foreign Banks 

3.5.1.24 5-Year CDS Premiums of Select U.S. G-SIBs
88 2020 FSOC // Annual Report

0

4

8

12

16

0

4

8

12

16

2013 2014 2015 2016 2017 2018 2019 2020

Pre-Stress

Post-Stress DFAST

18 30 31 33 34 35 18 33

3.5.1.26 Initial and Stressed Capital Ratios

Percent of RWA Percent of RWA

Source: Federal 

Reserve

Note: Regulatory minimum is 5% pre-2016 and 4.5% from 2016 

onwards. For DFAST 2013-2015, bars show Tier 1 Common Capital 

Ratio. DFAST 2016-2020 bars show Common Equity Tier 1 Ratio. The 

x-axis labels represent the number of banks tested within a given year.

Post-Stress CCAR

Regulatory Minimum

3.5.1.26 Initial and Stressed Capital Ratios with the FDIC and OCC on the scenarios, which 

are also used for company-run stress tests by 

national banks, state nonmember banks, and 

federal savings associations. As part of DFAST, 

the firms must report their company-run stress 

test results to the Federal Reserve, their primary 

regulator, and the public. 

In the 2020 stress test cycle, 34 BHCs and IHCs 

were stress tested. The aggregate CET1 ratio 

would decline from 12 percent in the fourth 

quarter of 2019 to its minimum of 9.9 percent 

as part of the severely adverse scenario. The 

DFAST 2020 results were broadly similar to 

those of prior year exercises (Chart 3.5.1.26). 

In particular, aggregate loan losses as a 

percentage of the average loan balances in the 

severely adverse scenario in DFAST 2020 were 

comparable to the past several years. Finally, the 

Board did not object to the five IHCs (Barclays, 

Credit Suisse, Deutsche Bank, DWS, and UBS), 

whose capital planning practices were subject to 

qualitative assessment as part of the stress test.

In June 2020, the Federal Reserve announced 

that it had conducted a sensitivity analysis of 

bank capital adequacy taking into account the 

significant economic uncertainty during the 

COVID-19 pandemic. The Federal Reserve 

constructed three alternative downside 

scenarios to model possible paths for the 

economy: a rapid V-shaped recession and 

recovery, a slower U-shaped recession and 

recovery, and a W-shaped double-dip recession 

with a short-lived interim recovery. All three 

alternative downside scenarios featured higher 

peak unemployment rates and larger declines 

in GDP than the severely adverse scenario. 

Furthermore, the sensitivity analysis did not 

take into account the mitigating effects of 

government stimulus programs and expanded 

unemployment insurance.

The results of the sensitivity analysis showed 

that aggregate loan losses ranged from $560 

billion to $700 billion. Most firms remained 

well-capitalized and aggregate capital ratios 

declined from 12.0 percent in the fourth 

quarter of 2019 to minimum values between 
Financial Developments 89

9.5 percent and 7.7 percent across the three 

alternative scenarios. However, several firms 

would approach minimum capital requirements 

(Chart 3.5.1.27).

The Federal Reserve took several actions to 

preserve the resilience of the banking system 

in light of significant economic uncertainty 

during the pandemic. The Federal Reserve 

required CCAR applicable banks to temporarily 

suspend share repurchases and limit dividend 

payments based on recent earnings. In 

addition, the Federal Reserve required large 

banks to re-evaluate and resubmit their longterm capital plans in early November. Results 

from the CCAR 2020 resubmission and further 

policy actions, if any, will be disclosed by 

year-end 2020. On September 17, 2020, the 

Board released two scenarios featuring severe 

recessions for a second round of bank stress 

tests that would reassess banks’ resiliency in 

the face of the continued uncertainty from the 

COVID-19 pandemic. The Board will release 

firm-specific results from banks’ performance 

under these scenarios by the end of the year.

3.5.1.2 Insured Commercial Banks and Savings 

Institutions

As of the second quarter of 2020, the banking 

industry included 5,066 FDIC-insured 

commercial banks and savings institutions with 

total assets of $21.1 trillion. There were 1,010 

institutions with assets under $100 million 

and 903 institutions with assets over $1 billion. 

During 2019, 226 institutions were absorbed 

by mergers, while 13 new charters were added. 

Failures of insured depository institutions are 

down significantly since the 2008 financial 

crisis; four institutions failed in 2019 and four 

had failed at the time of this report in 2020 

(Chart 3.5.1.28).

As of year-end 2019, the FDIC’s “problem bank” 

list included 51 institutions—1 percent of all 

institutions—in comparison to 60 banks the 

prior year. Banks on this list have financial, 

operational, or managerial weaknesses that 

require corrective action in order to operate in 

a safe and sound manner. 

3.5.1.27 Minimum CET1 Capital Ratios in the Severely 

Adverse and Alternative Downside Scenarios

Source: Federal Reserve Note: Excludes common distributions. Sample consists 

of the 33 firms participating in DFAST 2020. 

Scenario

Minimum CET1 Capital Ratio

25th 

Percentile

75th 

Percentile Aggregate

Stress Test

Severely Adverse 8 12.3 9.9

Sensitivity Analysis

V-shaped 7.5 11.3 9.5

U-shaped 5.5 10.8 8.1

W-shaped 4.8 10.5 7.7

3.5.1.27 Minimum CET1 Capital Ratios in the Severely Adverse 

and Alternative Downside Scenarios

0

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2

3

4

5

0

100

200

300

400

500

600

1980 1985 1990 1995 2000 2005 2010 2015

3.5.1.28 FDIC-Insured Failed Institutions 

Number of Institutions As Of: 2019 Percent

Note: No FDIC-insured institutions 

failed during 2005, 2006, and 2018.

Source: BEA, FDIC, 

Haver Analytics

Number of 

Institutions 

(left axis)

Assets of Failed 

Institutions as a Percent 

of Nominal GDP 

(right axis)

3.5.1.28 FDIC-Insured Failed Institutions 
90 2020 FSOC // Annual Report

-1500

-1000

-500

0

500

1000

1500

-1500

-1000

-500

0

500

1000

1500

2009 2011 2013 2015 2017 2019

Non-interest Income

Net Interest Income

Noninterest Expense

Provisions

3.5.1.29 Commercial Bank and Thrift Net Income

Billions of US$ Billions of US$

Source: FDIC

Note: Includes all FDIC-insured commercial 

banks and thrifts. Values are annualized. 

As Of: 2020 Q2

Realized Gains/Losses

Net Income

Income Tax Expense

3.5.1.29 Commercial Bank and Thrift Net Income The total assets of U.S. commercial banks 

and savings institutions increased by $2.9 

trillion between the second quarter of 2019 

and the second quarter of 2020. Loans and 

leases increased by $695 billion during that 

period. While all major loan categories grew, 

C&I increased the most, up $473 billion or 

21 percent. Growth in the C&I portfolio was 

driven by a combination of draws on lines of 

credit by businesses and PPP lending. Banks 

increased their investment securities by $737 

billion since the second quarter of 2019, with 

U.S. Treasury securities balances up by 51 

percent and MBS up by 16 percent. Cash and 

due from accounts also grew $1.3 trillion or 78 

percent, driven by a large inflow of deposits, 

and now represent 14 percent of total assets, up 

from 9 percent a year ago. 

For the first six months of 2020, net income 

for all U.S. commercial banks and savings 

institutions totaled $37 billion, a 70 percent 

decline from the first six months of 2019, driven 

by a decline in net interest income and rise 

in loan loss provisions (Chart 3.5.1.29). Net 

interest income fell by 3.5 percent in the first 

half of 2020 due to interest income declines 

outpacing interest expense declines. Interestearning assets grew 17 percent since June 

2019; however, the yields on these assets do 

not compensate for the 150 basis point drop in 

rates in early 2020. These earnings trends were 

broad-based throughout the industry, as more 

than half of commercial banks and savings 

institutions reported lower earnings in the first 

half of 2020. 

Credit quality has begun to show modest 

deterioration. The noncurrent ratio rose 15 basis 

points from the second quarter of 2019 to 1.08 

percent of total loans. Loan loss provisions for the 

first six months of 2020 rose $88 billion, reflecting 

economic conditions and the implementation of 

the CECL accounting standard. 

The long-term trend of banking industry 

consolidation continued in 2019 and 2020, as 

the ten largest institutions continued to hold 

over 50 percent of total industry assets (Chart 
Financial Developments 91

3.5.1.30). The 100 largest institutions hold 

about 82 percent of total industry assets, which 

is a historical high. As of the second quarter of 

2020, the total number of banks and savings 

associations decreased to 5,066, which is a 

historical low.

3.5.1.3 U.S. Branches and Agencies of 

Foreign Banks

As of June 30, 2020, assets of U.S. branches and 

agencies of foreign banks totaled $2.6 trillion, 

up nearly six percent from June 30, 2019 (Chart 

3.5.1.31). Reserve balances for U.S. branches 

and agencies of foreign banks totaled $640.1 

billion, comprising 25 percent of total assets as 

of June 30, 2020. Reserve balances increased 

24 percent year-over-year and accounted for 

90 percent of asset growth during the same 

timeframe. Noted growth in reserve balances 

is largely attributed to increased borrowings 

from head offices and related entities of U.S. 

branches and agencies of foreign banks that 

were placed on deposit at the Federal Reserve. 

In addition, deposits of borrowings from the 

Discount Window and certain Federal Reservesponsored liquidity facilities contributed 

to the increase in reserve balances and the 

maintenance of excess liquidity at U.S. branches 

and agencies of foreign banks. 

Securities purchased under agreement to 

resell (reverse repos) and fed funds sold at 

U.S. branches and agencies of foreign banks 

decreased by $79 billion or 21 percent from 

June 30, 2019, to June 30, 2020. Reverse repos 

represented 12 percent of total assets at U.S. 

branches and agencies of foreign banks as of 

June 30, 2020, compared to nearly 16 percent of 

total assets one year prior. The contraction in 

reverse repos is consistent with reduced market 

activity at the point of severe stress toward the 

beginning of the outbreak and with the intent of 

U.S. branches and agencies of foreign banks to 

preserve liquidity at the onset of the pandemic. 

As of June 30, 2020, total loan balances 

accounted for approximately 34 percent of total 

assets at U.S. branches and agencies of foreign 

banks. C&I lending remained a significant 

0

5

10

15

20

25

0

5

10

15

20

25

1984 1989 1994 1999 2004 2009 2014 2019

Number of Insured 

Depository Institutions 

(right axis)

3.5.1.30 Total Assets of Largest Insured Depository Institutions

Trillions of US$ Count (‘000s)

Source: FFIEC Call Report

As Of: 2020 Q2

Top 100 IDIs (left axis)

Other IDIs (left axis)

Top 10 IDIs (left axis)

Note: Fourth quarter data was used for years 1984 -

2019 and second quarter data was used for 2020.

3.5.1.30 Total Assets of Largest Insured Depository Institutions 

0

1

2

3

4

0

1

2

3

4

2004 2006 2008 2010 2012 2014 2016 2018 2020

3.5.1.31 U.S. Branches and Agencies of Foreign Banks: Assets

Trillions of US$ Trillions of US$

Source: Federal Reserve, 

Haver Analytics

As Of: 2020 Q2

Reserve Balances

Net Due from Related Institutions

Securities Purchased with Repos & 

Fed Funds Sold

Cash and Balances Due from 

Depository Institutions (Excluding 

Reserve Balances) 

Other Assets

Non-C&I Loans

C&I Loans

Note: Other assets includes government 

securities, ABS, and other trading assets.

3.5.1.31 U.S. Branches and Agencies of Foreign Banks: Assets
92 2020 FSOC // Annual Report

0

1

2

3

4

0

1

2

3

4

2004 2006 2008 2010 2012 2014 2016 2018 2020

3.5.1.32 U.S. Branches and Agencies of Foreign Banks: Liabilities

Trillions of US$ Trillions of US$

Source: Federal Reserve, 

Haver Analytics

As Of: 2020 Q2

Deposits & Credit Balances

Securities Sold with Repos & Fed Funds Purchased

Other Liabilities

Net Due to Related Depository Institutions

Note: Other liabilities includes transaction accounts, 

non-transaction accounts, and other borrowed money.

3.5.1.32 U.S. Branches and Agencies of Foreign Banks: Liabilities portion of overall lending by U.S. branches and 

agencies of foreign banks, with a ratio of C&I 

loans to total loans of approximately 56 percent 

as of June 30, 2020. C&I loan levels rose $78 

billion or 19 percent between June 30, 2019 and 

June 30, 2020. The most significant increases in 

C&I loans occurred during the first quarter of 

2020, driven by corporate draws on revolving 

and committed lines of credit. 

Deposits and credit balances represented 45 

percent of total liabilities for U.S. branches 

and agencies of foreign banks as of June 30, 

2020 (Chart 3.5.1.32). Net due to related 

depository institutions increased $60 billion 

or 14 percent from June 30, 2019 to June 30, 

2020. The year-over-year increase in net due 

to related depository institutions was driven by 

an uptick in head office borrowings from the 

Federal Reserve’s liquidity swap lines in the first 

quarter, which returned to more normal levels 

by the end of the second quarter. This funding 

was generally downstreamed to U.S. branches 

and agencies of foreign banks to support local 

operations and meet dollar liquidity needs. 

Securities sold with repurchase agreements 

(repos) and federal funds purchased decreased 

$10 billion or two percent between June 30, 

2019, and June 30, 2020. Repos totaled 35 

percent of total liabilities for U.S. branches 

and agencies of foreign banks as of June 30, 

2020, and decreased two percent year-over-year. 

While this figure initially increased in the first 

quarter given enhanced participation in the 

Federal Reserve’s emergency lending facilities, 

particularly with the expansion of the repo 

facility, it has since fallen. 

3.5.1.4 Credit Unions 

Credit unions are member-owned, not-forprofit, depository institutions. As of the second 

quarter of 2020, there were 5,164 federally 

insured credit unions with aggregate assets 

of $1.75 trillion. Just over two-thirds of credit 

unions (3,476) had assets under $100 million, 

with 24 percent having less than $10 million 

in assets. There were 1,331 credit unions with 

assets between $100 million and $1 billion, and 

357 credit unions with assets over $1 billion. 
Financial Developments 93

Consistent with long-running trends among 

depository institutions, consolidation in the 

credit union industry has continued recently, 

particularly at smaller institutions. The number 

of credit unions with less than $50 million in 

assets fell to 2,811 in the second quarter of 

2020, bringing the cumulative decline over the 

past five years to 28 percent. At the same time, 

however, total industry assets have grown at an 

annual average rate of 8.4 percent over the five 

years ending in the second quarter of 2020. 

Membership in federally insured credit unions 

has grown 21 percent over the past five years, 

reaching over 122 million members as of the 

second quarter of 2020.

The COVID-19 pandemic has presented the 

credit union system and its members with 

numerous challenges. The data generally show, 

however, that financial performance at credit 

unions was relatively solid in the first half of the 

year, despite the sharp rise in unemployment 

and a record-setting drop in economic 

activity. Net income at consumer credit unions 

amounted to $9.4 billion on an annualized basis 

in the second quarter of 2020, a sharp decline 

of 35 percent from the same period in 2019 

(Chart 3.5.1.33). That fall was largely due to a 

continued jump in provisioning for loan and 

lease losses and credit loss expenses as a result 

of the deterioration in economic conditions. 

The amount of outstanding loans at credit 

unions increased by 6.6 percent over the year 

ending in the second quarter of 2020, up slightly 

from the 6.4 percent pace registered during 

the same period a year earlier. Credit union 

real estate loans outstanding, which represent 

roughly half of the industry’s loan portfolio, 

increased a sizeable 10 percent in the most 

recent four-quarter period. Record-low mortgage 

rates have fueled strong real estate lending. 

The industry also posted a large increase in 

commercial loans, due mainly to Paycheck 

Protection Program lending. In contrast, auto 

loans, which represent one-third of the credit 

union loan portfolio, grew only 1.1 percent over 

the year ending in the second quarter of 2020, as 

loans for new autos contracted. 

-100

-50

0

50

100

-100

-50

0

50

100

2006 2008 2010 2012 2014 2016 2018 2020

Net Income

3.5.1.33 Credit Union Income

Billions of US$ Billions of US$

Source: NCUA

As Of: 2020 Q2

Noninterest Income

Net Interest Income

Note: Federally-insured credit unions. 

Values are annualized. 

Noninterest Expense

Provisions Realized Gains/Losses 

on Investments

3.5.1.33 Credit Union Income
94 2020 FSOC // Annual Report

Overall loan performance remained strong 

in the first half of 2020 despite the economic 

stresses and a rising level of unemployment. 

The system-wide delinquency rate declined 

to 58 basis points in the latest quarter, nearly 

matching a 13-year low reached last year. The 

delinquency rates on fixed-rate real estate loans 

and auto loans stood at 41 basis points and 47 

basis points, respectively. The delinquency rate 

on credit cards (just over 5 percent of total 

credit union loans) declined in the second 

quarter but remained elevated at 101 basis 

points. 

The credit union system experienced a return 

on average assets (ROAA) of just 57 basis points 

at an annual rate in the second quarter of 2020, 

down sharply from 97 basis points a year earlier. 

Both interest income and non-interest income 

were up modestly, while the NIM among all 

credit unions declined to 288 basis points from 

318 basis points a year earlier.

Based on various standard measures, smaller 

credit unions have continued to underperform 

larger credit unions. These smaller institutions 

account for the bulk of institutions but a very 

modest (and shrinking) share of assets and 

members. For example, credit unions with 

less than $100 million in assets account for 

67 percent of the number of institutions, but 

only 5.4 percent of assets, while credit unions 

with more than $1 billion in assets account for 

70 percent of system-wide assets and 65 percent 

of credit union members. ROAA at the smaller 

institutions averaged 36 basis points on an 

annualized basis in the second quarter of 2020, 

while ROAA at credit unions with more than $1 

billion in assets was higher at 63 basis points. 

At the same time, the loan delinquency rate for 

smaller credit unions was 87 basis points in the 

second quarter of the year, compared with 55 

basis points at the $1 billion-plus institutions.

Interest rates across the maturity spectrum have 

fallen to historical lows amid the COVID-19 

crisis. Credit union interest-sensitive deposits 

as a share of total deposits have fallen from 

over 60 percent a decade earlier to less than 50 
Financial Developments 95

percent. The share of money market accounts 

and IRA deposits has also been trending 

lower (Chart 3.5.1.34). A measure of longterm assets—which consists of fixed-rate first 

mortgages and investments with a term longer 

than three years—has been relatively steady at 

just under 28 percent of total assets in recent 

years. That share remains elevated compared to 

levels that prevailed 10 to 15 years ago (Chart 

3.5.1.35). 

The overall investment share of the asset side 

of credit union balance sheets has shrunk 

in recent years, while the loan share has 

increased. Over the past five years, the share 

of investments has declined from roughly 24 

percent of total assets to 18 percent currently. 

Over the same period, the share of assets 

accounted for by loans rose from roughly 64 

percent to 65 percent (Chart 3.5.1.36). 

The loan-to-deposit ratio at credit unions 

declined in the second quarter to 76.2 percent 

but remains higher than levels from a decade 

ago. An elevated loan share has generally 

helped to support credit union profitability 

in recent years. Consumers pulled back on 

spending in the first half of the year, driving the 

personal savings rate up to an all-time high. As 

a result, total deposits at credit unions surged 

by 16.5 percent in the year ending in the second 

quarter, the largest four-quarter increase in 

several decades.

The credit union industry remained wellcapitalized in the first half of the year. The 

overall net worth ratio in the second quarter 

of 2020 was 10.5 percent. In ordinary times, 

under statutory guidelines, a credit union is 

considered “well capitalized” if it holds a net 

worth ratio at or above 7 percent. 

While still maintaining the safety and 

soundness of the credit union system, the 

NCUA Board has undertaken a number of 

measures to provide regulatory relief, flexibility, 

and support for credit unions as they respond 

to the COVID-19 pandemic. Federal legislation 

has also provided assistance. For instance, the 

0

20

40

60

80

100

0

20

40

60

80

100

2006 2008 2010 2012 2014 2016 2018 2020

3.5.1.36 Credit Union Composition of Assets

Percent of Total Assets Percent of Total Assets

Source: NCUA

As Of: 2020 Q2

Loans Investments

0

10

20

30

40

0

10

20

30

40

2006 2008 2010 2012 2014 2016 2018 2020

3.5.1.35 Credit Union Net Long-Term Assets

Percent of Total Assets Percent of Total Assets

Source: NCUA

As Of: 2020 Q2

Fixed Rate First Mortgages

Investments Longer Than 3 Years

24

26

28

30

32

34

36

44

48

52

56

60

64

68

2006 2008 2010 2012 2014 2016 2018 2020

3.5.1.34 Credit Union Deposits

Percent Percent

Source: NCUA

As Of: 2020 Q2

Money Market and IRA 

Deposit Share (right axis)

Interest-Sensitive Deposit 

Share (left axis)

Note: Federally-insured credit unions. Interest-sensitive 

deposit share includes money market and IRA deposit 

share, share certificates, and certain other deposits. 

3.5.1.36 Credit Union Composition of Assets

3.5.1.35 Credit Union Net Long-Term Assets

3.5.1.34 Credit Union Deposits
96 2020 FSOC // Annual Report

0

100

200

300

400

500

0

100

200

300

400

500

2009 2011 2013 2015 2017 2019

3.5.2.2 Broker-Dealer Revenues

Billions of US$ Billions of US$

Source: FINRA

As Of: 2020 Q2

0

10

20

30

40

50

60

3000

3500

4000

4500

5000

5500

2009 2011 2013 2015 2017 2019

3.5.2.1 Number of Broker-Dealers and Industry Net Income 

Number of Firms As Of: 2020 Q2 Billions of US$

Source: FINRA

Net Income (right axis)

Number of Broker-Dealers (left axis)

Note: 2009 – 2019 data as of Q4 and 2020 

net income is YTD through Q2. 

3.5.2.2 Broker-Dealer Revenues

3.5.2.1 Number of Broker-Dealers and Industry Net Income CARES Act instituted temporary changes to 

the Federal Credit Union Act to expand the 

borrowing authority of the Central Liquidity 

Facility (CLF). This enhanced an important 

liquidity backstop for the industry. The NCUA 

has also awarded $3.7 million in grants and nointerest loans to 162 low-income credit unions, 

helping them provide affordable financial 

services to their members and communities 

during the COVID-19 pandemic.

3.5.2 Nonbank Financial Companies

3.5.2.1 Securities Broker-Dealers

As of June 2020, there were approximately 

3,600 securities broker-dealers registered with 

the SEC, a decline of 3.0 percent from yearend 2019, reflecting a steady decline since 

2009 (Chart 3.5.2.1). Aggregate revenues in 

the sector have trended higher in recent years, 

increasing 7 percent in 2019 relative to 2018 

(Chart 3.5.2.2). 

Broker-dealers were impacted by COVID-19 

pandemic-related market volatility and workfrom-home restrictions in 2020. In response, 

the SEC and FINRA have provided targeted 

regulatory assistance and relief in connection 

with pandemic-related challenges.

COVID-19 pandemic-related market volatility 

in 2020 resulted in significant increases in 

trading volumes across products. The industry 

experienced some operational issues due to 

increased volumes, such as website outages. 

Aggregate receivables from fails-to-deliver at 

all broker-dealers more than doubled between 

February and March month-ends but returned 

to average levels by April month-end.

Aggregate YTD June 2020 net income equaled 

full-year 2019 net income reflecting increased 

market activity and lower interest and other 

expenses. For the largest broker-dealers, gains 

from interest rate/fixed income products 

driven by wide bid-ask spreads and increased 

volatility were offset by losses in equities. 

Trading commission revenue increased on the 

rise in market volumes, particularly in equities. 
Financial Developments 97

Underwriting revenue rose largely as a result of 

an increase in debt issuances. 

The U.S. broker-dealer sector remains relatively 

concentrated. The ten largest broker-dealers 

account for 57 percent of industry assets, 30 

percent of industry total revenues, and 40 

percent of industry net income.

Total assets in the U.S. broker-dealer industry 

increased to $4.7 trillion as of the second 

quarter of 2020 but were well below the peak 

of $6.8 trillion in 2007 (Chart 3.5.2.3). Assets 

of the largest broker-dealers, which act as 

market makers, increased 12 percent between 

the fourth quarter of 2019 and the first quarter 

of 2020, driven by a 20 percent increase in 

securities and spot commodities owned. Brokerdealers typically obtain leverage through the 

use of secured lending arrangements such 

as repos and securities lending transactions. 

Broker-dealer leverage, measured in various 

ways, has declined markedly since 2007. For 

example, leverage measured as total assets 

over regulatory capital (defined as ownership 

equity qualified for net capital and allowable 

subordinated liabilities) declined to 10.5 in 

aggregate as of June 2020, down from 11.1 as of 

year-end 2019, but still remains well below the 

pre-crisis peak of 21 in 2006. 

3.5.2.2 REITs

Real estate investment trusts (REITs) are 

companies that own or finance incomeproducing real estate across a range of 

property sectors. Broadly speaking, REITs can 

be broken down into two major categories: 

equity REITs, which typically own and operate 

income-producing real estate, and mortgage 

REITs (mREITs), which provide financing for 

purchasing or originating mortgages and MBS. 

mREITs can be further divided into agency 

mREITs, which invest in agency MBS, and nonagency mREITs, which invest in a broad range 

of mortgage-related assets. 

mREITs tend to deploy significantly more 

leverage than equity REITs, and the amount of 

leverage used by mREITs is largely dependent 

0

2

4

6

8

2005 2007 2009 2011 2013 2015 2017 2019

0

5

10

15

20

25

3.5.2.3 Broker-Dealer Assets and Leverage

Trillions of US$ Ratio

Source: FINRA

As Of: 2020 Q2

Note: Leverage is the ratio of total assets to total regulatory 

capital. 2005 – 2019 data as of Q4 and 2020 data as of Q2.

Total Assets (left axis) Leverage (right axis)

3.5.2.3 Broker-Dealer Assets and Leverage
98 2020 FSOC // Annual Report

Index As Of: 30-Sep-2020

3.5.2.5 mREIT Stock Performance

25

50

75

100

125

150

25

50

75

100

125

150

Sep:2019 Dec:2019 Mar:2020 Jun:2020 Sep:2020

Index

Source: Bloomberg, L.P.

Note: Indexed to 100 as of 9/30/2019; mREITs

represents the BREIT Mortgage Index; Financials 

represents the S&P 500 Financials Subindex.

S&P 500

Financials

mREITs

0

200

400

600

800

1000

0

200

400

600

800

1000

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

3.5.2.4 REITs Total Assets

Billions of US$ Billions of US$

Source: Federal Reserve, 

Haver Analytics

As Of: 2020 Q2

mREITs

Equity REITs

Note: Statistical Release Z.1, “Financial Accounts 

of the United States.” 

3.5.2.5 mREIT Stock Performance 

3.5.2.4 REITs Total Assets on the credit quality and liquidity of the 

underlying investments. mREITs typically 

fund their operations through the short-term 

repo markets, and the combination of high 

leverage and short-term borrowing can lead 

to considerable funding risk. In addition to 

funding risk, non-agency mREITs can be 

exposed to credit and liquidity risks. In normal 

market conditions, these risks typically do not 

extend to agency mREITs. 

The size of the REIT industry grew considerably 

prior to the COVID-19 pandemic, which 

can be primarily attributed to the growth of 

mREITs. As of the fourth quarter of 2019, 

mREIT assets totaled $681 billion, a $513 

billion increase from the fourth quarter of 2009 

(Chart 3.5.2.4). Much of this growth has been 

concentrated in the largest mREITs, and as of 

the fourth quarter of 2019, three mREITs held 

a combined $262 billion in agency MBS and 

TBA securities, or approximately 75 percent of 

total mREIT agency MBS and TBA securities 

holdings. The growth of mREITs has been 

accompanied by an increase in repo financing, 

which increased from $90 billion as of the 

fourth quarter of 2009 to $379 billion as of the 

fourth quarter of 2019. 

mREIT assets fell considerably in the first half 

of 2020, as the sector came under significant 

pressure during the COVID-19 market stress. 

As of the second quarter of 2020, mREIT 

assets totaled $502 billion, a 26 percent decline 

relative to the fourth quarter of 2019. The stress 

in the sector was most acute in March, with 

mREIT stock prices falling by nearly 70 percent 

between March 4 and April 3 (Chart 3.5.2.5). 

During this period, prices of mortgage-linked 

assets fell considerably, which triggered margin 

calls from mREIT lenders. To raise liquidity, 

mREITs sold mortgage collateral which, 

similar to Treasury sales, expanded dealer 

balance sheets and impacted term MBS repo 

intermediation and pricing. However, given the 

decline in liquidity provisioning in the MBS 

market, these sales led to a sharp widening of the 

MBS-Treasury spread, further straining mREIT 
Financial Developments 99

balance sheets and creating a negative feedback 

loop for market functioning (Chart 3.5.2.6). 

Quarterly changes in mREIT balance sheets 

can provide insight into the magnitude of this 

deleveraging campaign. In the first quarter of 

2020, mREIT exposures to agency securities 

fell by $124 billion or 37 percent compared to 

the previous quarter. Similarly, mREIT repo 

borrowing fell by $119 billion or 31 percent 

over the quarter. Ultimately, FOMC actions 

announced in March, which included purchases 

of agency MBS and CMBS, gradually improved 

liquidity conditions and market functioning in 

these markets. 

3.5.2.3 Money Market Mutual Funds

MMFs are a type of mutual fund that are 

generally used by investors to manage their 

cash needs. The COVID-19 pandemic caused 

stress in certain MMFs when, as noted in 

Box D, market participants shifted risk 

preferences towards cash and other highly 

liquid instruments. This rapid shift resulted 

in outflows from prime institutional MMFs, 

which saw assets decline in March 2020 by 

$77 billion. During the third week of March 

alone, prime institutional MMFs saw outflows 

of around $88 billion, or 8 percent of their 

net assets. Anecdotally, some of the outflows 

in March from prime institutional MMFs can 

be attributed to investors’ concerns that prime 

institutional funds would impose gates and fees 

if their weekly liquid assets (WLAs), the share 

of assets convertible to cash within five business 

days, dropped below 30 percent of total assets. 

In response to market dislocations, two banks 

purchased assets from three affiliated prime 

MMFs to increase the funds’ WLAs. One MMF 

saw its weekly liquid assets decline to 28 percent 

of total assets. 

Shortly after the stress in March, as noted in 

Section 3.4.1, the Federal Reserve announced 

the establishment of the MMLF, which 

helped to improve liquidity. Following this 

announcement, assets in institutional prime 

MMFs increased in April by roughly the same 

amount of their decline in March.

Basis Points As Of: 30-Sep-2020

3.5.2.6 Agency MBS Spread to Treasuries

 50

 75

 100

 125

 150

 175

 200

50

75

100

125

150

175

200

2015 2016 2017 2018 2019 2020

Basis Points

Source: Bloomberg, L.P.

Note: Fannie Mae 30-year current-coupon 

spread to the 5/10-year Treasury blend. 

3.5.2.6 Agency MBS Spread to Treasuries 
100 2020 FSOC // Annual Report

0

1

2

3

4

5

6

0

1

2

3

4

5

6

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

3.5.2.7 MMF Assets by Fund Type

Trillions of US$ Trillions of US$

Source: SEC

As Of: Sep-2020

Prime

Government and Treasury

Tax-Exempt

3.5.2.7 MMF Assets by Fund Type Despite the stress in prime institutional MMFs in 

March 2020, MMF assets in the aggregate have 

grown significantly over the past year because, 

among other things, the COVID-19 pandemic 

increased investors’ demand for cash and lowerrisk assets. According to the SEC’s Money Market 

Fund Statistics, MMF net assets totaled $4.9 

trillion in September 2020, a 26 percent increase 

year-over-year (Chart 3.5.2.7). Inflows were 

concentrated in government and Treasury MMFs, 

which saw their assets increase by $1.1 trillion, or 

41 percent, from September 2019. Government 

and Treasury MMFs’ collective share of total assets 

increased to 77 percent in September 2020 from 

69 percent in September 2019. 

Over the twelve months ended September 2020, 

prime MMF assets decreased by $70 billion, or 6.6 

percent. Prime MMFs’ share of total MMF assets 

declined to 20 percent in September 2020, down 

from 28 percent in September 2019. Net assets in 

tax-exempt MMFs have declined by $18 billion 

over the past twelve months to $121 billion as of 

September 2020. 

The long-term trend since 2016 towards 

consolidation in the MMF sector, which slowed 

down in 2019, accelerated in 2020. As of 

September 2020, there were 352 MMFs, down 

from 369 funds in September 2019. Similarly, 

concentration in the MMF industry has gradually 

increased over the past several years. As of 

September 2020, the five largest MMF complexes 

managed 53 percent of total assets, up from 

approximately 46 percent at year-end 2015. 

Further, three MMF sponsors have recently closed 

some of their prime MMFs, potentially resulting 

in additional concentration. More specifically, 

two sponsors liquidated three institutional 

prime funds, which represented 3.6 percent of 

institutional prime assets as of year-end 2019. 

One retail prime fund, representing 28 percent of 

retail prime fund assets as of year-end 2019, was 

converted into a government fund.

Since the SEC money market fund reforms in 

October 2016, prime institutional and taxexempt institutional MMFs have been required 

to price their shares at market, known as Floating 
Financial Developments 101

Net Asset Value (FNAV), rather than at amortized 

cost, known as Constant Net Asset Value. The 

portion of assets of prime and tax-exempt 

institutional MMFs, which are required to transact 

at FNAV, has declined to 15 percent in September 

2020 from 17 percent in September 2019.

Yields on MMFs declined after the Federal 

Reserve cut its benchmark rate twice in March 

2020. The average gross 7-day yield on prime 

institutional MMFs dropped to 0.2 percent in 

September 2020 from 2.1 percent in September 

2019. The average gross 7-day yield on Treasury 

MMFs was 0.2 percent in September 2020, down 

from 2.0 percent in September 2019. Average 

gross 7-day yields for tax-exempt institutional 

MMFs were 0.2 percent in September 2020 down 

from 1.6 percent in September 2019. These low 

yields have resulted in many MMF sponsors 

waiving their fees to keep the yields earned by 

investors above zero.

Prime institutional MMFs’ daily liquidity—the 

share of assets convertible to cash within one 

business day—averaged 53 percent of assets 

in September 2020, up from 38 percent in 

September 2019. This substantially exceeds the 

10 percent required by SEC rules. WLAs for 

prime institutional MMFs averaged 66 percent 

in September 2020, also up from 54 percent in 

September 2019 and well above the 30 percent 

minimum required under SEC rules (Chart 

3.5.2.8). 

The WAM of fund assets provides an indication 

of the sensitivity of fund returns to changes in 

market interest rates. MMF managers tend to 

maintain a lower WAM during periods of rising 

rates and extend their WAMs in anticipation 

of stable or declining rates. Prime institutional 

MMF WAM averaged 40 days in September 

2020 versus 31 days in September 2019. These 

averages were well below the 60-day maximum 

permitted under SEC rules (Chart 3.5.2.9). 

The weighted average life (WAL) of fund assets 

provides an indication of the credit risk of an 

MMF’s portfolio. MMFs that have higher WALs 

are subject to increased risk when credit spreads 

10

20

30

40

50

60

70

10

20

30

40

50

60

70

2017 2018 2019 2020

3.5.2.8 Liquid Asset Shares of Prime MMFs

Percent of Total Assets Percent of Total Assets

Source: SEC 

As Of: Sep-2020

Daily Liquid - Retail

Weekly Liquid - Retail

Note: Weighted by fund size.

Daily Liquid - Institutional

Weekly Liquid - Institutional

3.5.2.8 Liquid Asset Shares of Prime MMFs

10

20

30

40

50

60

10

20

30

40

50

60

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

3.5.2.9 Weighted Average Maturities by Fund Type

Days Days

Source: SEC

Government and Treasury

Prime

Tax-Exempt

As Of: Sep-2020

Note: Weighted by fund size.

3.5.2.9 Weighted Average Maturities by Fund Type
102 2020 FSOC // Annual Report

rise. Prime institutional MMF WAL averaged 

59 days in September 2020 versus 62 days in 

September 2019. These averages were well below 

the 120-day maximum permitted under SEC rules.

The Federal Reserve’s overnight reverse 

repurchase agreement facility (ON RRPF) is a 

supplementary policy tool that it uses to set the 

floor on rates, to keep the federal funds rate in 

the target range set by the FOMC. Eligible MMFs 

have invested in the ON RRPF since regular 

testing began in September 2013. Given the 

low rate paid on investments in the ON RRPF, 

MMFs generally use it when better investment 

opportunities are not available in the afternoon 

market. As of the end of September 2020, when 

the ON RRPF paid a zero percent rate, MMFs’ 

investments in the ON RRPF were low at $850 

million. In contrast, MMFs invested around $285 

billion in the ON RRPF at the end of March 

2020, despite a zero percent rate. 

Use of the ON RRPF at the end of March peaked 

due to a confluence of factors. Among other 

things, massive inflows into government funds 

drove repo rates to zero as repo supply outpaced 

demand, which was further exacerbated by the 

effects of window-dressing by certain dealers 

typically seen around quarter-end. Supply of 

Treasury bills was also light as the passage of 

the CARES Act occurred only a few days before 

quarter-end prior to Treasury issuance fully 

ramping up. These factors led to Treasury bills 

in the secondary market trading in negative 

yield territory days before quarter-end, which 

left government funds with few other investment 

options than ON RRPF.

Repo holdings in MMFs totaled $1.1 trillion 

in September 2020 (down from $1.3 trillion in 

September 2019), or 22 percent of all assets. 

In 2019, Fixed Income Clearing Corporation 

(FICC) further expanded its sponsored repo 

service to include prime brokerage, brokerdealers and non-U.S. based banks in addition to 

custody banks, which were permitted to sponsor 

qualified institutional buyers onto the cleared 

repo platform. Over time, MMF investments in 

sponsored repos, which are centrally cleared 
Financial Developments 103

by FICC, have increased significantly—from 

less than $1 billion in early 2017 to the alltime high of roughly $275 billion at the end of 

December 2019. MMFs had just approximately 

$140 billion invested in sponsored repos at the 

end of September 2020. MMFs also are holding 

more Treasury securities than the historical 

norm, with government funds and prime funds 

holding 56 percent and 28 percent of their 

assets in Treasury securities respectively. 

3.5.2.4 Registered Investment Companies

Mutual Funds

Mutual funds are investment vehicles that pool 

money from many investors, invest in a variety 

of securities or assets, and give investors daily 

redemption rights. As of September 2020, net 

assets of equity, bond, and hybrid mutual funds 

totaled $18 trillion, or approximately 65 percent 

of total U.S. investment company assets. Excluding 

MMFs, U.S. mutual funds’ net assets increased by 

0.5 percent in the first nine months of 2020 after 

increasing 20 percent in 2019 (Chart 3.5.2.10). 

Prior to the pandemic, fixed income mutual 

funds saw consistent inflows while equity mutual 

funds saw consistent outflows. Between January 

2018 and February 2020, bond funds experienced 

net inflows for 23 of the 26 months and equity 

funds recorded net outflows for 24 of these 

same 26 months. Over this period, bond funds 

experienced $384 billion in net inflows while 

equity funds had $674 billion in net outflows. 

Flow patterns changed significantly in 

March 2020 amid the economic and market 

disruptions associated with the COVID-19 

pandemic. Mutual funds experienced a record 

monthly outflow in March in terms of both 

dollar amount ($348 billion) and percentage of 

assets (2.1 percent). Bond mutual fund outflows 

were $255 billion, the highest on record, and 

represented 73 percent of total outflows. Bond 

mutual fund outflows moderated in April 

and flows turned positive in May, likely due to 

improved market-wide risk appetite for those 

assets following the announcement of various 

Federal Reserve programs (Charts 3.5.2.11, 

3.5.2.12). 

0

5

10

15

20

25

30

0

5

10

15

20

25

30

1995 1998 2001 2004 2007 2010 2013 2016 2019

3.5.2.10 Net Assets of the Investment Company Industry

Trillions of US$ As Of: 2020 Q3 Trillions of US$

Other

ETFs

Equity Mutual Funds

Bond/Hybrid Mutual Funds

MMFs

Note: Other is composed of unit investment trusts (UIT) and closed-end 

funds. Q3 2020 figures include 2019 UIT data, which are reported annually 

and Q2 2020 closed-end fund data, which are reported on a lag.

Source: ICI, Haver 

Analytics

3.5.2.10 Net Assets of the Investment Company Industry

-100

-75

-50

-25

0

25

50

-100

-75

-50

-25

0

25

50

2017 2018 2019 2020

3.5.2.12 Monthly Equity Mutual Fund Flows

Billions of US$ Billions of US$

Source: ICI, Haver Analytics

As Of: Sep-2020

Note: Net fund flows.

-300

-200

-100

0

100

200

-300

-200

-100

0

100

200

2017 2018 2019 2020

3.5.2.11 Monthly Bond Mutual Fund Flows

Billions of US$ Billions of US$

Source: ICI, Haver Analytics

As Of: Sep-2020

Tax-Exempt

Taxable

Note: Net fund flows.

3.5.2.12 Monthly Equity Mutual Fund Flows

3.5.2.11 Monthly Bond Mutual Fund Flows
104 2020 FSOC // Annual Report

-15

-10

-5

0

5

10

-15

-10

-5

0

5

10

2017 2018 2019 2020

3.5.2.13 Monthly Bank Loan Mutual Fund Flows

Billions of US$ Billions of US$

Source: Morningstar, Inc.

As Of: Sep-2020

Note: Net fund flows.

3.5.2.13 Monthly Bank Loan Mutual Fund Flows During the March 2020 market turmoil, bank 

loan mutual fund monthly outflows exceeded 

$11 billion, second only to the December 2018 

record of over $13 billion (Chart 3.5.2.13). 

These funds offer investors daily redemptions 

and hold assets with lengthy settlement periods, 

some of which may, during times of significant 

market stress, take longer to sell and settle 

than the redemption period offered. Bank 

loan funds have experienced outflows for 

23 consecutive months through September 

2020, as floating rate notes became less 

attractive relative to high-yield bonds, given 

the anticipation for continued stable or falling 

interest rates. Between November 2018 and 

September 2020, cumulative outflows from 

bank loan mutual funds totaled $75 billion, 

or more than 54 percent of AUM. Bank loan 

funds met redemptions throughout this period 

of outflows, including during the significant 

market stress in March 2020. Over the same 

period, high-yield bond mutual fund inflows 

totaled $24 billion, or 9.8 percent of AUM, as 

modest net outflows for most of the period were 

more than offset by April-August inflows of $39 

billion (Chart 3.5.2.14). 

Investors continued to gravitate away from 

actively managed equity mutual funds and 

towards lower-cost, index-based equity funds. 

According to Morningstar, index-based mutual 

funds and ETFs represented 51 percent of U.S. 

equity fund assets as of September 2020, up 

from 26 percent at year-end 2009. Between 

January 2019 and September 2020, inflows 

to index-based U.S. and international equity 

funds totaled $205 billion, while their actively 

managed counterparts saw outflows of $531 

billion (Chart 3.5.2.15). In taxable bond 

-15

-10

-5

0

5

10

15

-15

-10

-5

0

5

10

15

2017 2018 2019 2020

3.5.2.14 Monthly High-Yield Mutual Fund Flows

Billions of US$ Billions of US$

Source: Morningstar, Inc.

As Of: Sep-2020

Note: Net fund flows.

3.5.2.14 Monthly High-Yield Mutual Fund Flows

-600

-400

-200

0

200

400

-600

-400

-200

0

200

400

Jan:2019 Jul:2019 Jan:2020 Jul:2020

3.5.2.15 Cumulative Equity Fund Flows

Billions of US$ Billions of US$

Source: Morningstar, Inc.

As Of: Sep-2020

Note: Includes ETFs and mutual 

funds. Cumulative net fund flows.

U.S. Passively Managed

International Passively Managed

International Actively Managed

U.S. Actively Managed

3.5.2.15 Cumulative Equity Fund Flows
Financial Developments 105

mutual funds, both actively managed and indexbased funds have continued to experience 

inflows (Chart 3.5.2.16). Nevertheless, indexbased funds are gaining market share and as of 

September 30, 2020, index-based mutual funds 

and ETFs represented 35 percent of taxable 

bond fund assets, up from 15 percent at yearend 2009. 

Exchange-Traded Funds 

Exchange-traded products (ETPs) include ETFs 

registered under the Investment Company Act 

of 1940 (’40 Act), non-’40 Act registered ETPs 

(such as those that primarily hold commodities 

or physical metals), and exchange-traded 

notes. ETFs registered under the ’40 Act, which 

account for over 99 percent of listed ETP assets, 

continue to grow at a faster pace than mutual 

funds and other SEC-registered investment 

vehicles. By the third quarter of 2020, these 

funds accounted for 17 percent of U.S. 

investment company assets, up from 12 percent 

in 2015 and 7.6 percent in 2010. 

After rising 30 percent in 2019, ETF assets rose 

another 7 percent over the first nine months 

of 2020, settling at $4.7 trillion in September. 

Recent years’ asset growth has been driven 

primarily by inflows, which totaled $2.8 trillion 

since 2009, rather than market appreciation 

(Charts 3.5.2.17, 3.5.2.18). 

-600

-400

-200

0

200

400

600

-600

-400

-200

0

200

400

600

Jan:2019 Jul:2019 Jan:2020 Jul:2020

3.5.2.16 Cumulative Equity and Fixed Income Fund Flows

Billions of US$ Billions of US$

Source: Morningstar, Inc.

As Of: Sep-2020

Note: Includes ETFs and mutual 

funds. Cumulative net fund flows.

Fixed Income Passively Managed

Fixed Income Actively Managed

Equity Passively Managed

Equity Actively Managed

3.5.2.16 Cumulative Equity and Fixed Income Fund Flows

0

1

2

3

4

5

0

1

2

3

4

5

2009 2011 2013 2015 2017 2019

3.5.2.18 ETF Assets by Category of Investment

Trillions of US$ Trillions of US$

Source: Morningstar, Inc.

As Of: Sep-2020

Equity

Fixed Income

Allocation

Alternative

Commodities

-1

0

1

2

3

4

5

-1

0

1

2

3

4

5

2009 2011 2013 2015 2017 2019

3.5.2.17 U.S.-Listed ETF AUM

Trillions of US$ Trillions of US$

Source: Morningstar, Inc.

As Of: Sep-2020

Cumulative Flows to ETFs

Cumulative Market Appreciation

AUM

3.5.2.18 ETF Assets by Category of Investment

3.5.2.17 U.S.-Listed ETF AUM
106 2020 FSOC // Annual Report

-40

-20

0

20

40

-40

-20

0

20

40

2017 2018 2019 2020

3.5.2.19 Monthly ETF Flows: Fixed Income Funds

Billions of US$ Billions of US$

Source: Morningstar Direct

As Of: Sep-2020

Tax-Exempt

Taxable

Note: Net fund flows.

3.5.2.19 Monthly ETF Flows: Fixed Income Funds Equity and fixed income ETFs experienced 

inflows for most months in 2019 and early 2020, 

with equity funds showing more variability. 

As the COVID-19 pandemic disrupted the 

economy and financial markets in March 2020, 

fixed income ETFs experienced record monthly 

outflows, totaling $21 billion or 2.3 percent of 

assets. Following the dislocation caused by the 

COVID-19 pandemic, the market stabilized 

and bond ETF flows and fixed income ETFs 

experienced inflows totaling $143 billion 

between April and September 2020 (Chart 

3.5.2.19). Despite the March 2020 market 

turmoil, equity ETF flows remained positive, 

totaling $16 billion for the month (Chart 

3.5.2.20). 

A number of fixed income ETFs began 

trading at discounts to their NAV amid the 

onset of COVID-19 pandemic-related market 

dislocations, but pricing began to normalize in 

many bond ETFs following the Federal Reserve’s 

announcement of the Secondary Market 

Corporate Credit Facility (SMCCF) on March 

23. Following this announcement, the discount 

on bond ETF prices relative to NAV improved 

in a matter of days, and many bond ETFs traded 

close to NAV at the end of March. As part of 

the SMCCF, which was established to support 

credit to employers by providing liquidity to the 

market for outstanding corporate bonds, the 

Federal Reserve began to purchase bond ETFs 

on May 12. Purchases under the SMCCF in May 

totaled $3.7 billion, and as of September 30, 

2020, the market value of ETF holdings under 

the SMCCF totaled $8.6 billion. 

Inflows to leveraged and inverse ETFs spiked 

in March and April amid heightened market 

volatility associated with the onset of the 

COVID-19 pandemic (Chart 3.5.2.21).

The ETF industry remains concentrated, as 

the three largest managers account for over 80 

percent of ETF assets, and the top ten managers 

account for over 95 percent of ETF assets. Over 

the first nine months of 2020, the number of 

available ETFs increased 1.0 percent in addition 

to the 5.3 percent increase in 2019. 

-80

-40

0

40

80

-80

-40

0

40

80

2015 2016 2017 2018 2019 2020

3.5.2.20 Monthly ETF Flows: Equity Funds

Billions of US$ Billions of US$

Source: Morningstar Direct

As Of: Sep-2020

Note: Net fund flows.

3.5.2.20 Monthly ETF Flows: Equity Funds

-10

-5

0

5

10

-10

-5

0

5

10

2015 2016 2017 2018 2019 2020

3.5.2.21 Monthly Inverse and Leveraged ETF Flows

Billions of US$ Billions of US$

Source: Morningstar Direct

As Of: Sep-2020

Inverse

Leveraged

Note: Net fund flows.

3.5.2.21 Monthly Inverse and Leveraged ETF Flows
Financial Developments 107

3.5.2.5 Alternative Funds

Hedge Funds

The aggregate NAV of qualifying hedge funds, 

which are large hedge funds with enhanced 

reporting requirements on the SEC’s Form PF, 

in the United States was $2.9 trillion in the 

first quarter of 2020, a 6.7 percent decrease 

from the prior year. The gross asset value 

(GAV) of qualifying hedge funds—which 

reflects the effect of leverage obtained through 

cash and securities borrowing—totaled $6.3 

trillion, a 3.0 percent decrease year-over-year 

(Chart 3.5.2.22). These figures cover the 

approximately 1,800 hedge funds and 550 

hedge fund advisers that have enhanced Form 

PF reporting requirements with the SEC. 

Various measures of leverage for hedge funds 

overall, including measures of off-balance sheet 

exposures, show increasing or flat patterns 

over the course of the past year. GAV divided 

by NAV showed aggregate qualifying hedge 

fund leverage of 2.2 as of the first quarter of 

2020, up from 2.1 in the first quarter of 2019. 

The aggregate qualifying hedge fund leverage 

ratio as measured by gross notional exposure 

(GNE), which includes the notional amount of 

derivatives but excludes repurchase agreement 

exposures, divided by NAV was 6.3 in the 

first quarter of 2020, unchanged from the 

previous year. When interest rate derivatives are 

excluded, the aggregate qualifying hedge fund 

GNE/NAV leverage ratio was 4.4, up from 4.2 in 

the first quarter of 2019. 

1.6

1.8

2.0

2.2

2.4

0

2

4

6

8

10

2013 2014 2015 2016 2017 2018 2019 2020

Leverage: GAV/NAV 

(right axis)

3.5.2.22 Hedge Fund Gross and Net Assets

Trillions of US$ Leverage

Source: SEC Form PF, OFR

As Of: 2020 Q1

Net Assets (left axis)

Gross Assets (left axis)

Note: QHF gross and net assets as 

reported on Form PF Questions 8 and 9. 

3.5.2.22 Hedge Fund Gross and Net Assets
108 2020 FSOC // Annual Report

3.5.2.25 Hedge Fund Financing Liquidity

Percent Percent

Source: SEC Form PF, OFR

As Of: 2020 Q1

0

20

40

60

80

100

0

20

40

60

80

100

2013 2014 2015 2016 2017 2018 2019 2020

0-7 Days 8-30 Days 30+ Days

Note: QHF financing liquidity as 

reported on Form PF Question 46. 

3.5.2.24 Hedge Fund Borrowing: Composition of Creditors

Trillions of US$ Trillions of US$

Source: SEC Form PF, OFR

As Of: 2020 Q1

0

1

2

3

4

0

1

2

3

4

2013 2014 2015 2016 2017 2018 2019 2020

U.S. G-SIB

Foreign G-SIB

Other

Note: QHF creditors as reported Form 

PF Question 47. 

3.5.2.25 Hedge Fund Financing Liquidity

3.5.2.24 Hedge Fund Borrowing: Composition of Creditors 

The aggregate level of hedge fund borrowing 

has increased significantly in recent years. As of 

year-end 2019, hedge fund borrowing totaled 

$3.2 trillion, up from $2.1 trillion at year-end 

2016 (Chart 3.5.2.23). The recent growth in 

borrowing has been driven primarily by repo 

borrowing, which grew from $0.7 trillion in 

December 2016 to $1.3 trillion in December 

2019. Over this same time period, prime broker 

borrowing grew from $1.1 trillion to $1.4 

trillion. In March 2020, aggregate hedge fund 

borrowing contracted by the most in over seven 

years, with month-over-month repo and prime 

broker borrowing declining by $90 billion and 

$275 billion, respectively. 

Hedge funds obtain the majority of financing 

from G-SIBs, with U.S. G-SIBs accounting 

for approximately 50 percent of funding and 

foreign G-SIBs accounting for an additional 35 

percent of funding (Chart 3.5.2.24). While the 

percent of financing that is subject to significant 

rollover risk has declined in recent years, over 

50 percent of financing is reported on Form PF 

as being secured for only seven days or fewer 

(Chart 3.5.2.25). Since filers may default to 

selecting the “1-days or less” bucket on Form PF 

in certain situations, such as when a creditor 

is allowed to demand more collateral, the data 

may be overstating the amount of financing that 

is truly secured for seven days or fewer.

3.5.2.23 Hedge Fund Secured Financing

Trillions of US$ Trillions of US$

Source: SEC Form PF, OFR

As Of: Mar-2020

0

1

2

3

4

0

1

2

3

4

2013 2014 2015 2016 2017 2018 2019 2020

Repo

Prime Broker

Other Secured Financing

Note: QHF secured borrowing as 

reported on Form PF Question 43. 

3.5.2.23 Hedge Fund Secured Financing 
Financial Developments 109

Hedge funds deploy a wide range of strategies 

and are invested in a various products and asset 

classes (Chart 3.5.2.26). As of the first quarter 

of 2020, qualifying hedge funds’ GNE totaled 

$18 trillion, of which $12 trillion, or 65 percent, 

were attributed to rates products (interest rate 

derivatives, U.S. government debt, and other 

sovereign debt) or FX products. Equity and 

credit products accounted for less than 25 

percent of GNE. 

According to eVestment data, which covers a 

smaller percentage of the hedge fund industry 

when compared to Form PF, the hedge fund 

industry experienced net outflows of $102 

billion, or roughly 3 percent of AUM, in 2019 

and net outflows of $48 billion, or 1.5 percent 

of AUM, over the first nine months of 2020. 

Outflows were concentrated in hedge funds that 

focus on macro, directional credit, managed 

futures, and long-short equity strategies. These 

categories of funds saw roughly $86 billion 

in outflows during 2019 and $50 billion in 

outflows during the first nine months of 2020. 

Event-driven funds and convertible arbitrage 

funds were the only strategy types to see 

inflows during the first nine months of 2020. 

2020 hedge fund returns, as provided by the 

Hedge Fund Research’s HFRI Fund Weighted 

Composite Index, stood at 0.5 percent through 

September 30, 2020. 

3.5.2.26 Hedge Fund Gross Exposures by Asset Class

Source: SEC Form PF, OFR

$5.5T

$1.9T

$1.1T

$3.3T

$3.2T

$1.1T

$2.1T

As Of: 2020 Q1

U.S. Government

Foreign Exchange

Interest Rate Derivatives

Sovereign Ex U.S. 

Credit

Equities

Other

Note: QHF gross notional exposures as reported 

on Form PF Questions 26 and 30. Excludes 

repurchase agreements. Options reported as 

delta adjusted notional value. Interest rate 

derivatives reported as 10-year bond-equivalents.

3.5.2.26 Hedge Fund Gross Exposures by Asset Class
110 2020 FSOC // Annual Report

3.5.2.27 Hedge Fund Treasury Exposures

Billions of US$ Billions of US$

Source: SEC Form PF, OFR

As Of: Mar-2020

-1500

-1000

-500

0

500

1000

1500

-1500

-1000

-500

0

500

1000

1500

2013 2014 2015 2016 2017 2018 2019 2020

Net

Long

Short

Note: QHF Treasury exposures as reported 

on Form PF Questions 26 and 30.

3.5.2.27 Hedge Fund Treasury Exposures Hedge Fund U.S. Treasury Exposures

Over the past several years, hedge funds have 

increased their exposures to U.S. Treasuries. A 

significant proportion of this growth has been 

concentrated in relative value hedge funds that 

seek to exploit pricing discrepancies between 

similar products or securities. A popular relative 

value strategy has been the “cash-futures basis 

trade,” whereby funds try to capture the spread 

between the implied repo rate and general 

repo rates over the term of the trade. Entering 

into this trade involves selling a Treasury 

futures contract, buying a Treasury security 

deliverable into that contract with repo funding 

from dealer intermediaries, and delivering the 

security at contract expiry. 

Funds often leverage the basis trade several 

times through overnight or term repo 

borrowing, leaving those reliant on overnight 

financing vulnerable to disruptions in repo 

markets. Without the ability to rollover shortterm financing at similar rates, funds can 

rapidly incur heavy losses, as reportedly 

occurred during September 2019, when 

overnight repo rates spiked from less than 

2.5 percent to over 6 percent. Similarly, funds 

are vulnerable to volatility in cash or futures 

markets and may face unsustainable margin 

calls in the event of large mark-to-market losses. 

Hedge funds’ GNE to Treasuries totaled $2.3 

trillion in February 2020, up from $1.3 trillion 

two years earlier (Chart 3.5.2.27). During this 

period, long and short Treasury exposures 

increased in tandem, resulting in little change 

in funds’ net exposure to Treasuries. As evident 

through the CFTC’s Commitment of Traders 

Report, the increase in funds’ short Treasury 

exposure has primarily been through futures 

contracts, consistent with the growth of the 

basis trade (see Section 3.4.3.1). The growth 

in funds’ exposures to Treasuries has coincided 

with a significant increase in hedge fund repo 

borrowing. Total repo borrowing peaked at 

$1.5 trillion in February 2020, a $660 billion 

increase from two years prior. 
Financial Developments 111

During the month of March, hedge funds’ 

gross Treasury exposures declined by over 

$400 billion, which can be partly attributed to 

leveraged funds unwinding the basis trade. This 

unwinding may have exacerbated illiquidity in 

the Treasury markets (see Box B). 

Private Equity

According to the SEC’s year-end 2019 Private 

Funds Statistics Report, the GAV of private 

equity funds in the United States totaled $3.7 

trillion in the fourth quarter of 2019, a 17 

percent increase from the fourth quarter of 

2018. The funds’ NAV totaled $3.3 trillion, a 17 

percent increase over that same period. These 

figures cover over 14,000 private equity funds, 

for which approximately 1,350 private equity 

advisers filed information on Form PF. 

The private equity industry remains 

concentrated. Large private equity advisers 

filing Form PF—which are defined as those 

with $2 billion or more in AUM—made up 24 

percent of all private equity advisers filing Form 

PF in the fourth quarter of 2019 and managed 

74 percent of gross assets. Pension funds are 

the largest beneficial owners of funds managed 

by large private equity advisers, accounting for 

29 percent of net assets; other private funds 

account for 19 percent, foreign official sector 

investors account for 11 percent, and insurance 

companies account for 6.2 percent. 

Acquisition-related activity backed by private 

equity trended upwards from 2015 to 2018, 

hitting a record $230 billion in 2018, before 

slowing in 2019 to $150 billion (Chart 3.5.2.28). 

Private equity merger and acquisition (M&A) 

activity fell dramatically as the coronavirus 

pandemic manifested, totaling $72 billion 

through the end of September 2020. Leveraged 

buyout (LBO) activity accounted for 71 percent 

of total private equity M&A activity in the first 

nine months of 2020, compared to 61 percent 

for the preceding five years. 

While private equity firms have raised 40 

percent less in the first half of 2020 than they 

did for the same period in 2019, these firms are 

0

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200

250

0

50

100

150

200

250

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

3.5.2.28 M&A Loan Volume for Private Equity-Backed Issuers

Billions of US$ Billions of US$

Source: S&P LCD

As Of: 30-Sep-2020

LBO

Non-LBO

YTD

3.5.2.28 M&A Loan Volume for Private Equity-Backed Issuers
112 2020 FSOC // Annual Report

may have a different level of granularity, be in a 

different format, and cover a different time period 

than disclosures concerning similarly situated 

funds. There are, however, anecdotal reports 

showing that, while some plans made substantial 

investment gains in the second quarter of 2020, 

annual returns have fallen short of longer-term 

targets. 

Single-Employer Private Plans 

According to the Milliman Corporate Pension 

Funding Study, the funded ratio of the 100 largest 

single-employer private defined benefit plans rose 

to 88 percent as of year-end 2019 compared to 87 

percent as of year-end 2018. The funded percentage 

of a plan is its assets relative to the estimated value 

of plan liabilities. Milliman estimates that the 

funded ratio for the 100 largest corporate defined 

benefit pension plans in the United States had an 

aggregate funded ratio of 84 percent at the end of 

September 2020.

Multiemployer Plans 

Milliman estimates that the aggregated funded 

percentage of multiemployer private defined benefit 

plans as of June 2020 was 82 percent, down from 85 

percent at year-end 2019. While the Pension Benefit 

Guaranty Corporation (PBGC) projects that the 

majority of multiemployer plans will remain solvent, 

some plans appear unable to raise contributions 

sufficiently to avoid insolvency. According to the 

PBGC 2019 Projections Report, 124 plans have 

declared that they will likely face insolvency over the 

next 20 years. 

The PBGC projects that its Multiemployer 

Insurance Program will have insufficient funds 

to cover the projected future demands from 

multiemployer plans requiring financial assistance, 

that there is a very high likelihood that the program 

will become insolvent by 2026, and that insolvency is 

a near certainty by the end of fiscal year 2027. The 

PBGC will be unable to provide financial assistance 

to pay the full level of guaranteed benefits when 

the Multiemployer Insurance Program becomes 

insolvent. 

holding a record amount of uncommitted capital 

earmarked for buyouts with over $800 billion at the 

end of 2019, which is up more than $250 billion 

since 2016. This increase suggests that deal-making 

activity could pick up once the uncertainty of the 

current crisis passes. Moreover, despite declines 

in overall deal-making, COVID-19 has accelerated 

the growth of buyout firms focused on technology 

companies, which in general have performed 

well through the crisis. According to Preqin Ltd., 

through July 6, 2020, approximately $30 billion, or 

roughly one-third of private equity fundraising, has 

gone towards technology company buyouts, up from 

just more than 10 percent during 2016.

3.5.2.6 Pension Funds

Defined benefit pension plans are significant holders 

of financial assets. As of the second quarter of 2020, 

the total pension fund entitlements funded by assets 

of U.S. private and public defined benefit pensions 

were $9.9 trillion, 5.5 percent higher than one year 

earlier. At the same time, defined benefit pension 

fund entitlements rose to $16 trillion, a 2.2 percent 

increase compared to the second quarter of 2019. 

Sponsors of pension plans strive to keep pace with 

the benefits owed to beneficiaries. As noted in Box 

G, the low-for-long interest rate environment may 

therefore result in sponsors needing to increase 

contributions or act in ways that increase a plan’s risk 

profile. For example, sponsors may use plan assets 

to assume greater levels of investment risk, such as 

employing high amounts of leverage or increasing 

exposure to higher-risk or illiquid asset classes, such 

as hedge funds, private equity funds, and real estate, 

in an effort to meet longer-term funding targets. If 

a pension plan needs to sell assets to raise the cash 

needed to meet benefit obligations, a plan with 

significant exposure to illiquid asset classes may 

be forced to sell its more liquid assets at depressed 

prices, further stressing its financial position.

It is difficult to analyze the impact of the COVID-19 

pandemic on defined benefit pension plans in the 

aggregate because the disclosure requirements 

differ between the single-employer private plans, 

multiemployer plans, and public plans. For example, 

disclosures concerning a defined benefit pension 

plan’s return assumptions and investment strategies 
Financial Developments 113

Public Plans 

According to Milliman, the aggregate funded 

status of the 100 largest U.S. public defined 

benefit plans in June 2020 was 71 percent, up 

from 66 percent at the end of March 2020, 

but down from 75 percent at the end of 2019. 

In addition, public pension fund sponsors are 

permitted to assume investment returns based 

on their own long-run expectations by the 

relevant accounting rules. Accordingly, pension 

funds that do not meet their assumed return 

may be overstating their current funded status. 

These return assumptions may be higher than 

recent average investment returns, and, in recent 

years, several large public pension funds have 

revised long-term investment return expectations 

downward. 

According to the Center for Retirement Research 

at Boston College, most public pension plans will 

close the 12-month period ended June 2020 with 

an annual return that is less than their expected 

investment returns. On average, annual returns 

for state and local plans were higher than their 

assumed returns for the same period a year 

earlier, with a return of 8.9 percent compared to 

the assumed return of 7.2 percent.

As noted in Box C, underfunded public pension 

funds are a significant source of fiscal pressure on 

several U.S. states, territories, and municipalities. 

Sixteen pension funds in seven states were less 

than 50 percent funded as of 2018. To increase 

expected returns and meet benefit obligations, 

public pension funds have steadily increased their 

exposure to alternative assets for years (Chart 

3.5.2.29). In reaction to the COVID-19 pandemic, 

some state and local governments deferred or 

reduced scheduled pension contributions in 2020 

to cover operating budget shortfalls pressuring 

the sustainability of the impacted plans. 

3.5.2.7 Insurance Companies

According to S&P Global, there were 4,537 

licensed insurance companies operating in the 

United States during 2019, of which 2,626 were 

licensed as property and casualty (P&C) carriers, 

1,223 were health insurers, and 688 were licensed 

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35

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25

30

35

2001 2004 2007 2010 2013 2016

3.5.2.29 Public Plan Allocation to Alternative Assets

Percent As Of: 2018 Percent

Source: publicplansdata.org

Real Estate

Other Alternative

Private Equity

Hedge Fund

Note: Includes public plans that reported investment 

allocations from 2001-2018. Simple average. 

3.5.2.29 Public Plan Allocation to Alternative Assets
114 2020 FSOC // Annual Report

as life insurance companies. Many of these 

are affiliated through common ownership by 

a holding corporation or parent insurance 

company. 

Taken together, the largest ten P&C insurance 

groups have a large share of the subsector’s 

profit, premiums, assets, and capital. Measured 

as a percentage of the aggregate net income, 

the ten groups with the highest net incomes 

account for 58 percent of the subsector total. 

Similarly calculated, those ten groups writing 

the largest amount of direct premiums make up 

47 percent of the market. The top ten holding 

the largest amount of assets account for 51 

percent of all P&C assets, and the ten with the 

largest amounts of capital (surplus) account for 

57 percent of the P&C total. 

In addition, the ten largest life insurance 

groups comprise a large share of that subsector. 

Measured as a percentage of the subsector’s net 

income, the ten life groups with the highest net 

incomes make up 63 percent of the total. The 

ten groups with the greatest amount account 

for 45 percent of the subsector’s aggregate 

revenue from premiums, considerations, and 

deposits. The ten life groups with the most 

capital account for 43 percent of the subsector’s 

aggregate amount. 

Measured as a percentage of the subsector’s 

net income, the ten largest health insurance 

groups with the highest net incomes make up 

78 percent of the total. The ten largest groups 

writing the most direct premiums account 

for 58 percent of the subsector’s aggregate. 

Additionally, the ten health insurance groups 

with the greatest amount of capital make up 

58 percent of the subsector’s total. While the 

market share of the largest ten firms in the 

subsectors is substantial in comparison to the 

remainder, the markets remain competitive 

with many active carriers.

The insurance industry is the largest, or one of 

the largest, investors in several key asset classes. 

According to the Financial Accounts of the 

United States, insurance companies were the 
Financial Developments 115

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2010 2012 2014 2016 2018

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50

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70

80

3.5.2.31 Insurance Industry Capital and Surplus

Billions of US$ Percent of Total Assets

Health Capital and Surplus 

(left axis)

Life Capital and Surplus (left 

axis)

P&C Capital and Surplus 

(left axis)

As Of: 2019

Note: C&S/Assets is calculated as capital and surplus as a 

percent of net admitted assets less net admitted separate 

Source: NAIC account assets. Life includes accident and health.

Health Capital and Surplus / 

Assets (right axis)

P&C Capital and Surplus / 

Assets (right axis)

Life Capital and Surplus / 

Assets (right axis)

0

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80

100

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100

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

3.5.2.30 Insurance Industry Net Income

Billions of US$ Billions of US$

Source: NAIC

As Of: 2019

Health

Life

P&C

Note: Life includes accident and health.

3.5.2.31 Insurance Industry Capital and Surplus

3.5.2.30 Insurance Industry Net Income largest investors in corporate and foreign bonds 

as of the second quarter of 2020 with $4,074 

billion or 28 percent of outstanding. Insurance 

companies were also major investors in mutual 

funds ($1,522 billion), equities ($1,036 billion), 

agency securities ($539 billion), municipal 

securities ($504 billion), and Treasury 

securities ($420 billion).

The insurance industry experienced growth in 

profit, capital, total assets, and revenue from 

premiums in 2019. Health insurers reported net 

income growth of 19 percent, capital growth of 

9.2 percent, total assets growth of 7.8 percent, 

and direct written premium growth of 6.4 

percent. However, 176 out of the 434 health 

insurers reported a decrease in income in 2019, 

and 100 reported a decrease in the amount of 

capital. The P&C carriers reported that net 

income grew by 3.8 percent, capital grew by 

14 percent, total assets grew by 8.9 percent, 

and direct written premiums increased by 5.1 

percent. As these are 2019 end of year figures, 

they do not reflect any effects of the COVID-19 

pandemic (Charts 3.5.2.30, 3.5.2.31). 

Notwithstanding overall performance 

measures, some insurers did not perform as 

well as the aggregate figures would suggest; 

534 out of a total of 1,127 P&C insurers 

reported a decrease in net income for 2019, 

and 226 reported a decrease in the amount 

of capital supporting their financial activities. 

Similarly, the life subsector reported 18 percent 

growth in net income, 5.5 percent increase 

in capitalization, 13 percent rise in revenue 

from premiums, considerations, and deposits, 

and an 8.4 percent increase in total assets in 

2019. However, 184 out of a total of 336 life 

insurers reported a decline in reported net 

income and 105 reported a decrease in capital 

in 2019. The sector as a whole continues to face 

challenges from the persistently low interest 

rate environment. 
116 2020 FSOC // Annual Report

activities. On the asset side, life insurers have felt 

the effects of the financial markets and credit 

trends in corporate bonds, commercial real estate, 

and less conventional investments such as CLOs, 

though some of the effects of the pandemic on 

financial markets were alleviated by policy actions, 

such as the facilities established by the Federal 

Reserve under section 13(3) of the Federal Reserve 

Act. Life insurers also face potential reductions 

in cash inflows and increased derivative collateral 

requirements in response to higher market volatility. 

On the liability side, meaningful increases in 

mortality and morbidity claims from the virus, 

should they occur among covered individuals, would 

result in greater underwriting losses. In addition, 

the low interest rate environment poses a long-term 

challenge to some insurers by lowering investment 

yields while increasing reserves held against future 

claims payments (see Box G). The COVID-19 

pandemic could also reduce sales across a wide 

range of insurance products, due to repricing. 

The pandemic’s impact on the P&C subsector will 

likely lead to higher-than-expected insured losses in 

some lines of insurance. This impact may be offset 

to some extent by social distancing measures and a 

decline in economic activity, such as transportation 

and miles driven. The insurance lines most likely 

to be adversely affected by the pandemic include 

those providing coverage for business interruption, 

workers’ compensation, professional liability, 

travel, and credit insurance. Numerous legal 

filings seeking to resolve disputes over claims for 

business interruption losses has created additional 

uncertainty. The drop in government and corporate 

bond yields could also impact P&C insurers’ future 

investment income. 

Impact Thus Far from the COVID-19 Pandemic 

The COVID-19 pandemic has had wide-ranging 

effects on the insurance industry. Insurance 

underwriting has been confronted with potentially 

greater losses from trade credit guarantees, 

event cancellations, litigation liability, workers’ 

compensation, higher mortality and morbidity 

rates, and substantial uncertainty from business 

interruption claims and questions about potential 

changes in demand. In addition, the financial 

markets within which insurers operate experienced 

price volatility, credit rating downgrades, and 

unreliable trading liquidity. While many portions 

of financial markets have recovered, insurance 

company investments will likely face uncertainty 

in regard to real estate valuations, the effects of 

mortgage forbearance, and the impact of escalating 

business bankruptcies. 

Based on forecasts of insured losses and insurers’ 

financial reports through the first half of 2020, 

insured COVID-19 pandemic-related losses do not 

appear to threaten the financial stability of the 

insurance sector. However, the full and actual extent 

of the impact of the pandemic and the economic 

downturn are unknown and may exceed current 

expectations. Over the longer term, the pandemic 

may have a broad-based impact on industry metrics, 

stemming from COVID-19-related insurance claims, 

macroeconomic effects, and financial market trends.

While health insurers have faced increasing claims 

related to COVID-19, the financial impact has been 

offset by individuals delaying medical care and 

procedures, though those delayed claims could 

impact the sector in 2021. According to S&P Global, 

through the second quarter of 2020, the health 

insurance industry reported an increase of only 

1.3 percent in benefits paid and cost containment 

expenses compared to the prior year. The net claim 

and claim adjustment expense ratio declined to 80 

percent from 89 percent for the second quarter. 

General expenses incurred increased 47 percent 

through June 30 impacted by the Affordable 

Care Act health insurance industry tax that was 

suspended in 2019 and resumed in 2020. 

The life insurance subsector faces challenges for 

both its investments and hedging and underwriting 
Financial Developments 117

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4.0

2001 2004 2007 2010 2013 2016 2019

3.5.2.33 Business Loans and Leases Outstanding

Trillions of US$ As Of: Sep-2020 Trillions of US$

Source: Federal Reserve,

Haver Analytics

Commercial Banks

Finance Companies

Note: Loans and leases owned and securitized. Series 

break in December 2010 due to change in data collection 

methodology. Gray bars signify NBER recessions.

0.0

0.5

1.0

1.5

2.0

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0.5

1.0

1.5

2.0

2001 2004 2007 2010 2013 2016 2019

3.5.2.32 Consumer Loans and Leases Outstanding

Trillions of US$ As Of: Sep-2020 Trillions of US$

Source: Federal Reserve,

Haver Analytics

Note: Loans and leases owned and securitized. Series breaks 

in December 2010 and December 2015 due to change in data 

collection methodology. Gray bars signify NBER recessions.

Commercial Banks

Finance Companies

3.5.2.33 Business Loans and Leases Outstanding

3.5.2.32 Consumer Loans and Leases Outstanding 3.5.2.8 Specialty Finance

Specialty finance companies are non-depository 

institutions that provide loans to consumers and 

businesses. The amount of financing activity by 

specialty finance companies decreased modestly 

over the past year. Specialty finance companies 

held approximately $727 billion of consumer 

loans and leases and $365 billion of business 

loans and leases as of September 2020 (Charts 

3.5.2.32, 3.5.2.33). 

While specialty finance companies account 

for a relatively small share of overall consumer 

lending, they have a significant footprint in certain types of consumer lending activities such as 

auto lending. Compared to banks, which generally have more stable sources of funding such as 

deposits, specialty finance companies are more 

reliant on wholesale funding and the securitization market. 

Asset-Backed Securities

The COVID-19 pandemic disrupted the ABS 

market, halting the issuance of most ABS asset 

classes and resulting in higher interest rate 

spreads on ABS products at its onset. Issuance 

declined significantly between February and 

April, and the interest rate spreads on the 

securities spiked, reflecting heightened credit 

risk and liquidity risk. Between February 20 and 

March 19, spreads on AAA-rated tranches of 

CMBS of 5-year maturity increased by almost 

250 basis points to 307 basis points, and spreads 

on AAA-rated tranches of 3-year maturity 

prime auto loan ABS widened by almost 180 

basis points to 200 basis points. Although yield 

spreads on ABS spiked in mid-March, they did 

not quite reach the high levels observed during 

the 2008 financial crisis.

The Federal Reserve’s establishment of 

the Term Asset-Backed Securities Loan 

Facility (TALF) appears to have supported 

securitization market activity and helped 

normalize ABS spreads. Spreads on ABS 

categories affected by TALF stopped rising 

shortly after the facility was announced on 

March 23 and subsequently fell substantially. 

Issuance, which halted for all TALF-eligible 

asset classes in late March, gradually resumed 
118 2020 FSOC // Annual Report

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2006 2008 2010 2012 2014 2016 2018 2020

YTD

3.5.2.34 ABS Issuance

Billions of US$ Billions of US$

Source: Thomson Reuters, SIFMA

As Of: Sep-2020

Credit Card

Auto

Student Loans

Other

Equipment

Note: Figures are as of year end through 2019. 

2020 figures are through September.

3.5.2.34 ABS Issuance in April. That said, ABS issuance through 

September 2020 remained significantly lower 

than the pace of 2019, totaling $148 billion, 

excluding CDOs and CLOs (Chart 3.5.2.34). 

Finally, issuance under the support of TALF 

has been very limited since the facility became 

operational in mid-June, as almost all ABS 

spreads of eligible asset classes were already 

lower than TALF funding costs at that time.

Special Purpose Acquisition Companies

Special purpose acquisition companies (SPACs) 

are companies that are formed through an 

initial public offering (IPO) to raise funds to 

purchase businesses or assets to be acquired 

after the IPO. The IPO funds are placed into 

an escrow or trust account where they are held 

until released for predetermined reasons, most 

commonly when the SPAC identifies a company 

or assets to purchase. Through the first three 

quarters of 2020, SPACs completed 118 IPOs, 

raising $44 billion, which represents more than 

three times the amount raised by SPACs in 

2019. 

3.6 Financial Market Structure, 

Operational Challenges, and 

Financial Innovation

3.6.1 3.6.1 Market Structure

3.6.1.1 Central Counterparty Clearing

Cash Securities Clearing

In the United States, the Depository Trust & 

Clearing Corporation (DTCC) is the dominant 

provider of clearing services for cash securities 

through its subsidiaries Fixed Income Clearing 

Corporation (FICC) and National Securities 

Clearing Corporation (NSCC). FICC consists 

of two divisions, the Government Securities 

Division (GSD) and the Mortgage-Backed 

Securities Division (MBSD). GSD provides CCP 

services for its customers with respect to the 

U.S. government securities market, and MBSD 

provides CCP services to the U.S. mortgagebacked securities market. NSCC serves as a 

CCP for virtually all broker-to-broker trades 

involving equities, corporate and municipal 

debt, ADRs, ETFs, and UITs. 
Financial Developments 119

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2.0

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1.0

1.5

2.0

DTCC GSD DTCC MBSD DTCC NSCC

3.6.1.2 Maximum Uncovered Exposure for DTCC 

Billions of US$ Billions of US$

Source: DTCC PFMI 

Quantitative Disclosures

2020 Q1

2015 - 2019

As Of: 2020 Q1

Note: Peak uncovered exposure between Q3 2015 and Q4 2019 

and Q1 2020 as reported on question 6.5.4.

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40

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60

2016 2017 2018 2019 2020

3.6.1.1 Initial Margin Requirements: DTCC

Billions of US$ Billions of US$

Source: ClarusFT, PFMI 

Quantitative Disclosures

FICC: MBSD

NSCC

FICC: GSD

As Of: 2020 Q2

Note: Total initial margin required as reported 

in PFMI quantitative disclosures; includes 

house and client accounts. 

3.6.1.2 Maximum Uncovered Exposure for DTCC

3.6.1.1 Initial Margin Requirements: DTCC During the COVID-19 crisis, DTCC performed 

without interruption despite facing increased 

operational challenges and extreme market 

volatility. Despite the significant increase 

in initial margin requirements at DTCC’s 

clearinghouses, members generally satisfied 

intraday margin calls and settlement obligations 

(Chart 3.6.1.1). On March 20, GSD suspended 

one clearing member, Ronin Capital LLC, after 

it was unable to meet capital requirements at 

CME. In conjunction with their cross-margining 

agreement, FICC and CME jointly liquidated 

Ronin’s portfolio. On March 25, 2020, FICC 

announced that it completed the liquidation 

of Ronin’s portfolio without allocating losses 

to other GSD member firms. While FICC and 

NSCC performed without interruption during 

the heightened market volatility associated 

with COVID-19, the clearinghouses reported 

large margin breaches that could have led to 

significant losses in the event of a large clearing 

member default. 

In March, the disruptions in fixed income 

markets led to a breakdown in the historical 

relationship between TBAs and Treasuries, 

which materially impacted the performance 

of FICC’s MBSD margin model. The extreme 

volatility and breakdown in correlations during 

this time period was beyond the MBSD’s Value 

at Risk (VaR) model calibration. On March 19, 

2020, MBSD recorded a maximum backtesting 

deficiency (i.e., margin below required 

minimum) of $1.5 billion, which was incurred 

by a portfolio with a market value greater 

than $100 billion whose value was sensitive to 

changes in interest rates. According to PFMI 

quantitative disclosures, this $1.5 billion margin 

breach was approximately four times larger 

than any other breach recorded between 2015 

and 2019 (Chart 3.6.1.2). MBSD took a number 

of steps to address backtesting deficiencies, 

including: (i) lowering the intraday surveillance 

thresholds; (ii) issuing intraday margin calls 

for almost $37 billion during the month of 

March; (iii) applying charges to members with 

backtesting coverage below 99 percent; and (iv) 

developing a plan to re-introduce a VaR floor at 

MBSD. 
120 2020 FSOC // Annual Report

Similar to MBSD, DTCC’s GSD clearing service 

also recorded large backtesting deficiencies and 

on March 9, 2020, GSD recorded a maximum 

backtesting deficiency of $797 million, which 

was incurred by a large dealer portfolio. 

According to DTCC, GSD’s backtesting 

deficiencies were primarily attributable to the 

volatility in rates markets along with changes 

in portfolio size or composition. Given these 

deficiencies, GSD applied additional margin 

charges to those members with backtesting 

coverage below 99 percent. Additionally, GSD 

supplemented its formal intraday margin 

collection with additional intraday calls. 

NSCC’s VaR margin model is constructed 

to address dynamic changes in equity risk 

premiums and idiosyncratic risks that could 

impact equity prices. As a result, volatility 

charges at NSCC increased 146 percent between 

February and March 2020. On March 16, 

2020, NSCC incurred a maximum backtesting 

deficiency of $318 million. To address 

backtesting deficiencies, NSCC made intraday 

margin calls totaling almost $50 billion in 

March and applied additional margin charges 

to members with backtesting coverage below 99 

percent. 

Derivatives CCPs

The vast majority of U.S. exchange traded 

derivatives are cleared through CME, ICE Clear 

US, and the OCC. CME and ICE Clear US 

provide clearing services for futures and options 

on futures while the OCC provides clearing 

services for exchange-traded equity options. 

Within the OTC derivatives space, most USD 

interest rate swaps are cleared through LCH 

Ltd. or CME, while most credit default swaps 

are cleared through ICE Clear Credit, ICE 

Clear Europe, or LCH SA. 

Derivatives CCPs generally performed as 

expected during the COVID-19 market stress 

despite the backdrop of price volatility, record 

volumes, and the significant operational 

challenges of working from home. Initial 

margin requirements increased significantly 

at derivatives CCPs beginning at the end of 
Financial Developments 121

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2016 2017 2018 2019 2020

3.6.1.5 Initial Margin: OTC Derivatives

Billions of US$ Billions of US$

Source: ClarusFT, PFMI 

Quantitative Disclosures

Credit Default Swaps

Interest Rate Swaps

As Of: 2020 Q2

Note: Total initial margin required as reported in PFMI quantitative 

disclosures; includes house and client accounts. Interest rate swaps margin 

includes LCH Ltd. and CME. Credit default swaps margin include CME, ICC, 

ICEU, and LCH SA). CME ceased clearing credit default swaps in Mar. 2018. 

0

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350

2016 2017 2018 2019 2020

3.6.1.4 Initial Margin: U.S. Exchange Traded Derivatives

Billions of US$ Billions of US$

Source: ClarusFT, PFMI 

Quantitative Disclosures

ICE Clear US

OCC

CME

As Of: 2020 Q2

Note: Total initial margin required as reported in PFMI 

quantitative disclosures; includes house and client accounts. 

0

10

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70

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40

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60

70

Feb:2020 Mar:2020 Apr:2020

3.6.1.3 Liquidity Demand at Derivatives Clearing Organizations

Billions of US$ Billions of US$

Source: CFTC

As Of: 30-Apr-2020

Note: Light blue represents aggregate variation margin payments 

and dark blue represents net initial margin payments. Series 

covers February 3, 2020 through April 30, 2020. Excludes OCC. 

Variation Margin Payments

Incremental Initial Margin Payments

3.6.1.5 Initial Margin: OTC Derivatives

3.6.1.4 Initial Margin: U.S. Exchange Traded Derivatives

3.6.1.3 Liquidity Demand at Derivatives Clearing Organizations February, with daily increases peaking at $35 

billion on March 9. Over the same period, there 

was also a significant increase in daily variation 

margin payments, which peaked at $54 billion 

on March 9, as well (Chart 3.6.1.3). 

The increases in initial margin requirements 

were more pronounced for CCPs clearing 

exchange-traded derivatives, with CME (futures 

and options), ICE Clear US, and the OCC 

reporting a combined $131 billion increase in 

required initial margin, a 72 percent increase 

between the fourth quarter of 2019 and the first 

quarter of 2020 (Chart 3.6.1.4). Over this same 

period, initial margin requirements for interest 

rate swaps at CME and LCH Ltd. increased by 

a combined $39 billion, or 20 percent, while 

initial margin requirements for credit default 

swaps at ICE Clear Credit, ICE Clear Europe, 

and LCH SA increased by $21 billion, or 46 

percent (Chart 3.6.1.5). The increase in initial 

margin requirements can be attributed to both 

the increase in derivatives activity and the 

extreme volatility during this period. Initial 

margin requirements for exchange-traded 

and OTC derivatives fell slightly in the second 

quarter but remain elevated compared to 

historical levels. 

In the June 2020 FIA survey, respondents 

generally believed the industry fared well 

through the COVID-19 market stress, and a 

majority believed that post-crisis reforms helped 

derivatives markets cope with the pandemic. 

However, 76 percent of respondents identified 

margin volatility and unpredictability and 40 

percent highlighted clearing operations and 

systems as challenges needing review.

Clearing Rates for OTC Derivatives

Over the past year, the share of outstanding 

OTC interest rate derivatives that were 

centrally cleared remained stable. Measured 

by gross notional outstanding, approximately 

78 percent of outstanding global interest rate 

derivatives were centrally cleared as of June 

2020, unchanged from June 2019. In contrast, 

the share of outstanding single- and multinamed credit default swaps that were centrally 
122 2020 FSOC // Annual Report

60

70

80

90

100

60

70

80

90

100

2015 2016 2017 2018 2019 2020

3.6.1.7 Average Clearing Rates for OTC Trading

Percent Percent

Source: CFTC

As Of: 2020 Q3

Note: Gross notional of new transactions. 

Excludes security-based swaps.

Credit Default Swaps Interest Rate Swaps

1

10

100

1000

0

20

40

60

80

100

Interest Rate FX Credit Equity

Not Cleared (left axis)

Cleared (left axis)

3.6.1.6 Global OTC Central Clearing Market Share

Percent Trillions of US$ (Log)

Source: BIS

As Of: 2020 Q2

Total Notional 

Outstanding (right axis)

3.6.1.7 Average Clearing Rates for OTC Trading

3.6.1.6 Global OTC Central Clearing Market Share cleared increased markedly, from 54 percent 

as of June 2019, to 60 percent as of June 2020. 

This increase can be attributed largely to an 

increase in the amount of multi-named CDS 

that were centrally cleared. As of June 2020, 65 

percent of multi-named CDS outstanding were 

centrally cleared, up from 60 percent in June 

2019. OTC equity and FX derivatives continue 

to have lower clearing rates. As of June 2020, 

4.1 percent of outstanding OTC FX derivatives 

and 0.4 percent of OTC equity derivatives were 

centrally cleared globally (Chart 3.6.1.6). 

Clearing rates in the United States were 

broadly similar to global clearing rates, and 

as of September 25, 2020, over 80 percent of 

outstanding OTC interest rate derivatives were 

centrally cleared, while 65 percent of credit 

index swaps were centrally cleared. Clearing 

rates on new U.S. interest rate swap transactions 

peaked in the second quarter of 2020, when 

over 90 percent of new U.S. interest rate swap 

volumes were centrally cleared (Chart 3.6.1.7). 

Clearing rates on new credit index swap 

transactions fell below 75 percent in the third 

quarter of 2020. This decline can primarily 

be attributed to an increase in the volume of 

credit swaptions, credit total return swaps, and 

other exotic credit products for which clearing 

is not widely available, resulting in low clearing 

rates. New index CDS products that are offered 

for clearing continue to report higher clearing 

rates, often above 95 percent. 

Central clearing has become more prevalent 

throughout the world as clearing mandates have 

been introduced in a number of jurisdictions 

for the most standardized products, including 

fixed-float rate swaps and index-based CDS. 

In addition, and more recently, margin 

requirements for uncleared swaps have led 

some market participants to centrally clear 

swaps voluntarily in cases where central clearing 

is more cost-efficient. As a result, clearing rates 

and the amount of margin posted for centrally 

clearable, but not mandated, products like 

inflation swaps and non-deliverable forwards 

are significantly higher than they were a few 

years ago, prior to the uncleared margin 
Financial Developments 123

requirements; in some cases, these rates continued 

to rise in 2020. 

Central Clearing & Brexit 

While lawmakers in the EU and UK have made 

progress in mitigating the impact that Brexit 

will have on the derivatives markets and market 

participants, the cliff-effect of the current 

Brexit transition period increases uncertainty 

concerning how certain transactions will be 

handled. Specifically, both UK-based entities and 

third-country-based entities relying on UK-based 

personnel to support existing transactions that 

novate derivative contracts to EU-based affiliates 

would be subject to EU regulations on clearing 

and margin requirements. Such transactions 

would otherwise avoid these requirements due to 

grandfathering provisions.

Currently, the relief provided by the EU does not 

apply to novations that occur before the end of the 

Brexit transition period. Many EU counterparties 

with UK-based counterparties or operations have 

been unwilling to novate those contracts because 

the novation would trigger clearing or margin 

requirements for the EU counterparty under 

European law. Given the global nature of derivative 

markets, such dislocations may impact U.S.-based 

entities and markets. Derivatives markets could 

experience dislocations if neither UK nor EU 

authorities provide permanent relief. 

3.6.1.2 Alternative Reference Rates

In 2020, the transition from USD LIBOR continued 

to advance in preparation for LIBOR’s anticipated 

cessation after year-end 2021. Market participants, 

index providers, vendors, the ARRC, and U.S. 

and foreign regulators all took significant steps to 

address known transition issues. 

In March, COVID-19-related market dislocations 

caused few transactions to occur in the wholesale 

unsecured funding markets that LIBOR is designed 

to measure. The lack of transactions forced LIBOR’s 

publication to increase reliance on expert judgment 

from LIBOR panel banks, further highlighting 

LIBOR’s vulnerabilities and the need to move 

forward with the LIBOR transition by year-end 2021. 

Over the same time period, the transaction volume 

underlying SOFR increased. 

In response to disruptions related to the pandemic, 

the UK FCA, which regulates LIBOR’s administrator 

and maintains the agreements with LIBOR panel 

banks for continued submissions, released a 

statement reiterating the year-end 2021 target date 

for transition from LIBOR. Given that voluntary 

agreements to continue panel bank submissions 

through 2021 were arranged by the UK FCA, U.S. 

regulators cannot extend or modify the timeline for 

the transition. 

On June 23, 2020, the UK Chancellor of the 

Exchequer made a statement that the UK 

government intends to propose legislation. In 

particular, the UK government intends to amend the 

UK’s existing regulatory framework for benchmarks 

to ensure it can be used to manage different 

scenarios prior to a critical benchmark’s eventual 

cessation, to withstand circumstances in which the 

FCA may require an administrator to change the 

methodology of a critical benchmark, and to clarify 

the purpose for which the FCA may exercise this 

power. New regulatory powers would enable the 

FCA to direct a methodology change for a critical 

benchmark, in circumstances where the regulator 

has found that the benchmark’s representativeness 

will not be restored and where action is necessary 

to protect consumers and/or to ensure market 

integrity.

Work of the ARRC

In the U.S., the Federal Reserve and FRBNY 

convened the ARRC to identify alternative reference 

rates to USD LIBOR and implement an orderly 

transition plan to its recommended rate, SOFR. In 

the last year, the ARRC made significant progress in 

developing contract fallback language, conventions 

for SOFR’s use in a variety of financial instruments, 

and best practices to facilitate the adoption of 

SOFR. 

The ARRC continued to address contract robustness 

through the publication of recommended contract 

fallback language for use in new issuance of 

variable rate private student loans and updated 

its recommended language for bilateral business 
124 2020 FSOC // Annual Report

things, proposed examples of replacement indices 

that meet Regulation Z standards. The CFTC issued 

relief from certain rules related to margin, business 

conduct, trade execution, and clearing for legacy 

swaps referencing LIBOR that are amended as a 

result of the transition. The prudential regulators 

finalized regulations for margin and capital that 

permitted non-cleared legacy swaps and securitybased swaps to retain their legacy status if amended 

to replace an interbank offered rate. State insurance 

regulators, through the NAIC, are monitoring the 

effect of the transition from LIBOR on insurer 

derivatives positions, life insurance reserving, and 

accounting standards. Insurers will receive basis 

swaps for some of their derivative positions as a 

result of the transition from LIBOR that may not 

be permissible under most state investment laws. 

The NAIC issued letter guidance to state insurance 

departments recommending that any basis swaps 

received as part of the LIBOR transition be deemed 

permissible investments under state investment laws 

for up to one year past the transition. 

In July 2020, the FFIEC published a “Joint Statement 

on Managing the LIBOR Transition.” The joint 

statement highlighted the risks of the transition 

away from LIBOR and encouraged supervised 

institutions to prepare for the transition in order to 

mitigate these risks. In addition to communicating 

the FFIEC statement, the OCC provided additional 

guidance to OCC-regulated institutions for 

identifying applicable risks, planning, and 

successfully transitioning from LIBOR within OCC 

Bulletin 2020-68, “FFIEC Statement on Managing 

the Libor Transition and Guidance for Banks.”

In October 2020, the Federal Reserve issued a 

supervision and regulation letter that encourages 

supervised institutions that are active in the derivatives 

market—particularly those with large LIBOR 

denominated derivatives exposures—to give strong 

consideration to adhering to ISDA’s fallback protocol.

In October, Treasury and the Internal Revenue Service 

issued guidance to provide clarification for taxpayers 

that modifying certain contracts to incorporate the 

ARRC’s and ISDA’s recommended fallback language 

will not result in a tax realization event. 

loans and syndicated loans. Previously, the ARRC 

published recommended fallback language for other 

asset classes, including adjustable-rate mortgages, 

floating-rate notes, and securitizations. The ARRC 

also identified best practices and recommended 

timelines for transitioning away from USD LIBOR 

across asset classes.

In a significant step, the ARRC published its 

spread adjustment methodology for cash products 

following a consultation process and began the 

process of acquiring a vendor for the publication 

of the spread adjustment. It also began a separate 

acquisition process for a vendor for the potential 

publication of a SOFR term rate. Notwithstanding 

these industry-wide transition efforts, the market 

acceptance of SOFR is progressing at various paces 

due to challenges such as structural differences 

of SOFR vs USD LIBOR, lower liquidity in SOFR 

derivatives markets and cash markets, as well as 

various operational challenges. With respect to 

a challenge associated with the lack of a credit 

spread, the FRBNY, FDIC, Federal Reserve, OCC, 

and Treasury met with representatives of a number 

of U.S. regional banks to discuss ways to support 

the transition of loan products away from LIBOR, 

including by holding a series of working sessions to 

explore the development of a credit risk sensitive 

spread. The agencies involved determined the 

official sector is not well positioned to develop a 

credit-sensitive spread to SOFR, and shared a letter 

with industry participants expressing the official 

sector’s support for the continued innovation 

in, and development of, suitable reference rates, 

including those that may have credit sensitive 

elements. Separately, in October 2020, the Financial 

Stability Board (FSB) published a “global transition 

roadmap” that sets out a timetable of actions for 

financial and non-financial sector firms to take in 

order to ensure a smooth LIBOR transition by end2021.

Regulatory Actions to Facilitate Transition 

Council member agencies continued to monitor and 

facilitate the transition through discussions with 

stakeholders and the provision of broad regulatory 

relief. The CFPB released a notice of proposed 

rulemaking (NPRM) concerning the anticipated 

discontinuation of LIBOR, including, among other 
Financial Developments 125

On November 6, 2020, the Federal Reserve, FDIC, 

and OCC issued a statement on reference rates for 

loans. The statement reiterated that agencies are 

not endorsing a specific replacement rate for LIBOR 

for loans. The statement also indicated that a bank 

may use any reference rate for its loans that the bank 

determines to be appropriate for its funding model 

and customer needs, and should include fallback 

language in its lending contracts that provides for 

use of a robust fallback rate if the initial reference 

rate is discontinued.

Derivatives Markets

The derivatives markets achieved some of the most 

significant milestones toward the transition. In 

October, two major derivative CCPs, CME and LCH, 

modified the rates used in their discounting and 

price alignment interest methodology to replace the 

effective federal funds rate with SOFR. The change 

in methodology affected approximately $120 trillion 

notional of contracts at LCH alone, increasing 

exposure to SOFR and liquidity in SOFR derivatives 

markets. Immediately following the transition, 

SOFR swap volumes tripled in longer-dated tenors 

and experienced their highest rate of daily turnover. 

Continued liquidity across the SOFR curve will be 

essential for a smooth transition from USD LIBOR.

Separately, on October 23, 2020, the International 

Swaps and Derivatives Association (ISDA) published 

an updated protocol that would allow market 

participants to incorporate contract fallbacks 

into legacy derivatives in the event that LIBOR 

is found by the UK FCA to be non-representative 

of underlying market conditions or LIBOR’s 

publication ceases. Voluntary adherence to the 

protocol is an important step for the smooth 

transition of legacy instruments in the derivatives 

markets. ISDA also modified its definitions to 

incorporate the same contract fallbacks into 

new instruments. Both the protocol and revised 

definitions will go into effect on January 23, 2021.

3.6.2 Operational Challenges Related to COVID-19

Financial institutions performed business functions 

relatively seamlessly during the COVID-19 

pandemic, in part due to investments in operational 

and technology capabilities that were made prior to 

March. The industry also benefited from shifting 

customer support from in-person to online or 

automated processes. Banks have taken steps to 

protect customers and employees by consolidating 

branch operations and limiting walk-in traffic, 

leveraging multiple production sites to separate 

operational staff, and employing staggered 

work schedules. Financial institutions have also 

adopted safety measures for their employees, 

including transitioning to a mostly remote working 

environment and implementing similar protection 

measures for the critical staff who remained onsite.

These processes have allowed financial institutions 

to maintain operations while adhering to social 

distancing guidelines, but also have the potential 

to introduce new sources of risk. For example, the 

implementation of teleworking strategies using 

virtual private networks, virtual conferencing 

services, and other remote telecommunication 

technologies can increase cybersecurity 

vulnerabilities, insider risks, and other operational 

exposures. Cyber attackers are taking advantage 

of the pandemic to create campaigns designed 

to leverage individuals’ fear and uncertainty, 

potentially increasing their rate of success 

under these circumstances. Ransomware is also 

proliferating and harming financial institutions and 

their third-party service providers. 

Similarly, the use of online and mobile systems 

by customers, bank staff, and third-party 

service providers may stress or adversely affect 

telecommunications capacity and management 

processes. Sensitive processes performed outside 

of institution-owned or authorized properties and 

devices can increase the potential for exposure of 

customer sensitive information. 
126 2020 FSOC // Annual Report

0

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250

300

350

0

50

100

150

200

250

300

350

2014 2015 2016 2017 2018 2019 2020

3.6.3.1 Market Capitalization of Certain Blockchain-Based Digital Assets

Source: Coinmarketcap.com; OFR

Billions of US$ As Of: 30-Sep-2020 Billions of US$

Bitcoin

Etherum

Ripple

Litecoin

Tether

3.6.3.1 Market Capitalization of Blockchain-Based Digital Assets 3.6.3 Financial Innovation 

3.6.3.1 Digital Assets and Distributed Ledger 

Technology

The market capitalization of digital assets, 

such as Bitcoin, Ethereum, XRP, and Litecoin, 

has increased greatly in recent years though it 

has also been highly volatile (Chart 3.6.3.1). 

Data regarding the trading of digital assets is 

sparse and may be unreliable. CoinMarketCap.

com estimated that after reaching $800 

billion in early 2018, the market capitalization 

of the digital assets that it tracks declined 

precipitously to $100 billion in late 2018 

before rising to $342 billion as of September 

30, 2020. Stablecoins—digital assets designed 

to maintain a stable value, usually relative to 

another asset (typically a unit of fiat currency or 

commodity) or a basket of assets—continued to 

grow in market capitalization in 2020 following 

robust growth in 2019, with some experiencing 

a five-fold increase during that period. While 

the growth rate of stablecoins in 2020 has 

eclipsed that of other digital assets, the total 

market capitalizations of other types of digital 

assets remains substantially larger.

Digital assets are generally enabled by 

blockchains or other distributed ledger 

technologies. Such systems share data across 

a network, creating identical copies of their 

ledger that are then often stored at and 

synchronized across multiple locations. 

Distributed ledger technology has applications 

that extend well beyond the simple transfer of 

value. In recent years, an increasing number 

of financial institutions have initiated proof 

of concept or pilot projects to evaluate the 

potential for applications of distributed ledger 

technology in areas such as interbank and 

intrabank settlement, derivatives processing, 

repo clearing, and trade finance. While the 

ultimate value of a new technology is not always 

clear when it is first introduced, interest in 

distributed ledger technologies remains high. 
Financial Developments 127

3.6.3.2 Peer-to-Peer Payments 

Consumers continue to embrace peer-to-peer 

payment services, and the COVID-19 pandemic 

has further highlighted the potential benefits of 

mobile contactless payment options. Peer-to-peer 

payment services allow for the transfer of funds 

between two parties using mobile apps. Some peerto-peer payment services have expanded capabilities 

beyond simply facilitating transactions between 

peers, which has allowed them to, for example, 

help facilitate government assistance payments. 

The apps are typically linked to debit or credit card 

accounts and other types of bank accounts, thereby 

allowing the funding transfers to proceed through 

bank-maintained payment networks. Although 

some service providers are relatively new companies, 

banks and other financial service providers are also 

entering the market and have reported significant 

consumer participation and transaction volume. 

3.6.3.3 Marketplace Lending 

Marketplace lending involves the provision of loans 

through online, electronic platforms. Initially, 

marketplace lending focused on retail investors 

providing funding to individual borrowers and 

was called peer-to-peer lending. This model has 

evolved into one that uses significant capital from 

institutional investors to finance primarily consumer 

and small business loans. Some of the largest 

marketplace lenders in the consumer finance area 

concentrate on providing debt consolidation loans 

and refinancing existing student loans. During the 

COVID-19 pandemic, marketplace lenders played a 

role in government assistance to small businesses. 

For example, their lending platforms enabled some 

small business owners’ participation in the PPP by 

providing a means to apply for PPP loans. 

3.6.3.4 Large Technology Firms in Financial Services

Prior to the pandemic, several large technology and 

e-commerce firms entered, or explored entering, 

financial services markets. These firms offer 

financial products or services, such as the provision 

of loans to small businesses or individuals. Some 

of these technology and e-commerce companies 

have characteristics that could allow them to grow 

quickly in the financial services space, including 

large customer networks, broad name recognition, 

and access to client data. Additionally, while these 

firms are subject to regulations that may limit the 

activities in which they engage, they are generally 

not subject to the same range of regulations and 

oversight applicable to financial institutions. These 

technology firms can promote the development of 

new products and services but could also increase 

risks. For example, new technology and systems to 

evaluate and determine the creditworthiness of 

potential borrowers may create benefits for financial 

institutions and customers, but may also add 

complexity, limit transparency, and create different 

consumer protection risks than those of traditional 

credit evaluation methods if lenders do not identify 

and address potential issues in a proactive manner. 

3.6.3.5 Reliance of Financial Institutions on Third-Party 

Service Providers

Financial institutions are increasing their use 

of third-party service providers to supplement 

or increase their capabilities. This dynamic has 

accelerated during the COVID-19 pandemic, as 

institutions are utilizing third parties to support 

widespread remote work capabilities, increased 

technological capacity, and solutions to maintain 

operations under elevated operational volumes. The 

financial services industry has generally succeeded 

in transitioning to a remote working environment 

without significant operational problems, to date.

Relationships with external providers often allow 

an institution to take advantage of advanced or 

proprietary technologies, including recent fintech 

innovations. Due to economies of scale or access to 

lower-cost labor, external providers are often able to 

perform services at a lower cost than institutions can 

perform them in-house. In addition, as specialists, 

external providers may be able to perform functions 

for a financial institution more efficiently, more 

accurately, or at a higher quality than if they were 

performed internally. 

While the use of third-party service providers can 

have advantages, it can also introduce risk if not 

appropriately managed. The reliance of many 

institutions on a single vendor creates concentration 

risk, as a service interruption or cyber event at that 

vendor could result in widespread disruption in 

access to financial data and could impair the flow of 

financial transactions. Third-party service providers 
128 2020 FSOC // Annual Report

evident in the steep increase in the premium to 

borrow U.S. dollars as reflected in the foreign 

exchange (FX) swap basis. The FX swap basis 

compares the cost of borrowing a currency in the 

money market and the cost of borrowing the same 

currency through an FX swap, effectively posting 

foreign currency as collateral. When financial 

markets are operating smoothly, the FX swap basis 

is relatively close to zero for major currency pairs, 

as arbitrageurs can trade off gaps between the two. 

But during February and March, the FX swap basis 

for key U.S. dollar currency pairs spiked toward 

levels last observed during 2008. As a result, foreign 

banks and corporations, which were experiencing 

a surge in funding costs given the stress in CP 

markets, found it more expensive to borrow against 

their currencies for dollars. The dollar shortage 

threatened to exacerbate liquidity strains on 

corporates, contribute to widening defaults, and 

deepen the economic downturn stemming from the 

pandemic.

Beginning in mid-March, the Federal Reserve 

took several actions to help address the strains in 

dollar funding markets. First, it eased the terms 

of the swap lines with standing counterparties 

(the Bank of Canada, Bank of England, Bank of 

Japan, European Central Bank, and Swiss National 

Bank), reducing the cost of swap pricing to OIS + 

25 basis points, extending the maturity of the swaps 

through the introduction of 84-day operations, 

and increasing the frequency of auctions from 

weekly to daily. Additionally, the Federal Reserve 

re-established temporary swap lines with nine other 

central banks, including some emerging market 

central banks. Finally, in late March, the Federal 

Reserve introduced a new temporary Foreign and 

International Monetary Authority (FIMA) repo 

facility, which allowed a broader range of foreign 

official entities to obtain dollars against U.S. 

Treasury collateral. Central banks immediately 

availed themselves of the swap lines to make 

dollars available to financial institutions in their 

jurisdictions. Swaps outstanding went from under 

$50 million in early March to a peak of $449 billion 

in late May (Chart 3.7.1.1). While notable, this was 

may further subcontract services to other third 

parties, which may make oversight more complex 

for both the financial institution and regulatory 

agencies. To control for risks associated with 

outsourcing to third parties, financial institutions 

should conduct appropriate due diligence before 

entering the third-party relationship and exercise 

effective oversight and controls afterward.

For instance, many institutions have increased their 

use of cloud computing services to supplement 

existing data storage capacity, to provide 

redundancy, and to gain access to additional 

computational capacity. While cloud providers may 

offer superior cost or technological solutions, there 

have also been recent instances of unauthorized 

access to client data at cloud providers. As with all 

third-party outsourcing relationships, effective risk 

control is important when a financial institution 

engages third-party cloud providers.

3.7 Global Economic and Financial 

Developments

3.7.1 Foreign Exchange Market

As COVID-19 spread in early 2020 and financial 

market strains intensified, investors sought the safety 

of the dollar, generating a sharp rise in the value 

of the nominal trade-weighted dollar. The nominal 

trade-weighted dollar appreciated 10 percent from 

the beginning of the year to its peak on March 

23—with the bulk of this move occurring in March 

as countries imposed sweeping restrictions on 

their national economies. Among the currencies 

weakening sharply against the dollar during this 

period, the British pound depreciated 13 percent, 

the Australian dollar 18 percent, the Brazilian real 

22 percent, and the Mexican peso 25 percent.

At the same time, the premium to obtain dollar 

funding increased to levels not seen since the 

2008 financial crisis. The dollar funding strains 

could be primarily attributed to lenders reducing 

intermediation activities as a precaution amid the 

heightened uncertainty, increased demand for 

dollars as some foreign banks faced significant 

drawdowns of corporate credit lines, and increased 

dollar hedging demand given the significant market 

volatility. Dollar funding strains were particularly 
Financial Developments 129

-40

-30

-20

-10

0

10

20

-40

-30

-20

-10

0

10

20

3.7.1.3 Change in USD Exchange Rates, EMEs

Percent Percent

Source: Federal 

Reserve, Wall Street 

Journal, Haver Analytics

As Of: 30-Sep-2020

3/23/20 – 9/30/20

12/31/19 – 3/23/20

Note: Percent change relative to end-2019. Chinese renminbi (RMB), Korean 

won (KRW), Indian rupee (INR), Indonesian rupiah (IDR), Mexican peso (MXN), 

South African rand (ZAR), Russian ruble (RUB), Argentine peso (ARS), Turkish 

lira (TRY), Brazilian real (BRL). Positive indicates appreciation of listed currency.

Total

-30

-20

-10

0

10

20

30

-30

-20

-10

0

10

20

30

3.7.1.2 Change in USD Exchange Rates, Advanced Economies

Percent Percent

Source: Federal Reserve, 

Haver Analytics

As Of: 30-Sep-2020

3/23/20 – 9/30/20

12/31/19 – 3/23/20

Note: Percent change relative to end-2019. Positive indicates appreciation 

of listed currency. Swiss Franc (CHF), Euro (EUR), Swedish Krona (SEK), 

Japanese Yen (JPY), Australian Dollar, (AUD) New Zealand Dollar (NZD), 

British Pound (GBP), Canadian Dollar (CAD), and Norwegian Krone (NOK). 

Total

0

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400

500

0

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400

500

Jan:20 Mar:20 May:20 Jul:20 Sep:20

3.7.1.1 Federal Reserve Swap Lines

Billions of US$ Billions of US$

Source: Federal Reserve

As Of: 30-Sep-2020

Note: Wednesday levels.

3.7.1.3 Change in USD Exchange Rates, Emerging Markets

3.7.1.2 Change in USD Exchange Rates, Advanced Economies

3.7.1.1 Federal Reserve Swap Lines lower than during the 2008 financial crisis, 

where the peak reached $583 billion. 

In combination with the extraordinary actions 

by central banks and governments to support 

the global economy, the expansion of Federal 

Reserve facilities helped calm dollar funding 

markets. Dollar appreciation pressures eased, 

and the FX swap basis decreased for many 

dollar currency pairs, returning to normal 

historical ranges by May. As strains in dollar 

funding markets dissipated, outstanding 

drawings on the swap lines gradually declined, 

falling to less than $25 billion as of September 

30, 2020. 

As financial market strains eased, the sharp 

moves in FX rates seen in the first three months 

of the year generally reversed, particularly 

across advanced economies. Between March 23 

and September 30, 2020, the dollar depreciated 

7.2 percent on a nominal, trade-weighted basis. 

The euro appreciated 8.9 percent against 

the dollar, the pound 12 percent, and the 

Australian dollar 24 percent. By September, 

advanced economy currencies had appreciated 

on net against the dollar year-to-date or had 

made up nearly all of the decline from earlier 

in the year (Chart 3.7.1.2). Emerging market 

currencies, on the other hand, had seen 

more limited recovery or had even continued 

to depreciate against the dollar. As of the 

end of September, this left many emerging 

market currencies still substantially weaker 

against the dollar on net year-to-date (Chart 

3.7.1.3). Continued pressures on emerging 

market currencies have reflected in part 

large COVID-19 outbreaks across some major 

emerging markets, combined with pre-existing 

macroeconomic strains in a few specific 

instances. 

While the real broad dollar index is only 0.8 

percent stronger on net in 2020 through the 

end of September, it remains relatively strong 

from a historical perspective. Notably, the real 

trade-weighted dollar stands 8.2 percent above 

its 20-year average as of the end of September, 

having recently peaked at its strongest level 
130 2020 FSOC // Annual Report

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300

United

States

Germany France Italy Spain Japan United

Kingdom

3.7.2.2 General Government Gross Debt to GDP

Percent Percent

Source: IMF WEO

2020 (October 2020 Projection)

2019

Percent As Of: Oct-2020

3.7.2.1 Advanced Economies Real GDP Growth 

-12

-8

-4

0

4

8

-12

-8

-4

0

4

8

2005 2007 2009 2011 2013 2015 2017 2019 2021

Percent

Source: IMF WEO, 

Haver Analytics

Note: Annual change in GDP, constant prices. Dotted lines 

represent the IMF’s most recent projections for 2020 and 2021.

United States 

United Kingdom

Euro Area

Japan

3.7.1.4 Real U.S. Dollar Trade-Weighted Index

Index Index

Source: Federal Reserve, 

Haver Analytics

As Of: Sep-2020

Note: Index shown as a share of its 20-year average. Real USD 

Trade-Weighted Index is a weighted average of the FX value of 

the USD against the currencies of a broad group of major U.S. 

trading partners. Gray bars signify NBER recessions.

80

90

100

110

120

80

90

100

110

120

2000 2003 2006 2009 2012 2015 2018

3.7.2.2 General Government Gross Debt to GDP

3.7.2.1 Advanced Economies Real GDP Growth

3.7.1.4 Real U.S. Dollar Trade-Weighted Index since 2002 (Chart 3.7.1.4). 

3.7.2 Advanced Economies

The COVID-19 pandemic has led to a dramatic 

decline in global economic activity. According 

to the International Monetary Fund (IMF) 

October 2020 World Economic Outlook 

(WEO), advanced economies are projected to 

contract by 5.8 percent in 2020. Despite the 

steep decline in U.S. economic activity, the 

U.S. is projected to outperform other advanced 

economies, with real GDP projected to decline 

by 4.3 percent in 2020. In comparison, real GDP 

in the euro area, the United Kingdom (UK), 

and Japan is projected to decline by 8.3 percent, 

9.8 percent, and 5.3 percent, respectively (Chart 

3.7.2.1). Real GDP for advanced economies is 

projected to rebound sharply in 2021, but remain 

below its 2019 level. The rapidly evolving nature 

of the pandemic, however, introduces significant 

uncertainty into any forecast, and the depth and 

duration of the contraction is dependent on 

a number of factors, most notably authorities’ 

ability to limit the spread of COVID-19 without 

imposing lockdown measures, the development 

of a vaccine and therapeutics, and fiscal and 

monetary economic support.

Advanced economies have taken significant 

fiscal measures to help mitigate the impact of 

COVID-19 and support long-term economic 

recovery. They have relied on a combination 

of direct fiscal stimulus programs, such as 

wage subsidies and cash payments, along 

with liquidity support in the form of loans, 

asset purchases, and guarantees. Direct fiscal 

spending programs have increased headline 

government debt levels meaningfully in 2020 

(Chart 3.7.2.2). In contrast, liquidity support 

is largely off-balance sheet and could lead to 

significant growth in government debt if these 

public interventions incur losses.

In 2019, negative interest rate policies, coupled 

with increased economic uncertainty, pushed 

the amount of negative-yielding debt in the 

Bloomberg Barclays Global Aggregate Negative 

Yielding Debt Index up significantly, hitting 

a record $17 trillion in August 2019 (Chart 
Financial Developments 131

Percent As Of: Sep-2020

3.7.2.5 Euro Area Business and Consumer Surveys

Source: European Commission, 

Haver Analytics

60

70

80

90

100

110

120

-40

-30

-20

-10

0

10

20

2006 2009 2012 2015 2018

Index

Economic Sentiment (right axis)

Industrial Confidence (left axis)

Consumer Confidence (left axis)

Note: Confidence surveys calculated by subtracting 

the percentage of negative responses from the 

percentage of favorable responses. For economic 

sentiment index, 100 = long-term average.

-30

-20

-10

0

10

-30

-20

-10

0

10

3.7.2.4 Euro Area H1 2020 Real GDP

Percent Percent

Source: Eurostat, Haver Analytics

As Of: 2020 Q2

Note: Percentage change in real GDP Q2 2020 

compared with Q4 2019. Seasonally adjusted.

0

5

10

15

20

0

5

10

15

20

2017 2018 2019 2020

3.7.2.3 Outstanding Negative Yielding Debt

Trillions of US$ As Of: 30-Sep-2020 Trillions of US$

Source: Bloomberg, L.P.

Government Related

Sovereigns

Note: Market value of Bloomberg Barclays Global Aggregate Negative 

Yielding Debt Index, which is a sub-index of the Bloomberg Barclays 

Aggregate Index. In 2017, SIFMA estimated that the aggregate index 

covers approximately half of the value of global bonds outstanding.

Securitized

Corporates

3.7.2.5 Euro Area Business and Consumer Surveys

3.7.2.4 Euro Area H1 2020 Real GDP

3.7.2.3 Outstanding Negative Yielding Debt 3.7.2.3). While the amount outstanding in the 

index declined in the months following, the 

value of negative-yielding debt represented by 

the index remained well above historical levels. 

During the March 2020 market stress, however, 

the index value of negative-yielding debt fell 

sharply to less than $8 trillion. Since then, 

the index value of negative-yielding debt has 

steadily risen, and by the end of September, the 

amount outstanding again reached $16 trillion, 

slightly below the August 2019 record. 

Euro Area

Even prior to the COVID-19 pandemic, 

the economic outlook in the euro area was 

deteriorating. In the fourth quarter of 2019, 

euro area real GDP growth was flat, industrial 

confidence had fallen to its lowest level since 

2013, and inflation expectations were at record 

lows. While economic data improved somewhat 

in January and February 2020, economic 

activity collapsed in March as COVID-19 

spread through Europe, and major European 

Union (EU) member states imposed national 

lockdown policies. Euro area GDP growth fell by 

a cumulative rate of 15 percent in the first half 

of 2020 (Chart 3.7.2.4). The decline in GDP 

was particularly pronounced in economies that 

imposed severe measures to control widespread 

outbreaks, with Spanish, French, and Italian 

GDP falling by 22 percent, 19 percent, and 18 

percent, respectively. 

Euro area economic activity rebounded 

considerably in the summer, and in the third 

quarter of 2020, euro area real GDP increased 

by nearly 13 percent compared to the previous 

quarter. Despite this rebound, economic 

sentiment remained below pre-pandemic 

levels through September 2020, and the recent 

resurgence of COVID-19 cases and partial 

reimposition of national lockdowns will likely 

weigh on the economic recovery going forward 

(Chart 3.7.2.5). 

To help limit the economic impact of 

COVID-19, the ECB deployed a range 

of unconventional monetary tools while 

maintaining its deposit rate at -0.5 percent. 
132 2020 FSOC // Annual Report

and digital transitions. While the plan has yet to be 

ratified by national parliaments, it is expected that 

the majority of resources will be allocated between 

2021 and 2023 and that the maximum volume of 

the loans for each member state will not exceed 6.8 

percent of its gross national income. 

At the national level, euro area member states have 

also instituted a broad set of fiscal measures to 

help mitigate the direct economic impact of the 

COVID-19 pandemic. Importantly, several euro 

area economies have implemented job retention 

schemes in order to limit households’ loss of income 

and firms’ wage costs during the pandemic. In 

addition, euro area member states have supported 

businesses through loan guarantee programs and 

have introduced active tax and spending measures 

to support the recovery. 

As of the end of the second quarter of 2020, the 

euro area general government debt totaled €11 

trillion, up from €10 as of the second quarter of 

2019. Within the euro area, Italian, French, and 

German debt outstanding totaled €2.5 trillion, 

€2.6 trillion, and €2.3 trillion, respectively, or 149 

percent, 114 percent, and 67 percent of GDP. Debt 

outstanding for all euro area economies is projected 

to rise in the coming quarters as fiscal relief efforts 

to tackle COVID-19 take hold. 

Among other programs, the ECB launched a 

further round of asset purchases under its Pandemic 

Emergency Purchase Programme (PEPP). The 

PEPP supplements the ECB’s Asset Purchase 

Programme (APP) and allows the ECB to purchase 

assets currently eligible under the APP along with 

Greek government debt and nonfinancial CP. As of 

September 30, 2020, the ECB had purchased €567 

billion of securities under PEPP and is expected to 

purchase a further €783 billion through June 2021. 

Additionally, the ECB eased conditions for its third 

series of targeted long-term refinancing operations 

(TLTRO III) and new series of pandemic emergency 

longer-term refinancing operations. Participation 

in TLTRO III has been robust, and the amount of 

funds allotted in June and September 2020 totaled 

a combined €1.5 trillion, up from €0.2 trillion in 

March 2020.

In addition, the ECB has introduced a range of 

supervisory measures in response to COVID-19. 

First, the ECB provided capital relief measures, 

which are estimated to temporarily free up 

roughly €120 billion of CET1 capital. The ECB 

has also provided supervisory flexibility regarding 

the treatment of non-performing loans (NPLs), 

provided guidance to limit the procyclical effects 

of loss provisioning under International Financial 

Reporting Standards (IFRS) 9, and recommended 

that banks refrain from making dividends payments 

until 2021. In combination, these countercyclical 

measures could act as shock absorbers and 

mitigate the tightening of financing conditions for 

households and businesses.

On the fiscal front, the EU announced a historic 

plan to help aid member states’ economic recovery 

from COVID-19. The recovery plan, which was 

agreed upon by EU leaders on July 21, 2020, permits 

the European Commission to borrow up to €750 

billion on behalf of member states. Of this amount, 

€390 billion would be dispersed as grants, while 

the remaining €360 billion would be dispersed as 

loans. The plan should provide heavily indebted 

member states additional fiscal space to support 

economic recovery from the COVID-19 pandemic. 

To participate, member states must prepare national 

recovery and resilience plans, and a large portion of 

the funds is expected to support investment in green 
Financial Developments 133

Percent As Of: 30-Sep-2020

3.7.2.7 Euro Area 10-Year Spreads

Source: Reuters, Haver Analytics

0

4

8

12

16

20

0

1

2

3

4

5

2015 2016 2017 2018 2019 2020

Percent

Note: Calculated as the weekly average 

spread between local 10Y and German 10Y.

Italy (left axis)

Spain (left axis)

France (left axis)

Greece (right axis)

Ireland (left axis)

Portugal (left axis)

Percent As Of: 30-Sep-2020

3.7.2.6 Euro Area 10-Year Sovereign Yields

Source: Reuters, Haver Analytics

-1

0

1

2

3

4

5

-1

0

1

2

3

4

5

Jan:2015 Jan:2016 Jan:2017 Jan:2018 Jan:2019 Jan:2020

Percent

Italy

Spain

France

Germany

3.7.2.7 Euro Area 10-Year Spreads

3.7.2.6 Euro Area 10-Year Sovereign Yields Yields on European sovereign bonds, which fell 

to record lows in mid-2019, rose slightly in late 

2019 and early 2020 (Chart 3.7.2.6). However, 

during the March 2020 market stress, yields 

on highly-rated European sovereign bonds 

plunged again, and by mid-March, the 10-

year German bond (Bund) fell to a record -84 

basis points. At the same time, spreads across 

European sovereigns widened. Beginning in 

late February, the spread between Italian (BTP) 

and Bund yields widened as investors grew 

concerned about the outbreak in northern Italy 

(Chart 3.7.2.7). The spread between BTPs and 

Bunds topped out at around 2.8 percent in 

mid-March and has since more than retraced its 

gains following the ECB’s launch of PEPP and 

the announcement of the EU-wide fiscal relief 

package. 

United Kingdom

On January 31, 2020, the UK officially exited 

the EU under the Withdrawal Agreement. As 

part of the Withdrawal Agreement, the UK 

and EU agreed to a transition period until 

December 31, 2020, during which the UK is 

not in the EU but retains all of the rights and 

obligations of an EU member. While the focus 

has since shifted to handling the COVID-19 

pandemic, the post-Brexit transition period has 

not been extended and, absent any agreement, 

UK-EU trade will revert to World Trade 

Organization rules at year-end. 

Similar to other European countries, the UK 

was severely impacted by COVID-19. UK GDP 

fell by a cumulative 21 percent in the first half 

of 2020, rivaling Spain as the economy most 

negatively impacted by the pandemic. To help 

keep workers employed during the COVID-19 

related lockdowns, the UK government 

instituted a policy to cover 80 percent of 

furloughed workers’ monthly salaries up to 

a ceiling. Given that furloughed workers are 

considered employed, the UK unemployment 

rate has remained relatively stable and was 

reported at 4.8 percent between July and 

September 2020. 
134 2020 FSOC // Annual Report

-3

-2

-1

0

1

2

3

-3

-2

-1

0

1

2

3

2005 2008 2011 2014 2017 2020

3.7.2.9 Japanese Consumer Price Inflation

Percent Percent

Source: Bank of Japan, 

Haver Analytics

As Of: Sep-2020

Note: Data represents year-over-year percentage 

change. CPI excludes fresh food and is adjusted for the 

consumption tax increase that took effect in April 2014.

Billions of GBP As Of: 18-Oct-2020

3.7.2.8 UK COVID-19 Business Loan Schemes

0

10

20

30

40

50

60

70

0

10

20

30

40

50

60

70

May:2020 Jun:2020 Jul:2020 Aug:2020 Sep:2020 Oct:2020

Billions of GBP

Source: HM Treasury

CBILS

BBLS

Note: Bounce Back Loan Scheme (BBLS), Coronavirus Large 

Business Interruption Loan Scheme (CLBILS), Coronavirus 

Business Interruption Loan Scheme (CBILS). Data reported 

monthly instead of weekly after August 16, 2020.

CLBILS

3.7.2.9 Japanese Consumer Price Inflation

3.7.2.8 UK COVID-19 Business Loan Schemes At the same time, the UK government has 

launched three separate loan schemes to 

facilitate businesses’ access to credit (Chart 

3.7.2.8). The Bounce Back Loan Scheme is 

aimed at micro businesses and includes a 

100 percent government guarantee, while 

the Coronavirus Business Interruption Loan 

Scheme and Coronavirus Large Business 

Interruption Loan Scheme, which are aimed 

at small and medium-sized enterprises (SMEs) 

and larger businesses, are backed by an 80 

percent government guarantee. As of October 

18, aggregate lending under these three 

schemes totaled £62 billion. 

The Bank of England (BOE) has also 

introduced a range of measures to respond to 

the economic shock from COVID-19. On March 

10, the BoE Monetary Policy Committee voted 

to reduce its bank rate from 75 basis points to 

25 basis points and to introduce a new Term 

Funding Scheme with additional incentives for 

SMEs, financed by the issuance of central bank 

reserves. In addition, the BOE Financial Policy 

Committee reduced the UK countercyclical 

capital buffer rate to 0 percent and the BOE 

Prudential Regulation Authority set out its 

supervisory expectation that banks should not 

increase dividends or other distributions, such 

as bonuses.

Japan

Japanese economic activity fell significantly 

due to COVID-19 related lockdowns. In the 

third quarter of 2020, Japanese real GDP fell by 

5.9 percent compared to the third quarter of 

2019. Between 2017 and 2019, inflation in Japan 

remained positive but has since turned negative 

and stood at -0.7 percent as of September 30, 

2020 (Chart 3.7.2.9). 

Prior to the pandemic, the Bank of Japan (BOJ) 

eased its monetary stance by switching from 

an outcome-based forward guidance policy to 

an open-ended policy, noting that it expected 

to keep policy rates at current levels or to 

reduce them so long as uncertainties remained 

regarding reaching the 2 percent inflation 

target. The BOJ has maintained its policy rate 
Financial Developments 135

-40

0

40

80

120

160

-40

0

40

80

120

160

2010 2012 2014 2016 2018 2020

3.7.2.10 Japan 10-Year Government Bond Yield

Basis Points Basis Points

Source: Bloomberg, L.P.

As Of: 30-Sep-2020

3.7.2.10 Japan 10-Year Government Bond Yield at -0.1 percent since January 2016. In addition, 

the BOJ continued to follow its policy of yield 

curve control whereby the BOJ will purchase 

JGBs so that the 10-year JGB yield remains at 

around zero percent. Since the introduction of 

the BOJ’s yield curve control policy in 2016, the 

yield on 10-year JGBs has been little changed 

(Chart 3.7.2.10). 

On March 26, 2020, the BOJ announced that 

it would enhance monetary easing through 

a number of policy measures, including 

increasing purchases of Japanese government 

bonds (JGBs), easing access to U.S. dollar 

funds, purchasing CP and corporate bonds, 

establishing a new operation to provide 

loans against corporate debt, and by actively 

purchasing exchange-traded funds and 

Japanese REITs. 

At subsequent meetings, the BOJ announced 

the expansion of its CP and corporate bond 

purchase programs along with the introduction 

of a new operation to support bank lending 

to SMEs. In total, the BOJ’s COVID-19 

support programs amount to ¥110 trillion, or 

approximately $1 trillion. Of this amount, ¥20 

trillion is in the form of CP and corporate bond 

buying programs while the remaining ¥90 

trillion is in the form of lending programs. 

In addition to the BOJ’s monetary response, 

the Japanese Financial Services Agency (JFSA) 

has provided guidance with regard to bank 

capital requirements in light of the COVID-19 

pandemic. Specifically, the JFSA confirmed that 

banks can use capital buffers when necessary 

to maintain lending volume. The JFSA has 

also confirmed that certain rescue lending 

activity would be risk weighted at 0 percent, 

that it would take a flexible approach to banks 

breaching the liquidity coverage ratio, and 

that the JFSA and BOJ would temporarily 

exclude central bank deposits from the leverage 

ratio exposure measure. Finally, the Japanese 

government announced a series of fiscal 

packages to support its economy, including cash 

handouts to individuals, subsidies to affected 
136 2020 FSOC // Annual Report

3.7.3.3 Emerging Market Sovereign Bond Spreads

Source: JP Morgan, Haver Analytics

0

200

400

600

800

1000

0

200

400

600

800

1000

2013 2014 2015 2016 2017 2018 2019 2020

Basis Points As Of: 30-Sep-2020 Basis Points

Latin America

Europe

Asia

Note: JP Morgan EMBI+ Sovereign 

Spreads indices for each region. 

-8

-4

0

4

8

-8

-4

0

4

8

SAU

EGY

THA

RUS

MYS

COL

MEX

POL

ZAF

PER

TUR

BRA

PAK

ARG

CHN

KOR

3.7.3.2 COVID-19 Impact on 2020 Current Account Balances

Percent of GDP Percent of GDP

Source: IMF July 2020 

External Sector Report

Oil Effect

Tourism & Remittances

Net Impact

Note: Estimated net direct impact of specific factors 

on current account balances for select EMEs. 

-12

-8

-4

0

4

8

12

-12

-8

-4

0

4

8

12

Aggregate EM Asia EM Europe Latin

America

Middle East

& Central

Asia

SubSaharan

Africa

3.7.3.1 2020 Real GDP Revisions for Developing Economies 

Percent Percent

Source: IMF WEO

October 2020 IMF Forecast

October 2019 IMF Forecast

3.7.3.3 Emerging Market Sovereign Bond Spreads

3.7.3.2 COVID-19 Impact on 2020 Current Account Balances

3.7.3.1 2020 Real GDP Revisions for Developing Economies firms, and the introduction of loan guarantee 

programs. 

3.7.3 Emerging Market and Developing 

Economies

Similar to advanced economies, EMEs 

experienced a sharp contraction in economic 

output in the first half of 2020. According 

to the IMF’s October 2020 WEO update, 

emerging and developing economies, which 

were projected to grow by approximately 4.6 

percent in 2020, are now projected to contract 

by 3.3 percent (Chart 3.7.3.1). Latin American 

economies, which are sensitive to commodity 

price fluctuations and have been hard hit by the 

COVID-19 pandemic, are projected to contract 

by 8.1 percent in 2020. In aggregate, emerging 

Asian economies have had more success in 

containing the spread of COVID-19, permitting 

authorities to lift lockdowns relatively quickly. 

Comparatively, emerging Asian economies are 

projected to contract by 1.7 percent in 2020. 

In the years following the 2013 Taper Tantrum, 

most EMEs narrowed current account deficits 

and built up reserves. Nevertheless, certain 

EMEs remained vulnerable to external shocks, 

and those reliant on remittances, tourism, or 

higher commodity prices are likely to see a 

deterioration in their external balances (Chart 

3.7.3.2). Additionally, EMEs typically have less 

fiscal capacity relative to advanced economies to 

respond to the economic fallout associated with 

the COVID-19 pandemic, complicating both the 

health response and the economic recovery. 

Spreads on USD-denominated sovereign bonds 

in all emerging market regions spiked sharply 

in March 2020 as investors repriced risk assets 

given the dimming global economic outlook 

(Chart 3.7.3.3). Latin American spreads 

surged to 800 basis points, while spreads 

for emerging Asia and emerging Europe 

roughly doubled to 340 basis points and 580 

basis points, respectively. Spreads on USDdenominated bonds have since compressed 

as foreign investor capital outflows subsided 

amid improved investor sentiment, in part due 
Financial Developments 137

-100

-50

0

50

100

150

200

-100

-50

0

50

100

150

200

2010 2012 2014 2016 2018 2020

Net Portfolio Flows

3.7.3.5 Foreign Investor Portfolio Inflows to EMEs

Billions of US$ Billions of US$

Source: IMF, Haver Analytics

As Of: 2020 Q2

Debt Inflows

Equity Inflows

-250

-125

0

125

250

375

500

-250

-125

0

125

250

375

500

2010 2012 2014 2016 2018 2020

 Net Flows

Bank Inflows

3.7.3.4 Foreign Investor Capital Inflows to EMEs

Billions of US$ Billions of US$

Source: IMF, Haver Analytics

As Of: 2020 Q2

Portfolio Inflows

Foreign Direct Investment

3.7.3.5 Foreign Investor Portfolio Inflows to EMEs

3.7.3.4 Foreign Investor Capital Inflows to EMEs to aggressive policy responses and optimism 

around the development of a COVID-19 vaccine 

and treatment methods, as well as expectations 

that full-scale lockdowns may be avoided. At 

the same time, local currency bond spreads 

have also compressed amid the launch of 

local currency bond purchase programs by 

some emerging market central banks aimed at 

providing liquidity and supporting local bond 

markets. Despite this compression in spreads, 

the outlook for emerging market credit has 

deteriorated over the past year, and Fitch 

downgraded a record number of sovereigns in 

the first half of 2020. 

While net capital flows to EMEs remained 

positive in the first quarter of 2020, portfolio 

flows turned negative for the first time since 

2015 (Chart 3.7.3.4). During this period, EMEs 

witnessed over $50 billion of equity portfolio 

outflows, the largest recorded quarterly 

outflow in over 15 years, with China and Korea 

accounting for nearly half (Chart 3.7.3.5). In 

aggregate, equity flows stabilized in the second 

quarter of 2020, which can largely be attributed 

to sizable inflows into China. Foreign direct 

investment (FDI) and bank flows, which tend 

to be less volatile, remained positive in the 

first quarter of 2020 at $116 billion and $84 

billion, respectively. While EMEs continued to 

see robust FDI inflows in the second quarter of 

2020, bank inflows fell to $5 billion, as Brazil 

reported large bank outflows. 

Low-Income Countries

The G20 and other organizations took action 

to relieve credit stress on low-income countries 

in response to the COVID-19 crisis. In May 

2020, the G20 and Paris Club initiated the Debt 

Service Suspension Initiative (DSSI), whereby 

official bilateral creditors were encouraged 

to postpone debt service payments to eligible 

low-income countries through the end of 

2020. In October, the G20 and Paris Club 

extended the DSSI through June 2021, with 

possible extensions through the end of 2021. 

As of September 30, 2020, 43 countries have 

requested forbearance under the DSSI, freeing 

up $5 billion in fiscal space to fund social, 
138 2020 FSOC // Annual Report

3.7.3.6 Chinese Overseas Lending

Billions of US$ Billions of US$

Source: State Administration of 

Foreign Exchange, Haver Analytics

As Of: 2019

Note: FDI (Debt) reported 

from 2011 onwards.

0

250

500

750

1000

1250

1500

1750

0

250

500

750

1000

1250

1500

1750

2004 2007 2010 2013 2016 2019

Loans

Trade Credit

FDI (Debt)

3.7.3.6 Chinese Overseas Lending health, and economic measures to respond 

to the pandemic. Additionally, the IMF has 

doubled access to its emergency financing 

facilities, allowing it to meet increased demand 

for financial assistance during the pandemic. 

These measures should help support lowincome countries that do not have access to 

the same monetary and fiscal policy tools as 

advanced economies. Nevertheless, additional 

debt relief measures may be necessary, and any 

restructuring could be complicated due to the 

increasing reliance on non-Paris Club creditors. 

Over the past decade, non-Paris Club creditors 

have become a significant source of external 

financing for low-income countries. In 

particular, China has significantly increased 

overseas lending as part of its Belt and Road 

Initiative. According to the People’s Bank of 

China (PBOC), Chinese overseas lending in 

the form of direct loans, trade credit, and 

FDI debt exceeded $1.5 trillion as of year-end 

2019 (Chart 3.7.3.6). However, there is limited 

transparency regarding the destination and 

terms of Chinese overseas lending, and the 

actual amount of lending may significantly 

exceed what is reported. While China has 

agreed to participate in the G20’s temporary 

DSSI, the full scope of participation in unclear. 

For example, China has not suspended debt 

payments due to China Development Bank 

(CDB) as part of the official sector DSSI, 

instead classifying CDB as a commercial 

creditor. The lack of transparency on Chinese 

overseas lending and on its participation in the 

current DSSI potentially complicates any future 

debt relief initiatives. 

At the same time, low-income countries have 

increasingly relied on commercial creditors as 

a source of financing via the Eurobond market. 

According to the IMF, the issuance of foreign 

currency-denominated bonds by low-income 

countries has almost tripled from an average of 

$6 billion between 2012 and 2016 to an average 

of $16 billion between 2017 and 2018. While 

the G20 has called upon private creditors to 

participate in debt relief efforts, private sector 

participation has been limited. 
Financial Developments 139

Percent As Of: Sep-2020

3.7.3.9 Chinese Credit Growth

Source: PBOC, CCDC, 

Haver Analytics, Staff 

Calculations

5

10

15

20

25

5

10

15

20

25

2013 2014 2015 2016 2017 2018 2019 2020

Total Social Financing (New Definition)

Total Social Financing (Old Definition)

Percent

Note: Calculated as the year-over-year percentage change in total 

social financing (TSF) flows since 2002. TSF refers to the total volume 

of financing provided by the financial system to the real economy. TSF 

(old definition) excludes loan write-offs, ABS of depository institutions, 

and local government special bonds.

0 0

40

80

120

160

200

240

2008 2010 2012 2014 2016 2018 2020

3.7.3.8 Credit to the Chinese Nonfinancial Private Sector 

Percent of GDP As Of: 2020 Q1 Percent of GDP

Source: China National Bureau of 

Statistics, BIS, Haver Analytics Note: Rolling 4-quarter sum of GDP.

Nonbank Lending

Bank Lending

Percent As Of: 2020 Q3

3.7.3.7 Chinese Real GDP Growth and its Components

Source: China National Bureau 

of Statistics, Haver Analytics

-10

-5

0

5

10

15

20

-10

-5

0

5

10

15

20

2005 2008 2011 2014 2017 2020

Total

Percent

Manufacturing

Services

Note: Year-over-year percentage change. 

Agriculture

3.7.3.9 Chinese Credit Growth

3.7.3.8 Credit to the Chinese Nonfinancial Private Sector

3.7.3.7 Chinese Real GDP Growth and its Components China 

In response to the COVID-19 outbreak, 

Chinese authorities imposed strict containment 

measures, which led to a sharp drop in 

economic activity. Chinese economic growth, 

which has been slowing in recent years, 

contracted by 6.8 percent year-over-year in the 

first quarter of 2020 (Chart 3.7.3.7). To support 

the Chinese economy through the COVID-19 

pandemic, the Chinese government announced 

RMB 4.6 trillion of discretionary fiscal 

spending, worth roughly 5 percent of GDP. 

Concurrently, the PBOC provided moderate 

stimulus and acted to safeguard financial 

market stability. 

In mid-February, Chinese authorities began 

to lift strict lockdown measures outside of 

Hubei Province, and by the third quarter 

of 2020, real GDP growth rebounded to 4.9 

percent year-over-year. Despite the robust 

rebound in Chinese manufacturing, the 

domestic consumption recovery was muted, and 

household consumption remained below prepandemic levels. 

Prior to the COVID-19 pandemic, Chinese 

authorities were taking steps to encourage 

financial deleveraging, leading to a 

stabilization in the level of credit provided to 

the nonfinancial private sector as a percent of 

GDP. Nevertheless, the stock of nonfinancial 

private sector debt continued to increase and 

nonfinancial debt remained above 200 percent 

of GDP as of the fourth quarter of 2019 (Chart 

3.7.3.8). In 2020, Chinese regulators paused 

their deleveraging campaign as authorities try 

to balance COVID-19 related credit support 

with longer-term financial stability goals. As a 

result, Chinese credit growth, which had been 

trending downward in recent years, accelerated 

considerably between March and September 

2020 (Chart 3.7.3.9). A significant portion 

of recent credit growth may be attributed to 

authorities calling on commercial banks to 

forgo upwards of RMB 1.5 trillion in profits in 

2020 to support firms and the real economy 

by offering lower lending rates, cutting fees, 

deferring loan repayments, and granting more 
140 2020 FSOC // Annual Report

In May 2020, Chinese authorities introduced a 

national security law for Hong Kong in an attempt 

to quell anti-government protests. The law, which 

was passed by the National People’s Congress in 

June, bypasses Hong Kong’s Legislative Council 

and criminalizes any act of secession, subversion, 

terrorism, or collusion with foreign or external 

forces. The broad nature of the National Security 

Law gives Beijing additional control over Hong 

Kong’s judicial system, eroding the city’s rule of law, 

and threatens the city’s status as a global financial 

center. 

While the Hong Kong dollar initially came under 

pressure in the forward markets, fears of significant 

capital outflows have not materialized, as investors 

are still assessing the impact of the National Security 

Law. Instead, possibly at the direction of Chinese 

authorities, inflows from mainland investors into 

Hong Kong equity markets have supported financial 

markets, and the Hong Kong dollar has been 

trading at the strong end of its trading band in 

recent months. 

unsecured loans. Additionally, the cut in reserve 

requirements and a seeming commitment by the 

PBOC to provide liquidity may be helping banks to 

boost lending. At the same time, the government 

is supporting small and midsize banks to replenish 

their capital through various channels, including 

issuing ordinary shares, preferred shares, and 

perpetual bonds, in addition to the new special local 

government bonds.

Prior to the COVID-19 pandemic, the official NPL 

ratio at Chinese commercial banks stood at 1.9 

percent, although many market observers believe 

that the true NPL ratio was materially higher. Relief 

efforts to help support SMEs during the COVID-19 

pandemic may have further exacerbated any 

underreporting of NPLs as current rules allow banks 

to book interest payments even though the loans 

were in forbearance. Consequently, the aggregate 

NPL ratio for Chinese commercial banks is little 

changed through the second quarter of 2020. 

In June 2020, Chinese authorities stated that they 

will accelerate the settlement of NPLs in the second 

half of 2020, urging banks to make a bona fide 

classification of their assets. At the same time, China 

Banking and Insurance Regulatory Commission 

authorities stated that some small- and mediumsized financial institutions are facing deteriorating 

asset quality and NPLs are estimated to increase 

by approximately 50 percent by year-end. Chinese 

central authorities will also allow local governments 

to recapitalize small and medium banks by issuing 

new special local government bonds. 

On January 15, 2020, the United States and China 

signed the Phase One trade agreement, whereby 

China agreed to increase purchases of American 

products and services in 2020 and 2021 by at least 

$200 billion above 2017 levels, and the United States 

agreed to lower some tariffs on Chinese goods. In 

addition, China committed to provide improved 

access to China’s financial services market for U.S. 

companies and provide stronger legal protections 

for U.S. companies operating in China, particularly 

concerning intellectual property rights and 

technology transfer. 
Council Activities and Regulatory Developments 141

4 Council Activities and 

Regulatory Developments

4.1 Select Policy Responses to Support 

the Economy

As parts of the economy shut down and stress 

spread through financial markets, policymakers 

acted to minimize the health and economic 

effects of the pandemic. 

CARES Act

On March 27, the CARES Act was signed 

into law. The CARES Act authorized over $2 

trillion to address COVID-19 and to support 

the economy, households, businesses, and other 

entities. The CARES Act supported businesses 

through programs such as the PPP, which 

provides a direct incentive for small businesses 

to keep their workers on the payroll, along 

with significant additional funding for existing 

loan programs. The CARES Act also supported 

households and businesses through expanded 

unemployment benefits, cash payments to 

certain eligible households, several types of tax 

relief, forbearance for certain homeowners, 

and foreclosure and evictions moratoria for 

certain households. The statute also provided 

financial assistance to airlines and related 

firms and businesses critical to maintaining 

national security; financial regulatory relief for 

community banks and certain other financial 

institutions; and appropriated $454 billion 

to Treasury to support certain facilities and 

programs established by the Federal Reserve. In 

addition, the CARES Act provided significant 

funding for state and local governments and 

health care providers. 

Monetary Policy 

The FOMC lowered rates on March 3 and again 

on March 15 to the current level close to zero. 

The FOMC stated that it would keep rates low 

until it was confident that the economy had 

weathered recent events and was on track to 

achieve its maximum employment and price 

stability goals. It also stated that it was prepared 

to use its full range of tools to support the flow of credit 

to households and businesses in support of its policy 

mandates. In addition, the FOMC engaged in Treasury 

and agency MBS purchases to support smooth market 

functioning. 

Liquidity Facilities and Programs 

To address the liquidity squeeze associated with 

investors’ shift to cash and liquid assets, the Federal 

Reserve established liquidity facilities and programs 

under section 13(3) of the Federal Reserve Act, with 

Treasury’s approval. 

On March 17, the Federal Reserve announced the 

establishment of the Commercial Paper Funding Facility 

(CPFF) to ensure the functioning of the commercial 

paper market so that a broad range of companies 

would have access to credit and funding to meet their 

operational needs. Treasury provided $10 billion of 

credit protection to the Federal Reserve. The CPFF is 

scheduled to expire on March 17, 2021.

Also on March 17, the Federal Reserve announced the 

establishment of the Primary Dealer Credit Facility 

(PDCF) to offer overnight and term funding to primary 

dealers so that they may support market functioning and 

facilitate credit availability. The PDCF is scheduled to 

expire on December 31, 2020.

On March 18, the Federal Reserve announced the 

establishment of the MMLF to support market 

functioning and credit provision to the economy by 

helping money market funds meet redemption demands 

by investors. The Treasury Department provided $10 

billion of credit protection to the Federal Reserve. The 

MMLF is scheduled to expire on December 31, 2020. 

On April 9, the Federal Reserve announced the 

establishment of the Municipal Liquidity Facility (MLF) 

to assist eligible state and local governments manage 

cash flow issues by offering up to $500 billion in lending. 

Treasury provided $35 billion of credit protection to 

the Federal Reserve. The MLF is scheduled to expire on 

December 31, 2020. 
142 2020 FSOC // Annual Report

Reserve for the MSLP. The facilities are scheduled to 

expire on December 31, 2020.

Offshore Dollar Funding Markets 

The Federal Reserve also acted to provide liquidity 

to offshore dollar funding markets that were under 

stress. 

On March 15, the Federal Reserve, in coordination 

with the Bank of Canada, Bank of England, Bank 

of Japan, the European Central Bank, and the Swiss 

National Bank, announced two changes to enhance 

standing U.S. dollar swap arrangements: pricing was 

lowered to OIS +25 basis points and 84-day maturity 

auctions commenced.

On March 19, the Federal Reserve announced the 

establishment of temporary U.S. dollar liquidity 

arrangements with the Reserve Bank of Australia, 

the Banco Central do Brasil, the Danmarks 

Nationalbank (Denmark), the Bank of Korea, the 

Banco de Mexico, the Norges Bank (Norway), 

the Reserve Bank of New Zealand, the Monetary 

Authority of Singapore, and the Sveriges Riksbank 

(Sweden). Like the existing arrangements with 

other central banks, the facilities help address 

strains in global U.S. dollar funding markets. 

On March 20, the Federal Reserve, again in 

coordination with the Bank of Canada, Bank of 

England, Bank of Japan, the European Central 

Bank, and the Swiss National Bank, announced that 

one-week swaps would be offered daily.

On March 31, the Federal Reserve announced the 

establishment of the temporary FIMA Repo Facility. 

The FIMA Repo Facility allows certain central banks 

and other international monetary authorities to 

enter into repurchase agreements with the Federal 

Reserve. In addition to supporting global U.S. dollar 

funding markets, the facility is intended to support 

the smooth functioning of the U.S. Treasury market 

by offering an alternative source of U.S. dollars to 

sales of Treasury securities in the open market. 

Federal Reserve Balance Sheet 

As a result of its policy actions, the Federal Reserve’s 

balance sheet has increased significantly, totaling 

over $7 trillion in assets as of September 30, 2020 

Credit Market Facilities and Programs 

The Federal Reserve also established several 

facilities and programs under section 13(3) of the 

Federal Reserve Act to ensure the flow of credit to 

households, nonprofits, and businesses. 

On March 23, the Federal Reserve announced the 

establishment of the Term Asset-Backed Securities 

Loan Facility (TALF) to support the flow of credit 

by enabling the issuance of asset-backed securities 

backed by certain types of loans. Treasury provided 

$10 billion of credit protection to the Federal 

Reserve. The TALF is scheduled to expire on 

December 31, 2020. 

On March 23, the Federal Reserve also announced 

the establishment of the Primary Market Corporate 

Credit Facility (PMCCF) and the Secondary Market 

Corporate Credit Facility (SMCCF). The PMCCF 

supports credit to larger employers for bond 

and syndicated loan issuance, and the SMCCF 

supports credit to large employers by supporting 

liquidity for outstanding corporate bonds. Both 

facilities were initially open to investment grade 

companies and, on April 9, extended to include 

certain high-yield, rated companies that were 

investment grade as of March 22, 2020. Treasury 

provided $50 billion of credit protection to the 

Federal Reserve for the PMCCF and $25 billion for 

the SMCCF. Both facilities are scheduled to expire 

on December 31, 2020. 

On April 9, the Federal Reserve announced 

the establishment of the Paycheck Protection 

Program Lending Facility (PPPLF) to increase the 

effectiveness of the SBA’s PPP by supplying liquidity 

to financial institutions participating in PPP. The 

PPPLF extends credit to eligible financial institutions 

that pledge PPP loans as collateral. The PPPLF is 

scheduled to expire on December 31, 2020. 

On April 9, the Federal Reserve also announced the 

establishment of the Main Street Lending Program 

(MSLP) to support lending to small and mediumsized businesses. The Federal Reserve expanded 

the MSLP to include nonprofits in July. The MSLP 

operates through five facilities. Treasury provided 

$75 billion in credit protection to the Federal 
Council Activities and Regulatory Developments 143

0

50

100

150

200

250

300

0

50

100

150

200

250

300

Mar:2020 May:2020 Jul:2020 Sep:2020

4.1.2 Net Portfolio Holdings of 13(3) Facilities

Billions of US$ Billions of US$

Source: Federal Reserve, Haver Analytics

As Of: 30-Sep-2020

Note: Wednesday level.

PMCCF & SMCCF

PPP

MMLF

TALF

CPFF MLF

PDCF

MSLF

0

1

2

3

4

5

6

7

8

0

1

2

3

4

5

6

7

8

2008 2010 2012 2014 2016 2018 2020

4.1.1 Total Assets of the Federal Reserve

Trillions of US$ Trillions of US$

Source: Federal Reserve, FRED

As Of: 30-Sep-2020

Note: Wednesday level.

4.1.2 Net Portfolio Holdings of 13(3) Facilities 

4.1.1 Total Assets of the Federal Reserve (Chart 4.1.1). Most of the increase in 2020 

is due to its Treasury and MBS purchases. 

After peaking at approximately $130 billion 

early in the crisis, the Federal Reserve’s 

purchases in support of its liquidity and credit 

facilities were approximately $100 billion 

as of September 1, 2020 (Chart 4.1.2). The 

peak amount outstanding for the current 

facilities is significantly below the peak amount 

outstanding for similar facilities that were 

created during the 2008 financial crisis; many 

of the credit facilities, however, were not created 

in the 2008 financial crisis. 

4.2 Council Activities

4.2.1 Risk Monitoring and Regulatory 

Coordination

The Dodd-Frank Act charges the Council 

with the responsibility to identify risks to 

U.S. financial stability, promote market 

discipline, and respond to emerging threats 

to the stability of the U.S. financial system. 

The Council also has a duty to facilitate 

information sharing and coordination among 

member agencies and other federal and state 

agencies regarding financial services policy 

and other developments. The Council regularly 

examines significant market developments and 

structural issues within the financial system. 

This risk monitoring process is facilitated by 

the Council’s Systemic Risk Committee (SRC), 

whose participants are primarily member 

agency staff in supervisory, monitoring, 

examination, and policy roles. The SRC serves 

as a forum for member agency staff to identify 

and analyze potential risks, which may extend 

beyond the jurisdiction of any one agency. 

The Council’s Regulation and Resolution 

Committee (RRC) also supports the Council in 

its duties to identify potential gaps in regulation 

that could pose risks to U.S. financial stability.

The Council leveraged this infrastructure to 

respond to the COVID-19 pandemic. With 

the onset of the market stresses in March, the 

frequency of SRC meetings was increased from 

monthly to weekly or bi-weekly for the next 
144 2020 FSOC // Annual Report

six months to facilitate coordination, informationsharing, and analysis of key risk topics. 

On March 30, 2020, the Council also convened a 

principals-level task force on nonbank mortgage 

liquidity to assess potential liquidity strains on 

nonbank originators and servicers. Following up 

on the task force discussion, the Council formed a 

staff-level working group that included non-Council 

agencies to facilitate interagency coordination, 

additional market monitoring, and enhanced 

default planning for the possible failure and 

resolution of nonbank mortgage companies.

In July 2020, the Council established a working 

group composed of staff from Treasury, the Federal 

Reserve, and FHFA to assess potential risks related 

to the provision of secondary mortgage market 

liquidity. The working group focused in particular 

on the activities of Fannie Mae and Freddie Mac as 

the dominant private secondary market providers 

of liquidity through their purchase of mortgages 

for securitization and sale as guaranteed MBS. The 

working group assessed potential financial stability 

risks in the secondary market, as well as whether 

those risks are appropriately addressed by regulatory 

mitigants. The working group’s analysis informed 

the September 25, 2020 Council statement discussed 

below. 

4.2.2 Determinations Regarding Nonbank Financial 

Companies and Activities-Based Approach

One of the Council’s statutory authorities is to 

subject a nonbank financial company to supervision 

by the Federal Reserve and enhanced prudential 

standards if the company’s material financial 

distress—or nature, scope, size, scale, concentration, 

interconnectedness, or mix of its activities—could 

pose a threat to U.S. financial stability. The DoddFrank Act sets forth the standard for the Council’s 

determinations regarding nonbank financial 

companies and requires the Council to take 

into account ten specific considerations and any 

other risk-related factors that the Council deems 

appropriate when evaluating those companies.

As of the date of this report, no nonbank financial 

companies are subject to a final determination by 

the Council under Section 113 of the Dodd-Frank 

Act or are under review in Stage 1 or Stage 2 of the 

Council’s designation process. 

On December 4, 2019, the Council issued final 

interpretive guidance replacing the Council’s 

prior interpretive guidance on nonbank financial 

company determinations, which was issued in 

2012. The new interpretive guidance describes the 

approach the Council intends to take in prioritizing 

its work to identify and address potential risks to 

U.S. financial stability using an activities-based 

approach and enhances the analytical rigor and 

transparency in the processes the Council intends to 

follow if it were to consider making a determination 

to subject a nonbank financial company to 

supervision by Federal Reserve. 

On September 25, 2020, the Council approved a 

statement summarizing its review of the secondary 

mortgage market and presenting its key findings. 

As noted above, the Council’s review focused in 

particular on the activities of the Enterprises. 

In conducting the review, the Council applied 

the framework for an activities-based approach 

described in the December 2019 final interpretive 

guidance.

The Council’s review noted the central role the 

Enterprises continue to play in the national housing 

finance markets, and found that any distress at the 

Enterprises that affected their secondary mortgage 

market activities, including their ability to perform 

their guarantee and other obligations on their MBS 

and other liabilities, could pose a risk to financial 

stability, if risks are not properly mitigated. The 

Council’s review also considered whether the 

regulatory framework of the FHFA would adequately 

mitigate this potential risk posed by the Enterprises. 

FHFA’s recent capital proposal was central to the 

Council’s analysis. The Council considered whether 

the proposed capital rule is appropriately sized and 

structured, given the Enterprises’ risks and their key 

role in the housing finance system, and also whether 

the proposed capital rule promotes stability in the 

broader housing finance system (see Box F).
Council Activities and Regulatory Developments 145

4.2.3 Operations of the Council

The Dodd-Frank Act requires the Council to 

convene no less than quarterly. The Council 

held [five] meetings in 2020, including at least 

one each quarter. The meetings bring Council 

members together to discuss and analyze market 

developments, potential threats to financial stability, 

and financial regulatory issues. Although the 

Council’s work frequently involves confidential 

supervisory and sensitive information, the Council 

is committed to conducting its business as openly 

and transparently as practicable. Consistent with 

the Council’s transparency policy, the Council 

opens its meetings to the public whenever possible. 

The Council held a public session at [three] of 

its meetings in 2020. Approximately every two 

weeks, the Council’s Deputies Committee, which 

is composed of senior representatives of Council 

members, convenes to discuss the Council’s 

agenda and to coordinate and oversee the work 

of the Council’s five other committees. The other 

committees are the Data Committee; the Financial 

Market Utilities and Payment, Clearing, and 

Settlement Activities Committee; the Nonbank 

Financial Companies Designations Committee; 

the RRC; and the SRC. The Council adopted its 

eleventh budget in 2020. 

4.3 Safety and Soundness

4.3.1 Enhanced Capital and Prudential Standards 

and Supervision

On January 24, 2020, the OCC, Federal Reserve, 

and FDIC issued a final rule implementing a 

new approach—the standardized approach for 

counterparty credit risk (SA-CCR)—for calculating 

the exposure amount of derivative contracts under 

these agencies’ regulatory capital rule. Under 

the final rule, an advanced approaches banking 

organization may use SA-CCR or the internal 

models methodology to calculate its advanced 

approaches total risk-weighted assets, and must 

use SA-CCR, instead of the current exposure 

methodology, to calculate its standardized total 

risk-weighted assets. A non-advanced approaches 

banking organization may use the current 

exposure methodology or SA-CCR to calculate its 

standardized total risk-weighted assets. The final 

rule also implements SA-CCR in other aspects of 

the capital rule. The final rule requires an advanced 

approaches banking organization to use SA-CCR 

to determine the exposure amount of derivative 

contracts included in the banking organization’s 

total leverage exposure, the denominator of 

the supplementary leverage ratio. In addition, 

the final rule incorporates SA-CCR into the 

cleared transactions framework and makes other 

amendments, generally with respect to cleared 

transactions. The final rule requires advanced 

approaches banking organizations to use SA-CCR 

beginning January 1, 2022 and permits the option of 

using SA-CCR as early as March 31, 2020. 

On January 27, 2020, the OCC, Federal Reserve, 

and FDIC issued a final rule to implement section 

402 of the Economic Growth, Regulatory Relief, 

and Consumer Protection Act (EGRRCPA). Section 

402 directs these agencies to amend the regulatory 

capital rule to exclude from the supplementary 

leverage ratio certain funds of banking 

organizations deposited with central banks if the 

banking organization is predominantly engaged in 

custody, safekeeping, and asset servicing activities.

Actions Relating to CARES Act and Federal 

Reserve Facilities

Agencies issued a number of regulations pertaining 

to the CARES Act and facilities that were established 

by the Federal Reserve pursuant to section 13(3) of 

the Federal Reserve Act, in response to economic 

disruptions caused by COVID-19 and volatility in 

U.S. financial markets.

On March 23, 2020, the Federal Reserve, OCC, and 

FDIC issued an interim final rule to allow banking 

organizations to neutralize the regulatory capital 

effects of participating in the MMLF. The MMLF, 

established on March 18, 2020, authorized the 

Federal Reserve Bank of Boston to extend nonrecourse loans to eligible financial institutions 

to purchase certain types of assets from money 

market mutual funds in order to provide liquidity 

to the money market sector to help stabilize the 

financial system. This treatment would extend to the 

community bank leverage ratio.

On April 13, 2020, the OCC, Federal Reserve, and 

FDIC issued an interim final rule to allow banking 
146 2020 FSOC // Annual Report

organizations to neutralize the regulatory capital 

effects of participating in the PPPLF. Under the 

PPPLF, established on April 9, 2020, each of the 

Federal Reserve Banks would extend non-recourse 

loans to eligible financial institutions to fund 

loans guaranteed by the SBA under the PPP. This 

treatment is similar to the treatment extended 

previously by the agencies in connection with the 

MMLF. In addition, as mandated by section 1102 

of the CARES Act, loans originated under the 

PPP will receive a zero percent risk weight under 

the agencies’ regulatory capital rule, regardless of 

whether the lender participates in the PPPLF. 

Beginning on April 2, 2020, the SBA issued a 

number of interim final rules and guidance 

documents to implement the PPP, a new forgivable 

loan program created by the CARES Act. The 

CARES Act provides for forgiveness of up to the 

full principal amount of PPP loans, which are also 

guaranteed by the SBA. The PPP provided economic 

relief to small businesses nationwide adversely 

impacted by the economic effects of COVID-19. 

On April 23, 2020, the OCC, Federal Reserve, and 

FDIC issued an interim final rule making temporary 

changes to the community bank leverage ratio 

framework, pursuant to section 4012 of the CARES 

Act. Under the temporary change, a banking 

organization with a leverage ratio of 8 percent or 

greater (and that meets other qualifying criteria) 

may elect to use the community bank leverage 

ratio framework. The statutory interim final rule 

also established a two-quarter grace period for a 

qualifying community banking organization whose 

leverage ratio falls below the 8-percent community 

bank leverage ratio requirement, so long as the 

banking organization maintains a leverage ratio of 

7 percent or greater. The temporary changes to the 

community bank leverage ratio framework would 

cease to be effective as of the earlier of December 

31, 2020, or the termination date of the national 

emergency concerning COVID-19. 

Also on April 23, 2020, the OCC, Federal Reserve, 

and FDIC issued an interim final rule that provides 

a graduated transition to a community bank 

leverage ratio requirement of 9 percent from the 

temporary 8-percent community bank leverage 

ratio requirement (transition interim final rule). 

The transition interim final rule provides that 

the community bank leverage ratio will be 8 

percent through December 31, 2020, in the event 

the statutory interim final rule terminates before 

December 31, 2020, 8.5 percent through calendar 

year 2021, and 9 percent thereafter. The transition 

interim final rule also maintains a two-quarter 

grace period for a qualifying community banking 

organization whose leverage ratio falls no more than 

1 percentage point below the applicable community 

bank leverage ratio requirement. The agencies 

issued the transition interim final rule to provide 

community banking organizations with sufficient 

time and clarity to meet the 9 percent leverage ratio 

requirement under the community bank leverage 

ratio framework while they also focus on supporting 

lending to creditworthy households and businesses 

given the recent strains on the U.S. economy caused 

by COVID-19.

On April 27, 2020, the NCUA issued an interim final 

rule to make a conforming amendment to its capital 

adequacy regulation following the enactment of 

the CARES Act. The CARES Act requires that PPP 

loans receive a zero percent risk weighting under the 

NCUA’s risk-based capital requirements. To reflect 

the statutory requirement, the interim final rule 

amends the NCUA’s capital adequacy regulation 

to provide that covered PPP loans receive a zero 

percent risk weight. The rule provides that if the 

covered loan is pledged as collateral for a nonrecourse loan that is provided as part of the PPPLF, 

the covered loan can be excluded from a credit 

union’s calculation of total assets for the purposes 

of calculating its net worth ratio. The rule also 

makes a conforming amendment to the definition 

of commercial loan in the NCUA’s member business 

loans and commercial lending rule. In an additional 

interim final rule issued on April 29, the NCUA 

made further amendments conforming to the 

CARES Act, and introduced changes intended to 

make it easier for credit unions to join the NCUA’s 

Central Liquidity Facility. 

On May 6, 2020, the OCC, Federal Reserve, and 

FDIC issued an interim final rule to require banking 

organizations to neutralize the effect under the LCR 

rule of participating in the MMLF and PPPLF. The 
Council Activities and Regulatory Developments 147

rule was issued to facilitate the use of these Federal 

Reserve facilities, and to ensure that the effects of 

their use are consistent and predictable under the 

LCR rule.

On June 26, 2020, the FDIC issued a final rule 

that mitigates the deposit insurance assessment 

effects of participating in the PPPLF, MMLF, and 

PPP. Specifically, the rule removes the effect of 

participation in the PPP and borrowings under the 

PPPLF on various risk measures used to calculate 

the assessment rate of an insured depository 

institution; removes the effect of participation in the 

PPP and MMLF program on certain adjustments 

to an insured depository institution’s assessment 

rate; provides an offset to an insured depository 

institution’s assessment for the increase to its 

assessment base attributable to participation in 

the PPP and MMLF; and removes the effect of 

participation in the PPP and MMLF when classifying 

insured depository institutions as small, large, or 

highly complex for assessment purposes.

Additional Guidance and Regulatory Actions in 

Response to COVID-19

Finally, agencies issued numerous additional 

guidance statements and regulatory changes in 

response to the economic and financial impact 

of COVID-19, including temporary relaxations of 

prudential standards and supervisory requirements 

and modifications of compliance deadlines. 

In the second week of March 2020, the Federal 

Reserve encouraged financial institutions to 

review its SR letter 13-6 / CA letter 13-3, published 

in March 2013, entitled “Supervisory Practices 

Regarding Banking Organizations and their 

Borrowers and Other Customers Affected by a 

Major Disaster or Emergency.” On March 13, the 

FDIC issued Financial Institution Letter 17-2020, 

encouraging financial institutions supervised by 

the FDIC to take prudent steps to assist customers 

and communities affected by COVID-19. Agencies 

encouraged banking organizations to use the 

Federal Reserve discount window and the capital 

and liquidity buffers designed to enable banking 

organizations to continue to serve households and 

businesses and support the economy in adverse 

situations. 

On March 20, 2020, the Federal Reserve, OCC, 

and FDIC issued an interim final rule revising 

the definition of eligible retained income for all 

depository institutions, BHCs, and savings and 

loan holding companies subject to the agencies’ 

capital rule. The revised definition would make any 

automatic limitations on capital distributions that 

could apply under the agencies’ capital rules more 

gradual. The definition was revised again by an 

interim final rule issued the following week to make 

any automatic limitations on capital distributions 

that could apply under the total loss-absorbing 

capacity (TLAC) rule more gradually. 

On March 22, 2020, the Federal Reserve, CSBS, 

CFPB, FDIC, NCUA, and OCC issued an interagency 

statement encouraging financial institutions to offer 

prudent loan modification programs to mitigate 

adverse impacts of COVID-19 on borrowers, improve 

loan performance, and reduce credit risk. Agencies 

noted that banks may presume that borrowers are 

not experiencing financial difficulty when shortterm loan modifications (for example, six months) 

are made on a good faith basis in response to 

COVID-19. If those borrowers were current prior to 

any relief provided, the loan modifications are not 

considered troubled debt restructurings (TDRs). 

Such modifications include payment deferrals, fee 

waivers, extensions of repayment terms, or other 

insignificant delays in payment. Agencies said 

examiners would not automatically adversely risk 

rate credits that are affected by loan modifications, 

and regardless of whether or not modifications 

are considered TDRs, or are adversely classified, 

examiners would not criticize prudent loan 

modification efforts. In the same week, the Federal 

Reserve outlined adjustments to its supervisory 

approach that would prioritize outreach and 

monitoring while temporarily reducing examination 

activities, particularly for smaller banks. Large 

banks were instructed to submit their capital analysis 

plans, while additional time would be granted to 

resolve non-critical, existing supervisory findings.

On March 25, 2020, the OCC issued an interim final 

rule revising the agency’s short-term investment 

fund (STIF) rule for national banks acting in a 

fiduciary capacity. The rule allowed the OCC to 

authorize banks to temporarily extend the maturity 
148 2020 FSOC // Annual Report

limits of STIFs in light of a period of significant 

stress negatively affecting the ability of banks to 

operate in compliance with the maturity limits 

identified in the rule. The OCC simultaneously 

announced an order temporarily extending the 

maturity limits for STIFs affected by the market 

effects of COVID-19 upon certain conditions, 

including a determination by the bank that it would 

be acting in the best interests of the STIF under 

applicable law. The order extended the weighted 

average maturity and weighted average life of STIF 

investment portfolios to allow national banks to 

operate affected STIFs on a limited-time basis with 

increased maturity limits until July 20, 2020.

On March 27, 2020, the Federal Reserve, OCC, and 

FDIC announced that institutions were permitted 

to adopt early the SA-CCR rule for the reporting 

period ending March 31, on a best-efforts basis, 

to help improve market liquidity. SA-CCR was 

previously set to go into effect on April 1, 2020. On 

April 7, the Federal Reserve, FDIC, NCUA, OCC, 

and CFPB issued the “Interagency Statement on 

Loan Modifications and Reporting for Financial 

Institutions Working with Customers Affected by 

the Coronavirus (Revised)” to clarify the interaction 

between the March 22, 2020, interagency statement 

and section 4013 of the CARES Act. Section 4013 

created a forbearance program for federally backed 

mortgage loans, protected borrowers from negative 

credit reporting due to loan accommodations 

related to the National Emergency, and provided 

financial institutions the option to temporarily 

suspend certain requirements under the U.S. 

generally accepted accounting principles (GAAP) 

related to TDR for a limited period of time to 

account for the effects of COVID-19.

On April 14, 2020, the Federal Reserve issued an 

interim final rule that revises, on a temporary basis 

for BHCs, savings and loan holding companies, 

and U.S. intermediate holding companies of 

foreign banking organizations, the calculation 

of total leverage exposure, the denominator of 

the supplementary leverage ratio in the Federal 

Reserve’s capital rule, to exclude the on-balance 

sheet amounts of U.S. Treasury securities and 

deposits at Federal Reserve Banks. This exclusion 

has immediate effect and will remain in effect 

through March 31, 2021. The rule was adopted to 

allow BHCs, savings and loan holding companies, 

and intermediate holding companies subject to the 

supplementary leverage ratio increased flexibility to 

continue to act as financial intermediaries. The tier 

1 leverage ratio is not affected by this rulemaking.

On April 17, 2020, the FDIC, OCC, and Federal 

Reserve issued an interim final rule that allows 

institutions supervised by the agencies to defer 

obtaining an appraisal or evaluation for up to 120 

days after the closing of certain residential and 

commercial real estate loans.

On April 21, 2020, the NCUA issued a temporary 

final rule temporarily raising the maximum 

aggregate amount of loan participations that a 

federally insured credit union (FICU) may purchase 

from a single originating lender to the greater of 

$5,000,000 or 200 percent of the FICU’s net worth. 

The NCUA also temporarily suspended limitations 

on the eligible obligations that a federal credit 

union (FCU) may purchase and hold. In addition, 

given physical distancing policies implemented in 

response to the crisis, the agency tolled the required 

timeframes for the occupancy or disposition of 

properties not being used for FCU business or 

that have been abandoned. These temporary 

modifications were set in place until December 31, 

2020, unless extended.

On May 28, 2020, the Federal Reserve issued a 

final rule that amends compliance dates related to 

Single-Counterparty Credit Limits for BHCs and 

Foreign Banking Organizations (final SCCL rule), 

regarding the SCCL applicable to a foreign banking 

organization’s combined U.S. operations only. The 

rule changed initial compliance dates of January 1, 

2020, for a foreign banking organization that has 

the characteristics of a global systemically important 

banking organization (G-SIB), and July 1, 2020, for 

any other foreign banking organization subject to 

the final SCCL rule, to July 1, 2021 and January 1, 

2022, respectively.

Also on May 28, 2020, the NCUA issued an 

interim final rule that temporarily modifies its 

prompt corrective action (PCA) regulations to 

help ensure that FICUs would remain operational 
Council Activities and Regulatory Developments 149

and liquid during the COVID-19 crisis. The first 

temporary change enables the agency to issue 

an order applicable to all FICUs to waive the 

earnings retention requirement for any FICU that 

is classified as adequately capitalized. The second 

modifies its regulations with respect to the specific 

documentation required for net worth restoration 

plans for FICUs that become undercapitalized. 

These temporary modifications were set in place 

until December 31, 2020.

On June 1, 2020, the OCC, Federal Reserve, and 

FDIC issued an interim final rule temporarily 

revising the supplementary leverage ratio calculation 

for depository institutions. Under the interim 

final rule, any depository institution subsidiary of 

a U.S. global systemically important BHC or any 

depository institution subject to Category II or 

Category III capital standards may elect to exclude 

temporarily U.S. Treasury securities and deposits 

at Federal Reserve Banks from the supplementary 

leverage ratio denominator. Additionally, under 

this interim final rule, any depository institution 

making this election must request approval from 

its primary federal banking regulator prior to 

making certain capital distributions so long as the 

exclusion is in effect. The interim final rule, like 

the related rule issued on April 14, was adopted 

to allow depository institutions that elect to opt 

into this treatment additional flexibility to act as 

financial intermediaries during this period of 

financial disruption. The rule will remain in effect 

through March 31, 2021 and does not affect the tier 

1 leverage ratio.

Also on June 1, 2020, the OCC, Federal Reserve, 

FDIC, and NCUA issued final guidance for 

credit risk review. This guidance is relevant to 

all institutions supervised by the agencies and 

replaces Attachment 1 of the 2006 Interagency 

Policy Statement on the Allowance for Loan and 

Lease Losses. The final guidance discusses sound 

management of credit risk, a system of independent, 

ongoing credit review, and appropriate 

communication regarding the performance of the 

institution’s loan portfolio to its management and 

board of directors. 

On June 5, 2020, the OCC issued a final rule 

to strengthen and modernize the Community 

Reinvestment Act (CRA) by clarifying and 

expanding the activities that qualify for CRA credit; 

updating where activities count for CRA credit; 

creating a more consistent and objective method 

for evaluating CRA performance; and providing 

for more timely and transparent CRA-related 

data collection, recordkeeping, and reporting. In 

addition, the OCC, Federal Reserve, and FDIC 

released a statement in March noting that the 

agencies would favorably consider retail banking 

services and retail lending activities that meet the 

needs of low- and moderate-income individuals, 

small businesses, and small farms affected by 

COVID-19 and that are consistent with safe and 

sound banking practices and applicable laws, 

including consumer protection laws. Such activities 

could include offering short-term, unsecured credit 

products for creditworthy borrowers.

On June 15, 2020, the Federal Reserve announced 

that it would resume examination activities for 

all banks, after having reduced examination 

activity in March. Also in June, the Federal 

Reserve, FDIC, NCUA, OCC, and state regulators 

published examiner guidance to promote 

consistency and flexibility in the supervision and 

examination of financial institutions affected 

by the COVID-19 pandemic. Examiners will 

continue to assess institutions in accordance with 

existing agency policies and procedures and may 

provide supervisory feedback or downgrade an 

institution’s composite or component ratings, when 

conditions have deteriorated. In conducting their 

supervisory assessment, examiners will consider 

whether institution management has managed risk 

appropriately, including taking appropriate actions 

in response to stresses caused by COVID-19 impacts. 

The agencies have issued numerous statements 

related to supervisory policy since the emergence of 

the pandemic. 

On June 24, 2020, the OCC issued an interim final 

rule to lower assessments for most banks under its 

jurisdiction. Under the new rule, assessments due 

on September 30, 2020 for national banks, federal 

savings associations, and federal branches and 

agencies of foreign banks will be calculated using 
150 2020 FSOC // Annual Report

the December 31, 2019 “Consolidated Reports of 

Condition and Income” (Call Report) for each 

institution, rather than the June 30, 2020 Call 

Report. In the event a bank’s assets as reported on 

the June 30, 2020 Call Report are lower than on 

the December 31, 2019 Call Report, the OCC would 

calculate the assessment due on September 30, 

2020 for the institution using the June 30, 2020 Call 

Report.

On August 3, 2020, the Federal Financial 

Institutions Examination Council on behalf of its 

members issued a statement setting forth prudent 

risk management and consumer protection 

principles for financial institutions to consider while 

working with borrowers as initial coronavirus-related 

loan accommodation periods come to an end and 

they consider additional accommodations.

On August 13, 2020, the OCC published an interim 

final rule that revised OCC regulations applicable 

to OCC-regulated banks administering collective 

investment funds (CIFs) invested primarily in real 

estate or other assets that are not readily marketable. 

The rule codified the time period generally 

available to a bank for withdrawing accounts from 

these CIFs and created an exception allowing a bank 

to extend the time period for withdrawals with OCC 

approval. The exception established by this rule was 

intended to enable a bank to preserve the value of 

a CIF’s assets for the benefit of fund participants 

during unanticipated and severe market conditions, 

such as those resulting from COVID-19.

4.3.2 Dodd-Frank Act Stress Tests and 

Comprehensive Capital Analysis and Review

Section 165(i)(2) of the Dodd-Frank Act requires 

certain financial companies to conduct annual stress 

tests.

On February 6, 2020, the Federal Reserve and OCC, 

followed by the FDIC on February 14, released 

economic and financial market scenarios for use in 

upcoming stress tests for covered institutions. The 

supervisory scenarios include baseline and severely 

adverse scenarios, as described in the agencies’ final 

rule that implements stress test requirements of the 

Dodd-Frank Act. Rules state that the agencies will 

provide scenarios to covered institutions by February 

15 of each year. Covered institutions are required to 

use the scenarios to conduct annual stress tests. The 

results of the company-run stress tests will assist the 

agency in assessing the company’s risk profile and 

capital adequacy.

On March 18, 2020, the Federal Reserve issued a 

final rule intended to simplify its capital framework 

while preserving strong capital requirements 

for large firms. The final rule integrates the 

regulatory capital rule (capital rule) with CCAR, 

as implemented through the capital plan rule. The 

final rule makes amendments to the capital rule, 

capital plan rule, stress test rules, and Stress Testing 

Policy Statement. Under the final rule, the Federal 

Reserve will use the results of its supervisory stress 

test to establish the size of a firm’s stress capital 

buffer requirement, which replaces the static 2.5 

percent of risk-weighted assets component of a firm’s 

capital conservation buffer requirement. Through 

the integration of the capital rule and CCAR, 

the final rule removes redundant elements of the 

current capital and stress testing frameworks that 

currently operate in parallel rather than together, 

including the CCAR quantitative objection and the 

assumption that a firm makes all capital actions 

under stress. The final rule applies to BHCs and U.S. 

intermediate holding companies of foreign banking 

organizations that have $100 billion or more in total 

consolidated assets. 

On March 24, 2020, the FHFA issued a final rule 

amending its stress testing rule, pursuant to section 

401 of EGRRCPA. These amendments adopt the 

proposed amendments without change to modify 

the minimum threshold for the regulated entities 

to conduct stress tests from $10 billion to $250 

billion; remove the requirements for Federal Home 

Loan Banks subject to stress testing; and remove the 

adverse scenario from the list of required scenarios. 

These amendments align FHFA’s rule with rules 

adopted by other financial institution regulators 

that implement the Dodd-Frank Act stress testing 

requirements, as amended by EGRRCPA.

4.3.3 Resolution Planning and Orderly Liquidation

Under the framework of the Dodd-Frank Act, 

resolution under the U.S. Bankruptcy Code is the 

statutory first option in the event of the failure of 
Council Activities and Regulatory Developments 151

a financial company. Section 165(d) of the DoddFrank Act requires nonbank financial companies 

designated by the Council for supervision by the 

Federal Reserve and certain BHCs—including 

certain FBOs with U.S. operations—to periodically 

submit plans to the Federal Reserve, the FDIC, and 

the Council for their rapid and orderly resolution 

under the U.S. Bankruptcy Code in the event 

of material financial distress or failure. These 

submissions are also referred to as living wills. The 

Federal Reserve and FDIC review each plan and 

may jointly determine that a plan is not credible 

or would not facilitate an orderly resolution of the 

company under the U.S. Bankruptcy Code. Since 

the resolution planning requirements took effect 

in 2012, U.S. G-SIBs and certain other firms have 

improved their resolution strategies and governance, 

refined their estimates of liquidity and capital needs 

in resolution, and simplified their legal structures. 

These changes have made these firms more resilient 

and resolvable.

On December 17, 2019, the Federal Reserve and 

FDIC jointly announced that their review of the 

2019 resolution plans of the eight largest and most 

complex domestic banking organizations did not 

find any “deficiencies,” which are weaknesses that 

could result in additional prudential requirements 

if not corrected. However, plans from six of the 

eight banking organizations had “shortcomings,” 

which are weaknesses that raise questions about the 

feasibility of a firm’s plan but are not as severe as a 

deficiency. The shortcomings related to the ability of 

the firms to reliably produce, in stressed conditions, 

data needed to execute their resolution strategy.

Action plans to address the shortcomings were due 

to the agencies by April 30, 2020. The action plans 

demonstrated progress towards addressing the 

shortcomings. The agencies will review whether the 

shortcomings have been addressed adequately, in 

connection with their review of the 2021 targeted 

resolution plans for these firms.

On March 18, 2020, the FDIC and Federal Reserve 

invited comments on proposed guidance for the 

2021 and subsequent resolution plan submissions 

by certain foreign banking organizations (FBOs). 

The proposed guidance is meant to assist these 

firms in developing their resolution plans. It would 

impact FBOs that are triennial filers and whose 

intermediate holding companies have a score of 

250 or more under the second methodology of 

the G-SIB surcharge framework. The proposed 

guidance, which is largely based on prior guidance, 

describes the agencies’ expectations regarding 

a number of key vulnerabilities in plans for a 

rapid and orderly resolution under the U.S. 

Bankruptcy Code (i.e., capital, liquidity, governance 

mechanisms, operational, legal entity rationalization 

and separability, and derivatives and trading 

activities). The proposed guidance also updates 

certain aspects of prior guidance based, in part, on 

the agencies’ review of certain FBOs’ most recent 

resolution plan submissions and changes to the 

resolution planning rule.

On May 6, 2020, in light of the challenges arising 

from the coronavirus response, the FDIC and the 

Federal Reserve extended the 2020 resolution plan 

submission deadline by 90 days to September 29, 

2020 for four foreign banks, and the 2021 targeted 

resolution plan submission deadline by 90 days 

to September 29, 2021 for the large foreign and 

domestic banks in Category II and Category III of 

the agencies’ large bank regulatory framework. 

On July 1, 2020, the FDIC and the Federal Reserve 

provided information to the eight largest and most 

complex domestic banking organizations that will 

guide their next resolution plans, which are due 

by July 1, 2021. The 2021 plans will be required 

to include core elements of a firm’s resolution 

plan—such as capital, liquidity, and recapitalization 

strategies—as well as how each firm has integrated 

changes to, and lessons learned from, its response 

to COVID-19 into its resolution planning process. 

The July 2021 submission will be the first targeted 

resolution plan, a type of plan introduced in 

the revisions to the agencies’ resolution plan 

rule finalized last year.

Additionally, on July 1, 2020, the FDIC and the 

Federal Reserve announced that they recently 

completed a review of “critical operations,” which 

are operations at certain firms whose failure or 

discontinuance would threaten U.S. financial 

stability, and informed the firms of their findings. 
152 2020 FSOC // Annual Report

The agencies also announced their plan to complete 

another such review by July 2022, which will include 

a further, broader evaluation of the framework used 

to identify critical operations.

Furthermore, in 2020, the Federal Reserve and 

FDIC hosted Crisis Management Group (CMG) 

meetings for U.S. G-SIBs to discuss home and host 

resolvability assessments for the firms to facilitate 

cross-border resolution planning.

On August 31, 2020, the FDIC and SEC issued a 

final rule required by the Dodd-Frank Act, which 

clarifies and implements provisions relating to the 

orderly liquidation of certain brokers or dealers 

(covered broker-dealers) in the event the FDIC is 

appointed receiver under Title II of the Dodd-Frank 

Act. The FDIC and SEC developed the final rule in 

consultation with the Securities Investor Protection 

Corporation (SIPC).

Among other things, the final rule clarifies that, 

upon the appointment of the FDIC as receiver, the 

FDIC would appoint SIPC to act as trustee for the 

broker-dealer. SIPC, as trustee, would determine 

and satisfy customer claims in the same manner as it 

would in a proceeding under the Securities Investor 

Protection Act of 1970. The treatment of the covered 

broker-dealer’s qualified financial contracts would 

be governed in accordance with Title II. In addition, 

the final rule describes the claims process applicable 

to customers and other creditors of a covered 

broker-dealer and clarifies the FDIC’s powers as 

receiver with respect to the transfer of assets of a 

covered broker-dealer to a bridge broker-dealer.

4.3.4 Volcker Rule

On July 31, 2020, the OCC, Federal Reserve, FDIC, 

SEC, and CFTC issued a final rule that amends 

the regulations implementing section 13 of the 

BHC Act. Section 13 (commonly known as the 

Volcker Rule) contains certain restrictions on the 

ability of a banking entity or nonbank financial 

company supervised by the Board to engage in 

proprietary trading and have certain interests in, or 

relationships with, a hedge fund or private equity 

fund. Like the proposal published in February, 

the final rule modifies three areas of the rule by 

streamlining the covered funds portion of the rule; 

addressing the extraterritorial treatment of certain 

foreign funds; and permitting banking entities to 

offer financial services and engage in other activities 

that do not raise concerns that the Volcker Rule was 

intended to address.

4.3.5 Insurance

NAIC / State Developments

In response to the COVID-19 pandemic, state 

insurance regulators and the NAIC provided 

guidance to insurers in several areas and sought 

information to better understand the pandemic’s 

scope and potential coverage issues. States removed 

consumer cost-sharing for COVID-19 testing in most 

health insurance policies and continue to work with 

federal officials to implement additional measures 

enacted by Congress. States also issued bulletins that 

provided guidance to health insurers on 

prescription drug refills, prior authorization, grace 

periods, and coverage of telemedicine. Regulators 

also took steps to ease administrative burdens on 

carriers and agents and expand the pool of health 

providers in some states by relaxing licensing or 

credentialing requirements.

Some states have required or encouraged insurers 

to defer premium payments for consumers 

experiencing financial hardship due to COVID-19. 

Regulators in several states also issued directives 

on policy cancellations and non-renewals in several 

lines of insurance including health insurance, 

life insurance, auto insurance, and homeowners’ 

insurance. Several states have mandated or 

encouraged auto insurance companies to 

institute premium rebates to drivers, who have 

significantly reduced miles driven during the 

pandemic, and several major auto insurers also 

provided rebates voluntarily. 

The NAIC and state insurance regulators took 

several actions to identify the potential risks 

that COVID-19 might present to the insurance 

sector. Earlier this year, state insurance regulators 

through the NAIC issued an industry data call 

to assess the potential impacts of COVID-19 on 

insurance company solvency as well as a data call 

for information specifically relating to business 

interruption insurance. An initial set of this data was 

shared with FIO to assist it in exercising its statutory 
Council Activities and Regulatory Developments 153

authorities, including monitoring all aspects of the 

insurance industry and advising the Secretary of the 

Treasury on major domestic insurance policy issues. 

The NAIC also issued accounting and reporting 

guidance to temporarily help mitigate the balance 

sheet impacts of COVID-19, including guidance 

relating to troubled debt restructuring, mortgage 

loan impairments, and nonpayment of premiums. 

Following up on stress tests that the NAIC 

conducted in late 2019 relating to the insurance 

industry’s $158 billion in CLO holdings, the NAIC 

ran additional stress tests in spring 2020 that found 

senior tranches might be protected from widespread 

losses in a deep recession. 

In addition to work relating to the COVID-19 

response, state insurance regulators continued 

work on their Group Capital Calculation (GCC), 

which began in 2015. The GCC is designed to 

be an analytical tool that will give regulators 

information relating to the capital across certain 

insurance groups. Adoption of a model, including 

proposed legislative language for states that would 

protect GCC confidentiality, is expected in late 

2020. Adoption by U.S. insurance supervisory 

authorities of a GCC is also necessary for purposes 

of implementation of the covered agreements 

described below. 

The NAIC has continued to make progress on 

its Macroprudential Initiative, including the 

development of a liquidity stress test for large life 

insurers. Work on this initiative was placed on 

hold due to COVID-19 and, in its place, COVID-19 

liquidity data calls were conducted on the largest life 

insurers to gauge the liquidity and capital impact of 

the pandemic on such insurers. 

Covered Agreements

The Bilateral Agreement between the United States 

of America and the European Union on Prudential 

Measures Regarding Insurance and Reinsurance, 

generally known in the United States as the U.S.-

EU Covered Agreement, was signed by the parties 

in September 2017. It entered into force on April 4, 

2018. In anticipation of the withdrawal of the United 

Kingdom (UK) from the EU, in 2018 the United 

States and the UK entered into a substantively 

similar agreement, known as the U.S.-UK Covered 

Agreement, which is expected to enter into force 

shortly. Both agreements were negotiated by 

Treasury in coordination with the Office of the 

United States Trade Representative, pursuant to the 

Federal Insurance Office Act of 2010 (FIO Act).

In June 2019, in response to the covered agreements 

with the EU and the UK, the NAIC adopted 

changes to the Credit for Reinsurance Model Law 

and Credit for Reinsurance Model Regulation. 

The changes are intended to provide states with 

a model law and regulation that, upon adoption, 

aligns state law with the U.S. obligations under the 

agreements. In August 2020, the NAIC designated 

these revisions under its accreditation program, to 

take effect September 1, 2022. Pursuant to the terms 

of the covered agreements, this is the date by which 

the United States must complete any necessary 

preemption determination in accordance with 

the FIO Act. Some states have already completed 

the adoption of necessary amendments. Not later 

than March of 2021, as required under the covered 

agreements, FIO will begin reviewing the progress 

of each of the states and evaluating a potential 

preemption determination. 

Cybersecurity

In July 2020, the New York Department of Financial 

Services (NYDFS) filed its first-ever enforcement 

action under its 2017 cybersecurity regulation 

against a title insurer for alleged exposure of 

hundreds of millions of documents, many of which 

were said to contain sensitive personal information.

As of June 30, 2020, eleven states—Alabama, 

Connecticut, Delaware, Indiana, Louisiana, 

Michigan, Mississippi, New Hampshire, Ohio, South 

Carolina, and Virginia—had adopted the NAIC’s 

Insurance Data Security Model Law or similar law. 

Terrorism Risk Insurance Program

The Federal Insurance Office assists the Secretary 

of the Treasury in administering the Terrorism 

Risk Insurance Program (TRIP) created under the 

Terrorism Risk Insurance Act of 2002, as amended 

(TRIA). Under the Terrorism Risk Insurance 

Program Reauthorization Act of 2019, TRIP has 

been reauthorized for an additional seven-year 
154 2020 FSOC // Annual Report

period, ending December 31, 2027. Since 2016, 

Treasury has been required under TRIA to collect 

terrorism risk insurance information from insurers. 

In June 2020, Treasury published a Report on 

the Effectiveness of the Terrorism Risk Insurance 

Program. In the report, Treasury concluded that 

TRIP has remained effective in making terrorism 

risk insurance available and affordable in the 

insurance marketplace and that the market for 

terrorism risk insurance has been relatively stable, 

with few observable changes over time in the 

relevant benchmarks.

IAIS Update

In November 2019, the International Association 

of Insurance Supervisors (IAIS) advanced version 

2.0 of the International Capital Standard (ICS) 

into a five-year monitoring period from 2020 

through 2024. The IAIS agreement consisted of 

three parts: (1) the design of the reference ICS 

being developed by the IAIS; (2) the parameters 

around the operationalization of the ICS 

monitoring period; and (3) the IAIS’s approach to 

the comparability assessment of the Aggregation 

Method. The November 2019 IAIS meetings also 

resulted in the adoption of the holistic framework 

for the assessment and mitigation of systemic risk 

in the insurance sector, leveraging an activitiesbased approach to assessing potential systemic risks 

arising from products and activities. In October 

2020, FIO published a notice in the Federal Register 

seeking public comment on a planned FIO study to 

assess the potential effects of the ICS on the U.S. 

insurance market, including the implications for 

product cost and availability for U.S. consumers, the 

global competitiveness of U.S. insurers, and insurer 

investment behavior in the capital markets. 

In response to the onset of the COVID-19 global 

pandemic, the IAIS refocused its activities and 

projects on the impact of COVID-19. In addition, the 

IAIS issued a data call that focused on the effects 

of the COVID-19 global pandemic on the global 

insurance sector. The IAIS has also been monitoring 

supervisory responses to the pandemic and assessing 

the implications on the global insurance sector. 

4.4 Financial Infrastructure, Markets, and 

Oversight

4.4.1 Derivatives, Swap Data Repositories, 

Regulated Trading Platforms, and Central 

Counterparties

On September 19, 2019, the SEC issued a final 

rule, in accordance with the Dodd-Frank Act and 

pursuant to the Securities Exchange Act of 1934 

(Exchange Act) which adopts recordkeeping, 

reporting, and notification requirements applicable 

to security-based swap dealers (SBSDs) and 

major security-based swap participants (MSBSPs), 

securities count requirements applicable to certain 

SBSDs, and additional recordkeeping requirements 

applicable to broker-dealers to account for their 

security-based swap and swap activities. The 

agency also made substituted compliance available 

with respect to recordkeeping, reporting, and 

notification requirements under Section 15F of the 

Exchange Act and the rules thereunder.

In January 2020, the CFTC finalized amendments 

to Part 39 of its regulations as part of its ongoing 

review of regulations applicable to CCPs. The 

amendments address certain risk management 

and reporting obligations, clarify the meaning of 

certain provisions, simplify processes for registration 

and reporting, and codify existing staff relief and 

guidance. 

On February 4, 2020, the SEC issued a final rule that 

requires the application of specific risk mitigation 

techniques to portfolios of uncleared securitybased swaps. In particular, the final rule establishes 

requirements for each registered SBSD and each 

registered MSBSP regarding, among other things, 

reconciling outstanding security-based swaps with 

applicable counterparties on a periodic basis, 

engaging in certain forms of portfolio compression 

exercises, as appropriate, and executing written 

security-based swap trading relationship 

documentation with each of its counterparties prior 

to, or contemporaneously with, executing a securitybased swap transaction. The SEC also issued an 

interpretation addressing the application of the 

portfolio reconciliation, portfolio compression, and 

trading relationship documentation requirements 

to cross-border security-based swap activities, 
Council Activities and Regulatory Developments 155

and amended its regulations to address the 

potential availability of substituted compliance in 

connection with those requirements. Lastly, the 

final rule includes corresponding amendments 

to the recordkeeping, reporting, and notification 

requirements applicable to SBSDs and MSBSPs. 

The same day, the SEC issued separate rule 

amendments pursuant to a final rule and provided 

guidance to address the cross-border application of 

certain security-based swap requirements under the 

Exchange Act that were added by Title VII of the 

Dodd-Frank Act. The SEC also issued a statement 

regarding compliance with rules for security-based 

swap data repositories and Regulation SBSR, a 

regulation that addresses regulatory reporting and 

public dissemination of security-based swaps. The 

compliance date for the registration and substantive 

regulation of SBSDs and MSBSPs is October 6, 2021. 

In addition, these entities are required to begin 

counting their security-based swap transactions 

towards the de minimis thresholds for registration 

on August 6, 2021.

On March 18, 2020, the CFTC issued a final 

rule that amends its regulations governing the offer 

and sale of foreign futures and options to customers 

located in the U.S. The amendment codifies 

the process by which the agency may terminate 

exemptive relief issued pursuant to its regulations. 

On March 24, 2020, the SEC proposed to amend 17 

CFR 242, Rules 600 and 603 and to adopt new Rule 

614 of Regulation National Market System (NMS) 

under the Exchange Act to update the national 

market system for the collection, consolidation, 

and dissemination of information with respect to 

quotations for and transactions in NMS stocks (NMS 

information). This would expand the content of 

NMS information that is required to be collected, 

consolidated, and disseminated as part of the NMS 

under Regulation NMS and proposes to amend 

the method by which such NMS information 

is collected, calculated, and disseminated by 

introducing a decentralized consolidation model 

where competing consolidators replace the exclusive 

securities information processors.

The CFTC has adopted several modifications to its 

rules imposing margin requirements on uncleared 

swap transactions during the past year. On April 

9, 2020, the CFTC issued a final rule revising 

its margin rules by establishing an additional 

compliance phase-in period (phase 6) and setting 

a September 1, 2021, compliance date for phase 

6 entities. This amendment is intended to help 

ensure continued access to the swaps markets for 

certain entities with relatively smaller levels of swaps 

trading activities that may have difficulty meeting 

all of the operational conditions to exchange initial 

margin and is consistent with revisions adopted 

by the Basel Committee on Banking Supervision 

and the International Organization of Securities 

Commission (BCBS/IOSCO) to their joint 

international framework for margin requirements 

for non-centrally cleared derivatives. On May 11, 

2020, the CFTC issued a final rule amending its 

margin rules to exclude the European Stability 

Mechanism from the scope of the rules. 

On July 1, 2020, the Federal Reserve, FDIC, FCA, 

FHFA, and OCC issued a final rule that amends 

the agencies’ regulations requiring swap dealers 

(SDs), SBSDs, major swap participants (MSPs), and 

MSBSPs under the agencies’ respective jurisdictions 

to exchange margin with their counterparties for 

swaps that are not centrally cleared (Swap Margin 

Rule). The Swap Margin Rule as adopted in 2015 

takes effect under a phased compliance schedule 

spanning from 2016 through 2020, and the entities 

covered by the rule continue to hold swaps in their 

portfolios that were entered into before the effective 

dates of the rule. Such swaps are grandfathered 

from the Swap Margin Rule’s requirements until 

they expire according to their terms. The final rule 

permits swaps entered into prior to an applicable 

compliance date (legacy swaps) to retain their legacy 

status in the event that they are amended to replace 

an interbank offered rate or other discontinued 

rate, modifies initial margin requirements for 

non-cleared swaps between affiliates, introduces 

an additional compliance date for initial margin 

requirements, clarifies the point in time at which 

trading documentation must be in place, permits 

legacy swaps to retain their legacy status in the 

event that they are amended due to technical 

amendments, notional reductions, or portfolio 
156 2020 FSOC // Annual Report

compression exercises, and makes technical changes 

to relocate the provision addressing amendments 

to legacy swaps that are made to comply with the 

Qualified Financial Contract Rules. In addition, 

the final rule addresses comments received in 

response to the agencies’ publication of the interim 

final rule that would preserve the status of legacy 

swaps meeting certain criteria in the case of a 

Brexit without a negotiated settlement agreement. 

The same day, the agencies issued an interim final 

rule, with request for comment, extending the 

implementation deadlines of phase 5 and phase 6 

by one year, to September 1, 2021, and September 1, 

2022, respectively. 

On July 10, 2020, the CFTC issued an interim final 

rule further amending its initial margin compliance 

schedule to address operational challenges as a 

result of the coronavirus pandemic. The interim 

final rule deferred the compliance date for phase 5 

entities to September 1, 2021. The CFTC in October 

2020 also extended the phase 6 compliance date 

to September 1, 2022. The CFTC’s actions were 

consistent with revisions made by the BCBS/IOSCO 

to the implementation schedule of the international 

framework for margin requirements for noncentrally cleared derivatives. 

On July 22, 2020, the CFTC issued a final rule 

amending regulation 50.52, which exempts certain 

affiliated entities within a corporate group from the 

swap clearing requirement under Section 2(h) of 

the Commodity Exchange Act. These amendments 

concern the anti-evasionary condition to the 

inter-affiliate exemption from the swap clearing 

requirement. Under this condition, affiliates 

electing the exemption must ensure that swaps 

subject to the clearing requirement entered into 

with unaffiliated counterparties either be cleared 

or be eligible for an exception to or exemption 

from the clearing requirement. The amendments 

make permanent certain temporary alternative 

compliance frameworks intended to make this antievasionary condition workable for international 

corporate groups in the absence of foreign clearing 

regimes determined to be comparable to CFTC 

requirements.

On July 24, 2020, the CFTC issued a final rule to 

prohibit post-trade name give-up for swaps executed, 

pre-arranged, or pre-negotiated anonymously on 

or pursuant to the rules of a swap execution facility 

and intended to be cleared. The final rule provides 

an exception for package transactions that include 

a component transaction that is not a swap intended 

to be cleared, including but not limited to U.S. 

Treasury swap spreads.

On September 14, 2020, the CFTC issued a final rule 

that addresses the cross-border application of the 

SD registration threshold and certain requirements 

applicable to SDs and MSPs, establishes a formal 

process for requesting comparability determinations 

for the requirements from the CFTC, and 

defines key terms for the purpose of applying the 

Commodity Exchange Act’s swaps provisions to 

cross-border transactions. This approach considers 

international comity principles and the CFTC’s 

interest in focusing its authority on potential 

significant risks to the U.S. financial system. This 

final rule supersedes the CFTC’s 2013 cross-border 

guidance with respect to the CFTC requirements 

covered by the final rule.

On September 15, 2020, the CFTC issued a final 

rule imposing capital and financial reporting 

requirements on SDs and MSPs that are not subject 

to a banking regulator. The adoption of the capital 

requirements completes the CFTC’s obligations 

under Title VII of the Dodd-Frank Act to adopt rules 

imposing both capital and margin requirements 

on SDs and MSPs. The capital rules recognize 

the diversity of organizations registered with the 

CFTC as SDs, which includes global financial 

institutions, small SDs that engage primarily in 

swaps with commercial end-users, and agricultural 

or energy firms, by permitting the SDs to elect 

one of three capital approaches: (1) a bank-based 

capital approach that is consistent with the capital 

rules of the prudential regulators; (2) a capital 

approach that is consistent with the CFTC’s existing 

FCM and the SEC’s existing securities brokerdealer capital requirements; and, (3) for SDs 

predominantly engaged in nonfinancial activities, a 

capital requirement based on the SD’s tangible net 

worth. The CFTC’s final capital rules also require 

MSPs to maintain positive tangible net worth. The 
Council Activities and Regulatory Developments 157

financial reporting requirements require SDs and 

MSPs to file with the CFTC, among other reports, 

periodic unaudited financial statements and annual 

audited financial statements. The CFTC capital and 

financial reporting rules have a compliance date of 

October 6, 2021.

On September 22, 2020, the CFTC issued an NPRM 

proposing amendments to the CFTC margin rules 

to permit the application of a minimum transfer 

amount of up to $50,000 for each separately 

managed account of a counterparty to a CFTCregulated SD or MSP, and the application of 

separate minimum transfer amounts for initial 

and variation margin. In addition, on September 

23, 2020, the CFTC issued an NPRM proposing 

amendments to the definition of the term “material 

swaps exposure” by revising the method for 

calculating the average aggregate notional amount 

of swaps and other financial derivatives products 

(AANA). The proposed amendment would change 

the period for calculating AANA from June, July, 

and August of the prior year to March, April, and 

May of the current year, and the data points for 

calculating AANA, by utilizing month-end dates 

rather than daily figures during the three-month 

calculation period. The proposed amendment would 

also establish September 1 of each year as the date 

for determining material swaps exposure. These 

proposed changes would align the CFTC’s approach 

with the BCBS/IOSCO’s margin framework. The 

proposal would also permit an SD or MSP subject to 

the CFTC margin rule to use the risk-based model 

calculation of initial margin of a counterparty that 

is a CFTC-registered SD or MSP rather than its own 

initial margin calculation. 

CMGs continued to coordinate resolution planning 

for two U.S. CCPs that are considered systemically 

important in more than one jurisdiction, consistent 

with international standards. The CMGs discussed 

how the two U.S. CCPs navigated the operational 

and financial challenges posed by the COVID-19 

pandemic. Processes for cooperation and sharing 

information, both during a crisis and for purposes 

of resolution planning, are set forth in cooperation 

arrangements finalized in September 2020 that are 

specific to the CMG.

4.4.2 Securities and Asset Management

On March 10, 2020, the SEC issued a final rule 

amending the definition of the term “venture capital 

fund” and the private fund adviser exemption 

under the Investment Advisers Act of 1940 (Advisers 

Act) to reflect exemptions from registration for 

investment advisers who advise rural business 

investment companies (RBICs). These exemptions 

were enacted as part of the RBIC Advisers Relief 

Act, which amended Advisers Act sections 203(l) 

and 203(m), among other provisions. Specifically, 

the RBIC Advisers Relief Act amended Advisers 

Act section 203(l), which exempts from investment 

adviser registration any adviser who solely advises 

venture capital funds, by stating that RBICs are 

venture capital funds for purposes of the exemption. 

Accordingly, the new rule amended the definition 

of the term “venture capital fund” to include RBICs. 

The RBIC Advisers Relief Act also amended Advisers 

Act section 203(m), which exempts from investment 

adviser registration any adviser who solely advises 

private funds and has AUM in the United States of 

less than $150 million, by excluding RBIC assets 

from counting towards the $150 million threshold. 

Accordingly, the final rule amends the definition 

of AUM in the private fund adviser exemption to 

exclude the assets of RBICs.

On March 26, 2020, the SEC issued a final rule that 

amends the accelerated filer and large accelerated 

filer definitions to tailor the types of issuers that are 

included in the categories of accelerated and large 

accelerated filers and promote capital formation, 

preserve capital, and reduce unnecessary burdens 

for certain smaller issuers while maintaining 

investor protections. The amendments exclude 

from the accelerated and large accelerated filer 

definitions an issuer that is eligible to be a smaller 

reporting company and that had annual revenues of 

less than $100 million in the most recent fiscal year 

for which audited financial statements are available. 

The amendments also include a specific provision 

excluding business development companies from the 

accelerated and large accelerated filer definitions 

in analogous circumstances. In addition, the 

amendments increase the transition thresholds for 

accelerated and large accelerated filers becoming 

non-accelerated filers from $50 million to $60 
158 2020 FSOC // Annual Report

million, and for exiting large accelerated filer status 

from $500 million to $560 million. 

On March 31, 2020, the SEC issued temporary 

final rules for Form ID filers and for issuers subject 

to reporting obligations pursuant to Regulation 

Crowdfunding and Regulation A in order to address 

the needs of companies directly or indirectly 

affected by COVID-19. The temporary final 

rules provide temporary relief from the Form ID 

notarization process for certain filers and extend 

the filing deadlines for specified reports and forms 

due pursuant to Regulation Crowdfunding and 

Regulation A for certain issuers. On the same day, 

the SEC proposed amendments to facilitate capital 

formation and increase opportunities for investors 

by expanding access to capital for entrepreneurs 

across the United States. Specifically, the proposed 

amendments are intended to simplify, harmonize, 

and improve certain aspects of the exempt offering 

framework to promote capital formation while 

preserving or enhancing important investor 

protections. The proposed amendments seek 

to address gaps and complexities in the exempt 

offering framework that may impede access to 

investment opportunities for investors and access to 

capital for issuers.

On April 20, 2020, the SEC issued a final rule that 

amends the financial disclosure requirements for 

guarantors and issuers of guaranteed securities 

registered or being registered, and issuers’ affiliates 

whose securities collateralize securities registered or 

being registered in Regulation S-X to improve those 

requirements for both investors and registrants. 

The changes are intended to provide investors with 

material information regarding the specific facts 

and circumstances, make the disclosures easier to 

understand, and reduce the costs and burdens to 

registrants. In addition, by reducing the costs and 

burdens of compliance, issuers may be encouraged 

to offer guaranteed or collateralized securities 

on a registered basis, thereby affording investors 

protection they may not be provided in offerings 

conducted on an unregistered basis. Finally, by 

making it less burdensome and less costly for 

issuers to include guarantees or pledges of affiliate 

securities as collateral when they structure debt 

offerings, the revisions may increase the number 

of registered offerings that include these credit 

enhancements, which could result in a lower cost of 

capital and an increased level of investor protection.

On May 7, 2020, the SEC issued a temporary 

final rule to facilitate capital formation for small 

businesses impacted by COVID-19. Specifically, the 

rule is intended to expedite the offering process for 

smaller, previously established companies directly or 

indirectly affected by COVID-19 that are seeking to 

meet their funding needs through the offer and sale 

of securities pursuant to Regulation Crowdfunding. 

The temporary final rule is designed to facilitate this 

offering process by providing tailored, conditional 

relief from certain requirements of Regulation 

Crowdfunding relating to the timing of the offering 

and the availability of financial statements required 

to be included in issuers’ offering materials, while 

retaining appropriate investor protections.

On May 13, 2020, the SEC issued a proposed new 

rule (rule 2a-5) under the Investment Company 

Act of 1940 (Investment Company Act) that would 

address valuation practices and the role of the 

board of directors with respect to the fair value of 

the investments of a registered investment company 

or business development company. The proposed 

rule would provide requirements for determining 

fair value in good faith with respect to a fund for 

purposes of section 2(a)(41) of the Investment 

Company Act. This determination would involve 

assessing and managing material risks associated 

with fair value determinations; selecting, applying, 

and testing fair value methodologies; overseeing 

and evaluating any pricing services used; adopting 

and implementing policies and procedures; and 

maintaining certain records. The proposed rule 

would permit a fund’s board of directors to assign 

the fair value determination to an investment 

adviser of the fund, who would then carry out these 

functions for some or all of the fund’s investments. 

This assignment would be subject to board oversight 

and certain reporting, recordkeeping, and other 

requirements designed to facilitate the board’s 

ability to effectively oversee the adviser’s fair value 

determinations. The proposed rule would include 

a specific provision related to the determination of 

the fair value of investments held by unit investment 

trusts, which do not have boards of directors. The 
Council Activities and Regulatory Developments 159

proposed rule would also define when market 

quotations are readily available under section 2(a)

(41) of the Investment Company Act. If rule 2a-5 is 

adopted, the SEC would rescind previously issued 

guidance on the role of the board of directors in 

determining fair value and the accounting and 

auditing of fund investments.

On June 1, 2020, the SEC issued a final rule that 

modifies the registration, communications, and 

offering processes for business development 

companies (BDCs) and other closed-end investment 

companies under the Securities Act of 1933. As 

directed by Congress, the SEC adopted rules 

that allow these investment companies to use the 

securities offering rules that are already available 

to operating companies. These rules will extend to 

closed-end investment companies offering reforms 

currently available to operating company issuers by 

expanding the definition of “well-known seasoned 

issuer” to allow these investment companies to 

qualify; streamlining the registration process for 

these investment companies, including the process 

for shelf registration; permitting these investment 

companies to satisfy their final prospectus delivery 

requirements by filing the prospectus with the 

SEC; and permitting additional communications 

by and about these investment companies during 

a registered public offering. In addition, the SEC 

amended certain rules and forms to tailor the 

disclosure and regulatory framework to these 

investment companies. These amendments also 

modernize the SEC’s approach to securities 

registration fee payment by requiring closed-end 

investment companies that operate as “interval 

funds” to pay securities registration fees using the 

same method as mutual funds and exchange-traded 

funds and extend the ability to use this payment 

method to issuers of certain continuously offered, 

exchange-traded products. The final rule expands 

the ability of certain registered closed-end funds or 

BDCs that conduct continuous offerings to make 

changes to their registration statements on an 

immediately effective basis or on an automatically 

effective basis after a set period of time after filing. 

The final rule also sets forth certain structured data 

reporting requirements, including for filings on 

the form providing annual notice of securities sold 

pursuant to the rule under the Investment Company 

Act that prescribes the method by which certain 

investment companies (including mutual funds) 

calculate and pay registration fees.

On October 9, 2020, the SEC issued a final rule 

amending the definition of “accredited investor” 

in its rules to add new categories of qualifying 

natural persons and entities, and to make certain 

other modifications to the existing definition. The 

amendments are intended to update and improve 

the definition to identify more effectively investors 

that have sufficient knowledge and expertise to 

participate in investment opportunities that do 

not have the rigorous disclosure and procedural 

requirements, and related investor protections, 

provided by registration under the Securities Act 

of 1933. The SEC also adopted amendments to the 

“qualified institutional buyer” definition in Rule 

144A under the Securities Act to expand the list 

of entities that are eligible to qualify as qualified 

institutional buyers.

4.4.3 Accounting Standards

On June 1, 2020, the OCC, Federal Reserve, FDIC, 

and NCUA issued a joint policy statement on 

allowances for credit losses (ACLs), in response to 

changes to the U.S. generally accepted accounting 

principles (GAAP), as promulgated by the Financial 

Accounting Standards Board (FASB) Accounting 

Standards Update 2016-13 (CECL) and subsequent 

amendments issued since June 2016. These changes 

are codified in Accounting Standards Codification 

(ASC) Topic 326. This interagency policy statement 

describes the measurement of expected credit losses 

under the CECL methodology and the accounting 

for impairment on available-for-sale debt securities 

in accordance with ASC Topic 326; the design, 

documentation, and validation of expected credit 

loss estimation processes, including the internal 

controls over these processes; the maintenance of 

appropriate ACLs; the responsibilities of boards of 

directors and management; and examiner reviews of 

ACLs.

On September 15, 2020, Treasury released a study 

on the need, if any, for changes to regulatory capital 

requirements necessitated by CECL as required 

by Congress. The study found that a definitive 

assessment of the impact of CECL on regulatory 
160 2020 FSOC // Annual Report

capital is not currently feasible, in light of the 

state of CECL implementation across financial 

institutions and current market dynamics. Treasury 

also stated it will continue to actively monitor 

CECL implementation and consult with relevant 

stakeholders, including the prudential regulators, 

FASB, and the SEC.

On September 30, 2020, the OCC, Federal Reserve, 

and FDIC issued a final rule delaying the estimated 

impact on regulatory capital stemming from the 

implementation of CECL. The final rule provides 

banking organizations that implement CECL during 

the 2020 calendar year the option to delay for two 

years an estimate of CECL’s effect on regulatory 

capital, relative to the incurred loss methodology’s 

effect on regulatory capital, followed by a three-year 

transition period. The agencies provided this relief 

to allow these banking organizations to better focus 

on supporting lending to creditworthy households 

and businesses while also maintaining the quality of 

regulatory capital.

4.4.4 Bank Secrecy Act/Anti-Money Laundering 

Regulatory Reform

On February 21, 2020, the Financial Action Task 

Force (FATF), an international intergovernmental 

organization that developed international standards 

for combating money laundering and the financing 

of terrorism and proliferation of weapons of mass 

destruction, released guidance on the issue of 

digital identity for customer identification and 

verification. This guidance explains how digital ID 

systems could meet FATF’s customer due diligence 

standards and will assist governments and financial 

institutions worldwide to apply a risk-based approach 

to using digital ID systems. The FATF also discussed 

the changes made by the United States to improve 

the anti-money laundering (AML)/countering the 

financing of terrorism (CFT) system since the 2016 

Mutual Evaluation Report, including Treasury’s 

Customer Due Diligence rulemaking and beneficial 

ownership requirements that went into effect in 

2018. 

In July 2020, the FATF completed a 12-month 

review on the state of implementation of standards 

that were revised in June 2019 to explicitly impose 

AML/CFT obligations on virtual assets and virtual 

asset service providers. The United States had 

joined Switzerland as one of the first countries to 

voluntarily submit to an assessment of its compliance 

with the new standards. The results of the FATF’s 

findings will be published after they go through 

the FATF’s quality and consistency process. 

FATF announced a second 12-month review for 

completion in 2021 and committed to providing 

updated guidance on virtual assets, including 

AML/CFT and counter-proliferation financing 

implications of so-called “stablecoins.” FATF also 

called on its members to tackle new threats and 

vulnerabilities posed by criminals during the 

COVID-19 crisis.

4.5 Mortgages and Consumer Protection 

4.5.1 Mortgages and Housing Finance

On April 3, 2020, the CFPB, Federal Reserve, 

FDIC, NCUA, OCC, and CSBS issued a joint 

policy statement providing regulatory flexibility to 

enable mortgage servicers to work with struggling 

consumers affected by COVID-19. Under the CARES 

Act, borrowers in a federally backed mortgage loan 

experiencing financial hardship due, directly or 

indirectly, to COVID-19, may submit a forbearance 

request to their mortgage servicer. In response, 

servicers must provide a CARES Act forbearance 

that allows borrowers to defer their mortgage 

payments for up to 180 days with the possibility of 

an extension of up to another 180 days. The policy 

statement states that the agencies do not intend 

to take supervisory or enforcement action against 

mortgage servicers for delays in sending certain 

early intervention and loss mitigation notices, 

provided that servicers make good faith efforts to 

do so within a reasonable time. The joint statement 

clarifies the application of the Regulation X (which 

implements the Real Estate Settlement Procedures 

Act) mortgage servicing rules to CARES Act 

forbearance and describes the agencies’ flexible 

approach to supervision and enforcement with 

respect to certain Regulation X provisions that 

require consumer notices and loss mitigation 

provisions. The CFPB released a set of FAQs to 

provide additional compliance guidance. 

On April 17, 2020, the OCC, Federal Reserve, and 

FDIC issued an interim final rule to temporarily 
Council Activities and Regulatory Developments 161

amend the agencies’ regulations requiring 

appraisals and evaluations for certain real estate 

loan transactions. The interim final rule defers the 

requirement to obtain an appraisal or evaluation 

for up to 120 days following the closing of a 

transaction for certain residential and commercial 

real estate transactions, excluding transactions for 

acquisition, development, and construction of real 

estate. The rule states that regulated institutions 

should make best efforts to obtain a credible 

valuation of real property collateral before the loan 

closing, and otherwise underwrite loans consistent 

with the principles in the agencies’ Standards for 

Safety and Soundness and Real Estate Lending 

Standards. The agencies provided this relief to 

allow regulated institutions to expeditiously extend 

liquidity to creditworthy households and businesses 

in light of recent strains on the U.S. economy due 

to COVID-19. The provisions of the interim final 

rule expire on December 31, 2020. The agencies 

finalized the interim final rule by issuing a final rule 

on October 16, 2020. The final rule adopted the 

interim final rule without substantive changes. The 

final rule became effective on October 16, 2020. The 

NCUA issued a substantially similar interim final 

rule on April 21, and together the agencies issued 

a joint statement outlining additional flexibilities 

around appraisal standards. 

On May 12, 2020, the CFPB issued a final rule 

amending Regulation C, which implemented 

the Home Mortgage Disclosure Act (HMDA), to 

increase the threshold for reporting data about 

closed-end mortgage loans, so that institutions 

originating fewer than 100 closed-end mortgage 

loans in either of the two preceding calendar years 

do not have to report such data effective July 1, 

2020. The CFPB also set the threshold for reporting 

data about open-end lines of credit at 200 open-end 

lines of credit effective January 1, 2022, upon the 

expiration of the current temporary threshold of 

500 open-end lines of credit.

On June 25, 2020, the FHFA issued a final rule 

amending the existing Federal Home Loan Bank 

Housing Goals regulation. The final rule replaces 

the existing regulation’s four separate retrospective 

housing goals with a single prospective mortgage 

purchase housing goal with a target level of 20 

percent. The final rule also establishes a separate 

small member participation housing goal with a 

target level of 50 percent. It provides that a bank 

may request FHFA approval of alternative target 

levels for either or both of the goals. The final rule 

also establishes that housing goals apply to each 

bank that acquires any Acquired Member Assets 

mortgages during a year, eliminating the existing 

$2.5 billion volume threshold that previously 

triggered the application of housing goals for each 

Bank. Enforcement of the final rule will phase in 

over three years.

On June 26, 2020, the CFPB published a final 

interpretive rule on Regulation Z. The CFPB 

produces annually a list of rural and underserved 

counties and areas that is used in applying various 

Regulation Z provisions, such as the exemption 

from the requirement to establish an escrow account 

for a higher-priced mortgage loan and the ability 

to originate balloon-payment qualified mortgages. 

Regulation Z states that an area is “underserved” 

during a calendar year if, according to HMDA data 

for the preceding calendar year, it is a county in 

which no more than two creditors extended covered 

transactions, as defined in Regulation Z, secured 

by first liens on properties in the county five or 

more times. The official commentary provides an 

interpretation relating to this standard that refers to 

certain data elements from the previous version of 

the CFPB’s Regulation C, which implements HMDA, 

which were modified or eliminated in the 2015 

amendments to Regulation C. The CFPB issued this 

interpretive rule to specifically describe the HMDA 

data that will instead be used in determining that an 

area is “underserved.”

On June 30, 2020, the FHFA issued a revised NPRM 

and request for comment on a new regulatory 

capital framework for Fannie Mae and Freddie Mac 

that would amend definitions in FHFA’s regulations 

for assessments and minimum capital. The proposed 

rule would also remove the Office of Federal 

Housing Enterprise Oversight’s previous regulation 

on capital for the Enterprises.

On June 30, 2020, the CFPB issued an interim final 

rule amending Regulation X to temporarily permit 

mortgage servicers to offer certain loss mitigation 
162 2020 FSOC // Annual Report

options based on the evaluation of an incomplete 

loss mitigation application. Eligible loss mitigation 

options, among other things, must permit 

borrowers to delay paying certain amounts until 

the mortgage loan is refinanced, the mortgaged 

property is sold, the term of the mortgage loan 

ends, or, for a mortgage insured by the FHA, the 

mortgage insurance terminates. These amounts 

include, without limitation, all principal and interest 

payments forborne through payment forbearance 

programs made available to borrowers experiencing 

financial hardships due, directly or indirectly, to 

the COVID-19 emergency, including the payment 

forbearance program offered pursuant to section 

4022 of the CARES Act. These amounts also include 

principal and interest payments that are due and 

unpaid by these borrowers.

On July 10, 2020, the CFPB issued two NPRMs 

that would amend certain definitions of qualified 

mortgages (QMs) in Regulation Z. Regulation Z 

generally requires creditors to make a reasonable, 

good faith determination of a consumer’s ability to 

repay any residential mortgage loan, and loans that 

meet Regulation Z’s requirements for QMs obtain 

certain protections from liability. There are several 

different categories of QMs, including Temporary 

Government Sponsored Enterprise (GSE) QM 

loans and General QM loans. Temporary GSE QM 

loans include loans that are eligible for purchase 

or guarantee by either of the Enterprises, while 

operating under the conservatorship or receivership 

of the FHFA. The Enterprises are currently under 

Federal conservatorship. The CFPB established 

the Temporary GSE QM loan definition as a 

temporary measure that is set to expire no later 

than January 10, 2021 or when the Enterprises exit 

conservatorship, whichever occurs first. 

In one NPRM released on July 10, 2020, the CFPB 

proposed to extend the Temporary GSE QM loan 

definition to expire upon the effective date of final 

amendments to the General QM loan definition 

(or when the Enterprises cease to operate under 

the conservatorship of the FHFA, if that happens 

earlier). The final rule extending the Temporary 

QM loan definition was issued October 26, 2020. 

The other NPRM issued on July 10, 2020 proposed 

amendments to the General QM loan definition. 

For General QM loans, the ratio of the consumer’s 

total monthly debt to total monthly income (DTI 

ratio) must not exceed 43 percent. In the NPRM 

related to the General QM loan definition, the 

CFPB proposed, among other things, to remove 

the General QM loan definition’s 43 percent DTI 

limit and replace it with price-based thresholds. 

The objective of the NPRMs is to facilitate a smooth 

and orderly transition away from the Temporary 

GSE QM loan definition and to ensure access to 

responsible, affordable mortgage credit upon its 

expiration.

On July 22, 2020, the CFPB issued an NPRM that 

would amend Regulation Z to exempt certain 

insured depository institutions and insured credit 

unions from the requirement to establish escrow 

accounts for certain higher-priced mortgage loans.

On August 28, 2020, the CFPB issued an NPRM 

proposing to create a new category of QMs 

(Seasoned QMs) for first-lien, fixed-rate covered 

transactions that have met certain performance 

requirements over a 36-month seasoning period, 

are held in portfolio until the end of the seasoning 

period, comply with general restrictions on product 

features and points and fees, and meet certain 

underwriting requirements. The CFPB’s primary 

objective with this NPRM is to ensure access to 

responsible, affordable mortgage credit by adding 

a Seasoned QM definition to the existing QM 

definitions. 

In September 2020, CSBS issued for public comment 

proposed regulatory prudential standards for 

nonbank mortgage servicers subject to licensing 

and supervision by state financial regulators. The 

proposed standards include baseline prudential 

standards that cover eight areas, including capital, 

liquidity, risk management, data standards 

and integrity, data protection (including cyber 

risk), corporate governance, servicing transfer 

requirements, and change of control requirements. 

The capital and liquidity components of the 

baseline standards would be consistent with the 

minimum financial eligibility requirements imposed 

on nonbank seller/servicers by the Enterprises. 

Additionally, the proposed standards include 

enhanced prudential standards which would apply 
Council Activities and Regulatory Developments 163

higher capital and liquidity requirements as well 

stress testing and resolution planning requirements 

on certain, large complex servicers. 

4.5.2 Consumer Protection

On May 21, 2020, the CFPB extended the comment 

period for a supplemental NPRM regarding timebarred debt. The CFPB proposed to prohibit debt 

collectors from using non-litigation means (such 

as calls) to collect on time-barred debt unless 

collectors disclose to consumers during the initial 

contact and on any required validation notice 

that the debt is time-barred. Consumer research 

conducted by the CFPB found that a time-barred 

debt disclosure helps consumers understand that 

they cannot be sued if they do not pay, helping 

consumers make better informed decisions about 

whether to pay the debt.

On May 22, 2020, the CFPB issued a no-action letter 

(NAL) template that insured depository institutions 

can use to apply for a NAL covering their smalldollar credit products. The NAL template includes 

protections for consumers who seek small-dollar 

loan products.

On June 5, 2020, the CFPB issued a final 

rule amending the remittance rule. The Electronic 

Fund Transfer Act, as amended by the DoddFrank Act, establishes certain protections for 

consumers sending international money transfers, 

or remittance transfers. The CFPB’s remittance 

rule in Regulation E implements these protections. 

The CFPB amended Regulation E and the official 

interpretations of Regulation E to provide tailored 

exceptions to address compliance challenges that 

insured depository institutions may face in certain 

circumstances upon the expiration of a statutory 

exception that allows insured depository institutions 

to disclose estimates instead of exact amounts to 

consumers. The amendments to Regulation E 

became effective on July 21, 2020, the same day 

the statutory exception expired. The CFPB also 

increased a safe harbor threshold related to whether 

a person makes remittance transfers in the normal 

course of its business. On April 10, 2020, the CFPB 

issued a policy statement that for international 

remittance transfers that occur on or after July 

21, 2020 and before January 1, 2021, the CFPB 

will neither cite supervisory violations nor initiate 

enforcement actions against insured institutions for 

continuing to provide estimates to consumers under 

the temporary exception, instead of actual amounts.

On July 21, 2020, the CFPB issued a final rule 

amending its regulations governing payday, vehicle 

title, and certain high-cost installment loans. 

Specifically, the CFPB revoked several provisions 

of those regulations, including ones that provide 

that it is an unfair and abusive practice for a lender 

to make a covered short-term or longer-term 

balloon-payment loan, including payday and vehicle 

title loans, without reasonably determining that 

consumers have the ability to repay those loans 

according to their terms; prescribe mandatory 

underwriting requirements for making the abilityto-repay determination; and exempt certain loans 

from the mandatory underwriting requirements. 

The CFPB made these amendments to the 

regulations based on its re-evaluation of the legal 

and evidentiary bases for these provisions. The final 

rule did not amend the provisions of the regulations 

that impose certain requirements on providers 

that obtain authorization to initiate payment 

withdrawals, including prohibiting such withdrawals 

after two failed attempts without a new and specific 

authorization, and disclosures related to payment 

practices. 

4.6 Data Scope, Quality, and Accessibility

4.6.1 Data Scope

Expansion of LEI Adoption

During the past year, global adoption of the Legal 

Entity Identifier (LEI) of the Global LEI System 

continued to expand. As of September 30, 2020, 

more than 1.7 million LEIs had been issued by 36 

approved operational issuers. Approximately 34 

percent of these were issued in the United States, 

and approximately 13 percent were issued to U.S.-

based entities. The total number of LEIs issued 

represents a year-to-date increase of 9 percent, 

which follows the 9 percent increase in 2019. 

This expansion continues to be driven primarily by 

the LEI’s use in financial regulation, particularly 

in the European Union. Beginning in January 

2018, EU regulations under the revised Markets in 
164 2020 FSOC // Annual Report

Financial Instruments Directive (MiFID II) required 

entities involved in securities and Over-the-Counter 

(OTC) derivatives transactions to have an LEI and 

to use that LEI when reporting these transactions. 

Future expansion could also be supported by the 

growing interest of some large financial institutions 

in utilizing the LEI for purposes other than 

regulatory compliance and reporting. In the future, 

such expansion could lead in turn to the LEI being 

used (or evaluated for use) more extensively outside 

of the financial industry. Further use of the LEI 

in financial regulation can be expected to lead to 

modest future global increases in the number of 

LEIs issued.

Improving LEI Data Quality

Improving the quality of LEI data is important to 

building market confidence and the utility of the 

LEI. Therefore, considerable attention is directed 

to this challenge by the Council members that 

are represented on the Legal Entity Identifier 

Regulatory Oversight Committee (LEI ROC), 

including the OFR, SEC, CFTC, CFPB, FDIC, OCC, 

and the Federal Reserve. The LEI ROC is a group 

of more than 60 regulatory authorities from around 

the world that oversee the Global LEI Foundation 

(GLEIF). The GLEIF is a not-for-profit organization 

that serves as the Global LEI System’s central 

operating unit and ensures the system’s operational 

integrity.

One area of particular interest to these Council 

members is the ongoing work on “Level 2” LEI 

data – i.e., data submitted by legal entities acquiring 

an LEI regarding their “direct accounting 

consolidating parent” and their “ultimate 

accounting consolidating parent.” Level 2 LEI data 

allows parties to a financial transaction to use LEIs 

to identify not just the counterparties with whom 

they are transacting, but also affiliated entities, 

thereby improving the ability of such entities 

to perform a risk assessment of the transaction 

counterparties.

This past year, the LEI ROC continued to focus on 

improving the quality of Level 2 LEI data, as well as 

other elements of LEI reference data. The Council is 

committed to serving on the LEI ROC and working 

with the GLEIF to ensure the quality of LEI data 

is sufficient for use by industry participants and 

regulators. 

Updated LEI Standard

This past year, the International Organization 

for Standardization (ISO) completed a five-year 

systematic review of ISO 17442 (i.e., the ISO 

standard on which the Global LEI System is based) 

and published an updated version of this standard. 

Council members contributed to this review in a 

variety of ways.

Expanded Role of the LEI ROC 

This past year, the LEI ROC conducted due 

diligence and related work that led to its decision to 

take on the role of international governance body 

for new regulatory financial data standards for OTC 

derivative transaction reporting, which standards 

had earlier been promulgated by the Committee on 

Payments and Market Infrastructures-International 

Organization of Securities Commissions (CPMIIOSCO) and the FSB. These standards are the 

Unique Transaction Identifier (UTI), the Unique 

Product Identifier (UPI), and the Critical Data 

Elements (CDE). The LEI ROC agreed to take 

on this new role following the review of the work 

of its Working Group on Governance of Unique 

Identifiers and Data Elements. That work, in key 

parts, was performed in collaboration with the 

Working Group on UTI and UPI Governance 

(GUUG) of the FSB. On October 1, 2020, after 

having obtained the approval of the LEI ROC and 

FSB, the LEI ROC assumed the role of international 

governance body for the UTI, UPI, and CDE.

4.6.2 Data Quality

Reporting of Standardized Derivatives Data

In 2020, Council members continued to participate 

in the development of international regulatory 

and industry standards for the reporting of OTC 

derivatives transactions. A key milestone reached 

during the year was the approval of the UTI as 

a new ISO standard (ISO 23897), with support 

and input from Council members. This industry 

standard is now available for global application. 

Because this industry standard is expected to be 

used by regulators in multiple jurisdictions in their 

respective OTC derivative transaction reporting 

regimes, the UTI will improve the abilities of 
Council Activities and Regulatory Developments 165

firms and regulators to monitor these financial 

transactions across borders.

Another milestone reached during 2020 was an 

agreement by ISO to initiate development work on 

a new ISO standard for the UPI. Council members 

contributed to the submission to ISO on UPI. This 

development work is expected to continue into 2021. 

The UPI will allow derivatives regulators and other 

government agencies to better monitor emerging 

financial risks by categorizing different types of 

derivatives transactions. The Derivatives Service 

Bureau (DSB), a subsidiary of the Association 

of National Numbering Agencies, will act as the 

UPI Service Provider (i.e., it will receive and store 

product attributes and assign UPI codes to OTC 

derivatives products).

In 2020 Council members participated in a Joint 

Small Group of FSB GUUG and LEI ROC to refine 

DSB governance and to continue refinement of 

regulatory technical standards for CDE beyond 

those developed by CPMI-IOSCO. Like the UTI and 

UPI, the CDE are expected to be used by regulators 

in multiple jurisdictions in their respective OTC 

derivative transaction reporting regimes. It is 

expected these data elements will be submitted to 

ISO as business concepts or business elements within 

the ‘data dictionary’ of the ISO 20022 standard. 

Council members are participating in preparatory 

work for this submission, which is being conducted 

in partnership with the Society for Worldwide 

Interbank Financial Telecommunications (SWIFT), 

the Registration Authority for ISO 20022.

Potential Emerging Threats, Vulnerabilities, and Council Recommendations 167

The outbreak of the COVID-19 pandemic is 

the biggest external shock to hit the post-war 

U.S. economy. As businesses and establishments 

shut down in March and April, private-sector 

employment declined by almost a fifth. The 

implementation of the CARES Act and a series 

of policy measures taken by the Federal Reserve 

and Treasury helped stabilize financial markets. 

Although these policy measures have rejuvenated 

credit markets, a protracted outbreak can adversely 

affect any recovery and prolong the downturn. This 

section presents a general discussion of identified 

vulnerabilities in the context of the COVID-19 stress, 

highlights key actions taken to mitigate risks, and 

makes recommendations for addressing the risks.

5.1 Nonfinancial Business: Corporate Credit 

Low interest rates after the 2008 financial crisis 

fueled a prolonged credit expansion in nonfinancial 

business. Since 2011, the rate of growth in corporate 

borrowing has exceeded the growth in nominal 

GDP, pushing the corporate debt-to-GDP ratio to 

historic highs when the pandemic hit the United 

States (see Section 3.2.1). As credit conditions 

deteriorated in March, market financing dried up 

significantly. Bank credit lines became the principal 

source of funding for most businesses, especially 

those adversely affected by the pandemic (see 

Section 3.5.1).

Rapid and decisive intervention by the Federal 

Reserve and Treasury in March helped generate 

a rebound in debt financing and revived investor 

sentiment. Since then, principal equity indices have 

broken through to historic highs, while spreads in 

commercial paper and bond financing have also 

returned to near pre-pandemic lows. 

Meanwhile, banks have tightened standards on 

new lending. Since March, nearly $2 trillion in 

nonfinancial corporate debt has been downgraded 

and default rates on leveraged loans and corporate 

bonds have increased considerably. Business 

bankruptcy filings are approaching cyclical highs 

and are likely to increase until a full recovery takes 

hold (see Box A). 

A large wave of bankruptcies could stress resources 

at courts and make it harder for firms to obtain 

critical debtor-in-possession financing, which 

could preclude timely debt restructuring for many 

firms, potentially forcing them into liquidation. 

In comparison to debt restructurings, liquidations 

typically lead to greater economic losses from 

the ensuing declines in employment and capital 

spending. Moreover, creditors may suffer bigger 

losses from liquidation, potentially contributing to a 

further tightening in overall credit conditions.

Elevated valuations in U.S. equities and corporate 

bonds make these markets vulnerable to a major 

repricing of risk, increasing volatility, and weakening 

balance sheets of financial and nonfinancial 

businesses. Sharp reductions in the valuations of 

different assets could negatively impact liquidity, 

increase borrowing costs, and heighten rollover risk. 

Despite the turmoil in credit markets, the policyaided rebound in business financing has been strong 

and the ratio of corporate debt-to-GDP has reached 

new record highs. The potential risk to financial 

stability from nonfinancial business borrowing 

depends on the ability of businesses to service their 

obligations, the ability of the financial sector to 

absorb losses from defaults and downgrades, and 

the continued willingness of market participants 

to provide intermediation during times of stress. 

In the years prior to the pandemic, the increase in 

business debt did not fuel increased investments 

to strengthen corporations’ earnings potential, 

leaving them vulnerable to debt servicing problems. 

Moreover, debt overhang problems could lead to 

a sluggish recovery. In extreme situations when 

debt servicing problems are widespread, credit 

markets remain vulnerable to a repricing of risk and 

disruptions to financial stability.

5 Potential Emerging Threats, Vulnerabilities, 

and Council Recommendations
168 2020 FSOC // Annual Report

Recommendations

The Council recommends that agencies continue 

to monitor levels of nonfinancial business leverage, 

trends in asset valuations, and potential implications 

for the entities they regulate in order to assess 

and reinforce the ability of the financial sector to 

manage severe, simultaneous losses. Regulators and 

market participants should continue to monitor and 

analyze the exposures, loss-absorbing capacity, and 

incentives of different types of stakeholders. This 

includes the direct and indirect exposures of holders 

of U.S. nonfinancial corporate credit, the effects of 

potential liquidity risks in certain mutual funds, the 

effects of evolving loan covenant and documentation 

requirements, and the potential effects of markto-market losses and credit rating downgrades, 

among other considerations. Regulators and market 

participants should also continue to assess ways in 

which leveraged nonfinancial corporate borrowers 

and elevated asset prices may amplify stresses in the 

broader market in the event of a rapid repricing of 

risk or a slowdown in economic activity. 

5.2 Financial Markets

5.2.1 Short-Term Wholesale Funding Markets

In normal times, wholesale funding markets provide 

essential short-term funding to businesses, local 

governments, and other financial intermediaries 

(see Sections 3.4.1 and 3.4.2). In addition to 

government entities and the Federal Reserve, 

domestic participants in these markets include 

broker-dealers, banks, money funds, hedge funds, 

and securities lenders (see Box D). Developments 

in the STFMs can have implications for financial 

stability, as well as for the implementation of 

monetary policy.

Money Market Mutual Funds

Stresses on prime and tax-exempt MMFs revealed 

continued structural vulnerabilities that led to 

increased redemptions and, in turn, contributed 

to and increased the stress in short-term funding 

markets (see Section 3.5.2.3). MMFs offer 

shareholders redemptions on a daily basis (and 

retail at a stable NAV), while many of the shortterm instruments that the MMFs hold may not be 

liquid in times of stress. This liquidity difference 

contributes to redemption incentives including a 

so-called “first-mover advantage,” where investors 

believe they will be better off if they redeem faster 

than other investors. 

As prime MMFs experienced heavy redemptions, 

their WLAs dropped notably, and some funds’ 

WLAs (which must be disclosed publicly each 

day) approached or fell below the 30 percent 

minimum threshold required by SEC rules. When 

a fund’s WLA falls below 30 percent, the fund 

board can impose fees or gates on redemptions. 

Market participants reported concerns that the 

imposition of a fee or a gate by one fund could spark 

widespread redemptions from others. Preliminary 

research indicates that prime fund outflows 

accelerated as WLAs fell close to 30 percent. 

Among institutional and retail prime MMFs, the 

scale of the outflows as a percentage of fund assets 

exceeded those that occurred during the September 

2008 crisis, while the scale for tax-exempt funds 

was similar to that in the 2008 financial crisis (see 

Box D). Outflows abated after the Federal Reserve’s 

announcement of support for MMFs in mid-to-late 

March.

Repo Market

Repo markets have undergone significant structural 

changes since the 2008 financial crisis. These 

changes helped streamline some repo operations 

and reduced exposures to counterparty risk. Repo 

markets remain critical not only to financial stability 

but also to the implementation of monetary policy, 

and these linkages were highlighted by the turmoil 

in repo markets in mid-September 2019. 

Overnight repo rates spiked in mid-September 2019, 

with SOFR increasing by approximately 300 basis 

points (see Section 3.4.2). This unexpected high 

volatility has been attributed to technical factors (for 

example, to finance new Treasury settlements) and a 

decline in funds available from banks and MMFs, as 

corporations made quarterly tax payments. However, 

the repo volatility spilled over to other short-term 

rates, including the effective federal funds rate. The 

Federal Reserve restored control of the policy rate 

by injecting reserves, and the FOMC announced its 

intention to maintain an ample supply of reserve 
Potential Emerging Threats, Vulnerabilities, and Council Recommendations 169

balances to aid the orderly functioning of funding 

markets.

Repo rates on Treasuries and agency MBS spiked 

once again in mid-March 2020. Selling pressures 

in Treasuries likely originated from foreign central 

banks and foreign investors seeking dollar funding 

during the pandemic. Liquidity demand from 

leveraged participants, such as hedge funds using 

Treasury collateral (see Section 3.5.2.5 and Box 

B), and mREITs using agency MBS collateral (see 

Section 3.5.2.2), may have also played a significant 

role. These leveraged participants are vulnerable to 

funding risks because of their reliance on short-term 

repo funding. When these leveraged participants 

face margin calls (either because of an external 

shock to the repo market or investor concerns about 

their profitability), the need to deleverage can 

increase selling pressures and lead to more margin 

calls. Since the assets on their balance sheet are the 

same assets used as collateral in their repo funding, 

the pressure to deleverage can create an adverse 

feedback loop of increased selling pressures and 

more margin calls. The complexity of interactions 

involving leveraged participants raises concerns as to 

their role in amplifying funding stresses.

Recommendations

Recent market stresses, including the financial 

fallout from the pandemic, have confirmed that 

there remain potentially significant structural 

vulnerabilities in short-term funding markets. 

Market participants that rely predominantly on 

short-term debt are vulnerable to funding risks. 

For banks and other depository institutions, this 

risk is mitigated by deposit insurance and liquidity 

backstops, such as the Federal Reserve’s discount 

window. However, non-depository institutions 

are also important participants in these markets. 

Leveraged nonbank participants that depend on 

short-term funding also can pose a challenge to 

financial stability. If their short-term funding is 

not rolled over, these entities can be forced to 

deleverage, and that can create an adverse feedback 

loop of asset sales and margin calls. 

The Council recommends that regulators review 

these structural vulnerabilities, including the 

vulnerability of large-scale redemptions in prime 

and tax-exempt MMFs (as well as other shortterm funds with similar characteristics, such as 

short-term collective investment funds), and any 

role that leveraged nonbank entities may have 

played in the repo market, and, if warranted, take 

appropriate regulatory measures to mitigate these 

vulnerabilities.

5.2.2 Residential Real Estate Market: Nonbank 

Mortgage Origination and Servicing

Nonbank mortgage companies play a significant 

role in the housing finance system (see Section 

3.4.5). Nonbanks originated nearly 60 percent 

of new mortgages in 2019 and service nearly 

half of all mortgage debt outstanding. They are 

particularly important for helping extend credit 

to low- and moderate-income borrowers and have 

provided competition and liquidity in the market 

for mortgage servicing rights. While the business 

models of nonbank mortgage companies vary, 

many are subject to certain fragilities, such as a 

heavy reliance on short-term funding, obligations 

to continue to make servicing advances for certain 

delinquent borrowers, and limited resources to 

absorb adverse economic shocks. Given these 

fragilities and their connections to other markets 

and market participants, nonbanks could transmit 

risk to the broader financial system should they 

experience financial stress. 

As the shock from the pandemic hit the United 

States, federal and state governments enacted 

a series of public assistance policies to aid 

homeowners, such as suspending foreclosures, 

placing a moratorium on evictions, and offering 

flexibilities in home purchase and mortgage 

acquisition processes. Under the CARES Act, 

borrowers with a federally backed mortgage are able 

to request mortgage payment forbearance. 

An increase in forbearance and default rates has the 

potential to impose significant strains on nonbank 

servicers, but nonbanks have generally continued 

to meet their servicing obligations. Increased 

originations, beneficial policy actions, and fiscal 

stimulus have mitigated nonbanks’ potential credit 

and liquidity pressures. The surge in refinancing 

due to low rates has provided servicers with an 

additional source of liquidity to help sustain 
170 2020 FSOC // Annual Report

operations. In addition, federal agencies have issued 

guidance and provided clarification on servicer 

advance obligations that, in some cases, limited 

the duration of required advances. Ginnie Mae 

established a liquidity facility for its servicers that 

provides a last resort financing option, though 

that facility has seen limited uptake. Government 

stimulus programs and expanded unemployment 

insurance may have averted additional delinquencies 

and limited forbearance requests, relieving some 

potential stress on servicers. As the economy 

recovers, the Council will continue to monitor 

closely the origination and servicing markets and 

the condition of nonbank mortgage companies.

Recommendations

The Council recommends that relevant federal and 

state regulators continue to coordinate closely to 

collect data, identify risks, and strengthen oversight 

of nonbank companies involved in the origination 

and servicing of residential mortgages. Regulators 

and market participants have taken steps to address 

the potential risks stemming from nonbanks, 

including additional collaboration and the proposed 

strengthening of prudential requirements. The 

Council encourages regulators to take additional 

steps available to them within their jurisdictions to 

address the potential risks of nonbank mortgage 

companies. While nonbank mortgage originators 

have experienced enhanced profitability during 

the refinance boom, relevant regulators should 

ensure that the largest and most complex nonbank 

mortgage companies are prepared should 

refinances decrease or forbearance rates increase. 

In addition, the Council recommends that relevant 

federal and state regulators develop and establish 

an information-sharing framework to enable 

collaboration and communication in responding to 

distress at a mortgage servicer. Regulators should 

also develop and implement coordinated resolution 

planning requirements for large and complex 

nonbank mortgage companies. 
 Box F: Council Statement on Activities-Based Review of Secondary Mortgage Market Activities 171

On September 25, the Council issued a statement 

on its activities-based review of secondary mortgage 

market activities. The Council’s review focused in 

particular on the activities of Fannie Mae and Freddie 

Mac as the dominant private secondary market 

providers of liquidity through their purchase of 

mortgages for securitization and sale as guaranteed 

MBS. In assessing potential risks to financial stability, 

the Council applied the framework for an activitiesbased approach described in the interpretive guidance 

on nonbank financial company determinations issued 

by the Council in December 2019. 

The 2008 financial crisis demonstrated that financial 

stress at the Enterprises could limit their ability to 

provide reliable liquidity to the secondary market 

or perform their guarantee and other obligations 

on their MBS and other liabilities, with significant 

implications for the national housing finance markets, 

financial stability, and the broader economy. The 

Enterprises continue to play a central role in the 

national housing finance markets—acquiring nearly 

50 percent of newly originated mortgages in both 

single-family and multifamily markets—and are two of 

the largest U.S. financial institutions, with significant 

interconnectedness with financial markets and other 

financial institutions. 

If the Enterprises were unable to provide liquidity 

to the secondary market, other market participants 

may be unable in the near- or medium-term to 

provide liquidity at the scale and pricing needed 

to ensure smooth market functioning and financial 

intermediation. As a result, any distress at the 

Enterprises that affected their secondary mortgage 

market activities, including their ability to perform their 

guarantee and other obligations on their MBS and 

other liabilities, could pose a risk to financial stability, 

if risks are not properly mitigated.

Capital is a core component of FHFA’s regulatory 

framework. Therefore, in assessing potential risk 

mitigants, much of the Council’s analysis focused on 

a new capital regulation recently proposed by FHFA. 

This proposal is intended to enhance the quality and 

quantity of required capital, so as to ensure that each 

Enterprise is capitalized to remain a viable going 

concern both during and after a severe economic 

downturn and also to mitigate the potential risk 

to national housing finance markets posed by the 

Enterprise. 

In conducting its review, the Council considered the 

following two questions, among others: 

1) Is the proposed capital rule appropriately sized 

and structured given the Enterprises’ risks and 

their key role in the housing finance system? 

2) Does the proposed capital rule promote stability in 

the broader housing finance system?

Based on its assessment of the proposed rule, 

the statement issued by the Council contained the 

following key findings: 

First, with respect to Risk-Based Capital 

Requirements: The proposed rule includes a risksensitive capital framework that results in a granular 

calibration of credit risk capital requirements. It would 

require aggregate credit risk capital on mortgage 

exposures that, as of September 2019, would lead to 

a substantially lower risk-based capital requirement 

than the bank capital framework, and likely be lower 

than other credit providers across significant portions 

of the risk spectrum during much of the credit cycle. 

This would create an advantage that could maintain 

significant concentration of risk with the Enterprises. 

The Council encouraged FHFA and other regulatory 

agencies to coordinate and take other appropriate 

action to avoid market distortions that could 

increase risks to financial stability by generally taking 

consistent approaches to the capital requirements 

and other regulation of similar risks across market 

participants, consistent with the business models and 

missions of their regulated entities. 

Second, on Capital Buffers: The proposed rule 

includes a stress capital buffer and a stability capital 

buffer that would require the Enterprises to hold 

capital above their regulatory requirements. The 

inclusion of such capital buffers is an important step 

to mitigating the risks the Enterprises pose to the 

 Box F: Council Statement on Activities-Based Review of Secondary Mortgage 

Market Activities
172 2020 FSOC // Annual Report

broader system. The calibration of the buffers in the 

proposed rule might help achieve certain policy goals, 

such as reducing the buffers’ impact on higher risk 

exposures, but is based on total adjusted assets, not 

risk-weighted assets, and thus may be relatively riskinsensitive.

For that reason, the Council encouraged FHFA to 

consider the relative merits of alternative approaches 

for more dynamically calibrating the capital buffers. 

The capital buffers should be tailored to mitigate 

the potential risks to financial stability and otherwise 

ensure that the Enterprises have sufficient capital to 

absorb losses during periods of severe stress and 

remain viable going concerns, while balancing other 

policy objectives. 

Third, on Total Capital Sufficiency: The proposed rule 

would increase the quality and quantity of capital that 

the Enterprises would be required to hold. Significant 

high-quality capital would mitigate risks to financial 

stability by making it more likely that the Enterprises 

will be able to perform their countercyclical function 

and maintain market confidence as viable going 

concerns through the economic cycle. Similarly, a 

meaningful leverage ratio requirement that is a credible 

backstop to the risk-based requirements would 

address potential risks to financial stability. 

The proposed rule, by relying on definitions of 

regulatory capital that are similar to that of the U.S. 

banking framework, would ensure that high-quality 

capital is the predominant form of regulatory capital. 

With respect to the quantity of regulatory capital, the 

Council considered the proposed capital requirements 

in light of a number of relevant benchmarks, such 

as: (1) losses during the 2008 financial crisis; (2) a 

comparison of the proposed capital requirements to 

those of other large, complex financial institutions, 

taking into account differences in business models 

and risk profiles; and, (3) the capital requirements 

implied by a conservative mortgage stress test model. 

The proposed rule requires a meaningful amount of 

capital for the Enterprises, and is a significant step 

towards ensuring that the Enterprises would be able 

to provide liquidity to the secondary mortgage market 

and satisfy their obligations during and after a period 

of severe stress. However, the Council’s analysis using 

benchmark comparisons suggested that risk-based 

capital requirements and leverage ratio requirements 

that are materially less than those contemplated by 

the proposed rule would likely not adequately mitigate 

the potential stability risk posed by the Enterprises. 

Moreover, it is possible that additional capital could be 

required for the Enterprises to remain viable concerns 

in the event of a severely adverse stress, particularly if 

the Enterprises’ asset quality were ever to deteriorate 

to levels comparable to the experience leading up to 

the 2008 financial crisis.

The Council thus encouraged FHFA to ensure highquality capital by implementing regulatory capital 

definitions that are similar to those in the U.S. banking 

framework. The Council also encouraged FHFA to 

require the Enterprises to be sufficiently capitalized to 

remain viable as going concerns during and after a 

severe economic downturn. 

In addition to a capital framework, FHFA is also 

implementing significant additional enhancements to 

the Enterprises’ regulatory framework that would help 

mitigate the potential risk to financial stability, thereby 

enabling the Enterprises to provide secondary 

market liquidity throughout the economic cycle. 

These enhancements include efforts to strengthen 

Enterprise liquidity regulation, stress testing, 

supervision, and resolution planning. 

The Council supported FHFA’s commitment 

to developing its broader prudential regulatory 

framework for the Enterprises, and will continue to 

monitor the secondary mortgage market activities 

of the Enterprises and FHFA’s implementation of 

the regulatory framework to ensure potential risks 

to financial stability are adequately addressed. If 

the Council determines that such risks to financial 

stability are not adequately addressed by FHFA’s 

capital and other regulatory requirements or other 

risk mitigants, the Council may consider more formal 

recommendations or other actions, consistent with 

the December 2019 guidance.

Box F: Council Statement on Activities-Based Review of Secondary Mortgage 

Market Activities
Potential Emerging Threats, Vulnerabilities, and Council Recommendations 173

5.2.3 Commercial Real Estate Market

The COVID-19 pandemic led to the closure of 

many business establishments. While some of these 

closures have been temporary (such as restaurants), 

others have been more long-lasting (such as 

entertainment parks and movie theaters). Although 

the intensity and impact of closures depends on the 

duration and strength of the pandemic, it raises 

concerns about the viability of several types of 

business establishments and their ability to pay rent 

or generate income from commercial properties. 

A prolonged downturn leaves the commercial real 

estate (CRE) sector vulnerable to mortgage default 

and decline in valuations, with spillovers to the 

broader economy (see Section 3.4.6). 

There are two reasons why CRE is important to 

financial stability in the United States (see Box 

E). First, asset sales from financially distressed 

individual properties can lower valuations, spilling 

over into adjoining property values, leading to more 

distress and a general downward spiral on CRE 

valuations. Second, a significant proportion of CRE 

loans is currently held on balance sheets of banks, 

with small and mid-size banks more likely to be 

concentrated in CRE. Distress in CRE properties 

makes these creditor banks vulnerable to losses and 

write-downs, with the potential to tighten credit and 

dampen the economic recovery. If these valuation 

pressures and asset sales do not remain localized, a 

widespread decline in the valuation of underlying 

CRE properties could lead to sluggish economic 

growth.

Recommendations

The Council recommends that regulators continue 

to monitor volatility in CRE asset valuations, the 

level of CRE concentration at banks, and the 

performance of CRE loans. Regulators should also 

monitor exposures, loss-absorbing capacity, and the 

incentives of banks and other entities that hold CRE 

loans, including REITs and insurance companies. 

The Council recommends that regulators continue 

to encourage banks and other entities to bolster, 

as needed, their loss absorption capacity by 

strengthening their capital and liquidity buffers 

commensurate with the levels of CRE concentration 

on their balance sheets.

5.3 Financial Institutions

5.3.1 Large Bank Holding Companies

Large BHCs are critical to the U.S. financial 

system, performing essential banking functions 

such as the provision of credit to commercial and 

retail borrowers. As the shock from the pandemic 

has shown, bank credit lines provide a lifeline to 

business, especially in times when nonbanks and 

other market sources of finance tighten credit (see 

Section 3.5.1.1). 

The central role that large BHCs play in retail and 

wholesale payment systems ensure that operational 

failures do not disrupt commercial activity even 

in times of market stress. Large BHCs also help 

financial and nonfinancial firms to hedge their risk 

exposures in the derivatives markets. Lastly, several 

specialized financial services, such as tri-party 

repo and custody services for asset managers, are 

concentrated in the largest BHCs. 

The onset of the pandemic dried up funding 

from market and nonbank sources. Bank credit 

lines became the principal source of funding for 

corporations adversely affected by the pandemic. 

The strengthened capital positions following 

the 2008 financial crisis helped banks withstand 

large emergency credit drawdowns. Liquidity 

pressures were also eased when the Federal Reserve 

lowered the discount rate by 150 basis points, 

encouraged discount borrowing, and announced 

facility programs to aid banks and markets. Most 

corporations drew on their bank credit lines as a 

precautionary measure and deposited the proceeds 

with banks. Bank deposits grew sharply not just from 

credit line withdrawals and payments from fiscal 

programs, but also because investors fleeing risky 

assets sought the safety of insured deposits. These 

events underlined the critical role that the banking 

system plays in the provision of credit during 

episodes of financial distress. 

The pandemic has significantly impaired the 

ability of some households and businesses to repay 

debt. However, mortgage forbearance, interagency 

guidance on troubled debt restructurings, and 

various liquidity support programs have helped 

mitigate some of these pressures. As a result, 
174 2020 FSOC // Annual Report

delinquency rates on bank loans for the first half of 

2020 remain low and have yet to reveal a significant 

deterioration in loan performance. Meanwhile, 

large BHCs have significantly increased loan 

loss provisions in anticipation of the impending 

deterioration in asset quality. Loan loss provisions 

were also affected by the adoption of the CECL 

framework, though regulators have allowed a 

delayed capital phase-in to reduce the burden 

during the pandemic. 

The credit line withdrawals and the increase in loan 

loss provisions have put downward pressure on both 

leverage and risk-based capital ratios. As credit and 

equity markets rebounded from their March lows, 

broker-dealers and trust banks have also benefited 

from significant increases in trading revenues and 

underwriting income. However, for banks with 

larger credit footprints, the impending declines in 

credit quality have led to voluntary and involuntary 

restrictions on their capital distributions.

In light of the financial fallout from the COVID-19 

pandemic, regulatory authorities have provided 

temporary capital relief as many large banks 

voluntarily suspended share repurchases in midMarch. Following the release of the 2020 stress test 

results conducted by the Federal Reserve, large 

banks are required to preserve capital by suspending 

stock repurchases, capping dividend payments, and 

limiting dividends according to a formula tied to 

recent income. In spite of these policy measures, 

the largest banks remain vulnerable to a protracted 

downturn that is more severe than currently 

envisaged. These outcomes have been discussed 

under the 2020 Stress Test Results conducted by 

the Federal Reserve in their Assessment of Bank 

Capital during the Recent Coronavirus Event (see Chart 

3.5.1.27).

Recommendations 

Large and complex U.S. financial institutions were 

more resilient prior to the pandemic than they were 

prior to the 2008 financial crisis. This resilience 

has been achieved, in part, by raising more capital; 

holding higher levels of liquid assets to meet peak 

demands for funding withdrawals; improving 

loan portfolio quality for residential real estate; 

implementing better risk management practices; 

and developing plans for recovery and orderly 

resolution. 

The Council recommends that financial regulators 

ensure that the largest financial institutions 

maintain sufficient capital and liquidity to ensure 

their resiliency against economic and financial 

shocks. The Council recommends that regulators 

continue to monitor the capital adequacy for 

these banks and, when appropriate, phase out the 

temporary capital relief currently provided. 

The Council also recommends that regulators 

continue to monitor and assess the impact of rules 

on financial institutions and financial markets—

including, for example, on market liquidity and 

capital—and ensure that BHCs are appropriately 

monitored based on their size, risk, concentration 

of activities, and offerings of new products and 

services.

The Council further recommends that the 

appropriate regulatory agencies continue to review 

resolution plans submitted by large financial 

institutions; provide feedback and guidance to 

such institutions; and ensure there is an effective 

mechanism for resolving large, complex institutions. 

5.3.2 Investment Funds

Investment funds play a critical intermediary 

role in the U.S. economy, promoting economic 

growth through efficient capital formation. While 

recognizing these benefits, the Council has also 

identified a potential vulnerability relating to 

redemption risk in certain open-end funds. The 

level of this risk is a function of, among other 

things, the liquidity of the underlying assets, the 

effectiveness of the fund’s management of its 

liquidity, and the potential for an investor to enjoy 

a first-mover advantage. For example, although 

both equity and fixed income-oriented open-end 

funds offer daily redemptions to investors, some 

fixed-income markets are less liquid than equity 

markets and thus funds holding mostly fixed-income 

instruments may face greater vulnerability to run 

risks than funds holding mostly equities. During 

periods of significant financial stress, as investor 

sentiment about overall economic and market 

conditions changes, these funds – not unlike other 
Potential Emerging Threats, Vulnerabilities, and Council Recommendations 175

investors such as insurance companies, pension 

funds, and individual investors – may be inclined 

to directly sell these fixed-income instruments for 

cash. The Council has focused in particular on the 

question of whether the structure of open-end funds 

results in greater selling pressure than if investors 

held the fixed-income instruments directly. The 

SEC has taken several steps to address this potential 

vulnerability, including the adoption in October 

2016 of rules intended to enhance liquidity risk 

management by mutual funds and ETFs. 

During the mid-March financial turmoil, credit 

spreads increased to levels not seen since the 2008 

financial crisis, and corporate bond issuance came 

to a near halt. As discussed in Section 3.5.2.4, 

bond funds experienced historically high levels 

of outflows that some research has suggested 

contributed to stress in corporate and municipal 

bond markets. Interventions by the Federal Reserve 

and Treasury, including a commitment to purchase 

up to $250 billion of bonds, ultimately restored 

orderly functioning in the primary and secondary 

markets. Nonetheless, these events demonstrate the 

need for additional analysis to assess broader market 

structure dynamics that may have contributed to the 

stress, including whether investors redeeming shares 

from bond funds may have affected the extent of 

selling pressure in the bond market differently than 

if those investors had held and sold bonds directly. 

In addition to the potential vulnerability associated 

with redemption risk in mutual funds, the Council 

has also previously highlighted the use of leverage 

by investment funds. The use of leverage is 

most widespread among hedge funds but varies 

significantly among hedge funds of different sizes 

and investment strategies (see Section 3.5.2.5). 

Leverage can allow investment funds to hedge risk 

or increase exposures, depending on the activities 

and strategies of the fund. However, leverage 

introduces counterparty risk, and in a period of 

stress, if leveraged investment funds are forced to 

sell assets on a significant scale, it could exacerbate 

asset price movements. As discussed in Box B, hedge 

funds may have also contributed to Treasury market 

volatility.

Recommendations

The Council supports initiatives by the SEC and 

other agencies to address risks in investment funds. 

The Council also supports data collection and 

analytical work by member agencies aimed at the 

identification of potential emerging risks. The SEC 

implemented several data collection efforts and 

has established additional reporting requirements 

for investment funds. As a result, there is now 

significantly more data available to regulators to 

monitor and analyze developments concerning fund 

liquidity, leverage, and risk-taking. The Council 

recommends that the SEC and other relevant 

regulators consider whether there are additional 

steps that should be taken to address these 

vulnerabilities. 

5.4 Financial Market Structure, Operational 

Challenges, and Financial Innovation 

5.4.1 Central Counterparties

The benefits of CCPs include improved 

transparency, the application of centralized 

risk management and standardized margin 

methodologies, multilateral netting, and clear, 

predetermined procedures for the orderly 

management of counterparty credit losses. Central 

clearing mandates have increased the volume of 

cleared OTC derivatives trades, both in absolute 

terms and relative to the size of the markets.

The introduction of the CPMI-IOSCO Principles 

for Financial Market Infrastructures (PFMI) sets 

forth international principles for CCPs and other 

types of financial market infrastructures. The 

implementation of the PFMI worldwide, as well 

as other risk-management-focused policies, has 

improved the safety and efficiency of CCPs across a 

broad set of jurisdictions.

There have also been advances in the development 

of plans for CCP recovery. Regarding those CCPs 

designated as systemically important FMUs by the 

Council, the CFTC has regulations requiring such 

CCPs it supervises to maintain recovery and orderly 

wind-down plans, and the CFTC has reviewed and 

provided guidance on these recovery plans. The SEC 

has also approved recovery and orderly wind-down 

plans for the CCPs it supervises.
176 2020 FSOC // Annual Report

Although CCPs provide significant benefits to 

market functioning and financial stability, the 

inability of a CCP to meet its obligations arising 

from one or more clearing member defaults could 

potentially introduce strains on the surviving 

members of the CCP and, more broadly, the 

financial system. The overall market impact of 

these demands depends on the size of the CCP 

and its interconnectedness with other systemically 

important financial institutions. 

CCPs’ risk management frameworks are designed 

to ensure that they have sufficient pre-funded 

resources to cover a member default and, in the 

case of systemically important CCPs, multiple 

member defaults. In order to mitigate their risk, 

CCPs impose liquidity and resource requirements 

on clearing members that can increase with market 

volatility. The first line of defense of the CCP is often 

through initial margin requirements which, in order 

to achieve adequate risk coverage, are inherently 

procyclical. Initial margin models, however, also 

have features that mitigate procyclicality, including 

the use of historical and theoretical stress scenarios 

even during low volatility periods, to dampen the 

sensitivity of initial margin to changes in market 

volatility.

In response to the market volatility in March 2020, 

aggregate margin levels increased significantly. 

However, the markets served by the CCPs continued 

to function in an orderly fashion (see Section 

3.6.1.1). While the cleared derivatives markets 

functioned as designed, there is continued concern 

about the impact on clearing members and their 

clients of liquidity demands related to margin 

requirements. Similar concerns exist in the context 

of uncleared swaps and the collateral flows between 

swap dealers and their clients. Relevant authorities 

are engaged in efforts to examine the performance 

of CCPs’ and dealers’ margin frameworks and the 

potential strains placed on intermediaries and 

clients. 

A number of regulatory efforts have focused on 

monitoring and quantifying potential systemic risks. 

Many authorities regularly monitor risk exposures 

at CCPs and clearing members or broker-dealers 

pursuant to their regulatory regime. Both the CFTC 

and SEC maintain active risk surveillance programs 

of CCPs’ and intermediaries’ risk management and 

receive daily or weekly reports of positions, risk 

measures, margins, collateral, and default resources.

In addition to risk surveillance programs, 

supervisory stress tests involving multiple CCPs can 

be an important tool in this assessment. Supervisory 

stress tests can, for example, help shed light on 

the risks and vulnerabilities related to potential 

failures of the largest clearing members. Because 

these clearing members are often active across many 

markets, such failures could create exposures across 

multiple CCPs.

Recommendations

The Council recommends that the CFTC, Federal 

Reserve, and SEC continue to coordinate in the 

supervision of all CCPs designated by the Council 

as systemically important FMUs. Relevant agencies 

should continue to evaluate whether existing 

risk management expectations for CCPs are 

sufficiently robust to mitigate potential threats 

to financial stability. Member agencies should 

continue working with global counterparts and 

international standard-setting bodies to identify 

and address areas of common concern. During the 

last year, EU authorities and the CFTC have taken 

a number of steps to provide greater clarity to the 

regulation and supervision of CCPs operating in 

their markets. The Council encourages continued 

engagement by Treasury, CFTC, Federal Reserve, 

and SEC with foreign counterparts to address the 

potential for inconsistent regulatory requirements 

or supervision to pose risks to U.S. financial stability 

and encourages cooperation in the oversight and 

regulation of FMUs across jurisdictions.

The Council also encourages agencies to continue 

to monitor and assess interconnections among 

CCPs, their clearing members, and other financial 

institutions. While margin requirements have 

increased significantly in the aftermath of the 

financial fallout from the COVID-19 pandemic, 

agencies should continue to analyze and monitor the 

impact of regulatory risk management frameworks 

in cleared, uncleared, and related securities 

markets and their impact on systemically important 

intermediaries and clients. 
Potential Emerging Threats, Vulnerabilities, and Council Recommendations 177

Finally, the Council encourages regulators to 

continue to advance recovery and resolution 

planning for systemically important FMUs and to 

coordinate in designing and executing supervisory 

stress tests of multiple systemically important CCPs.

5.4.2 Alternative Reference Rates

The UK FCA continues to urge firms and regulators 

to prepare for a transition away from LIBOR on a 

global scale by year-end 2021. With more than $200 

trillion of USD LIBOR-based contracts outstanding, 

the transition from LIBOR, given its anticipated 

cessation or degradation, will require significant 

effort from market participants. The failure of 

market participants to adequately analyze their 

exposure to LIBOR and transition ahead of LIBOR’s 

anticipated cessation or degradation could expose 

market participants to significant legal, operational, 

and economic risks that could adversely impact U.S. 

financial markets.

In March, the FCA stated publicly that, despite the 

COVID-19 pandemic, the assumption that firms 

cannot rely on LIBOR being published after the 

end of 2021 has not changed (see Section 3.6.1.2). 

Currently, the FCA has voluntary agreements with 

LIBOR panel banks to continue submissions for 

publication of LIBOR through year-end 2021. 

The FCA expects some banks to stop submissions 

around that time. If a bank leaves the LIBOR 

submission panel, the FCA must assess whether 

LIBOR continues to be representative of the 

underlying market. The FCA could deem LIBOR 

“unrepresentative,” at which time EU-regulated 

financial institutions would no longer be able to 

rely on the rate for new transactions. Additionally, 

if enough banks leave the LIBOR panel, LIBOR 

may cease to be published. Even if LIBOR continues 

for some period with diminished submissions, 

its performance may become increasingly 

unpredictable and unstable.

In the U.S., the ARRC has made significant progress 

toward analyzing and adopting an alternative 

rate (SOFR), creating robust contract fallback 

language for a variety of products, and building 

the infrastructure for the development of SOFR 

markets. Broadly speaking, the pandemic has not 

materially slowed the progress, but progress has 

been faster in derivatives cleared on CCP platforms 

and floating-rate note (FRNs) markets, and relatively 

slower in bilateral markets with bespoke contract 

terms, such as bank loans to businesses (see Section 

3.5.3.2). Despite this progress, market participants 

with significant exposure to USD LIBOR remain 

vulnerable if they do not sufficiently prepare prior 

to the end of 2021. 

Legacy cash products and new transactions without 

robust fallback language present a particular 

difficulty for transition. Contractual fallback 

provisions may not contemplate the need for an 

alternative rate or may include provisions that 

probably cannot be operationalized in the event 

of LIBOR’s cessation, like the polling of LIBOR 

panel banks by the issuer. While many new FRN 

issuances include more robust contract fallback 

language, some new issuances still do not include 

these provisions, putting issuers and investors at 

risk. Securitized products are further complicated, 

as legacy contracts may require the consent of all 

parties to amend the transaction and new issuance 

continues to use legacy language that may not 

be feasible to implement. Re-documenting these 

products will require significant effort and expense, 

and in most cases, it may not be possible to contact 

and obtain the required consent from all parties 

involved; the slow adoption of more robust fallback 

language in these instruments, therefore, presents a 

particular vulnerability. 

Consumer exposures to LIBOR, most commonly 

through adjustable-rate mortgages, present a special 

set of considerations in addition to those discussed. 

Noteholders will need to take care in working to 

ensure that consumers are treated fairly and that the 

transition is explained clearly. The ARRC is working 

with consumer groups, lenders, investors, and 

regulators to achieve a smooth LIBOR transition.

Recommendations

The ARRC has released the Recommended Best 

Practices for completing the transition from LIBOR. 

Market participants should analyze their exposure to 

USD LIBOR, assess the impact of LIBOR’s cessation 

or degradation on existing contracts, and remediate 

risk from existing contracts that do not have robust 

fallback arrangements to transition the contract 
178 2020 FSOC // Annual Report

to an alternate rate. Market participants should 

consider participation in ISDA’s protocol, which 

takes effect in 2021, as it will be especially important 

in remediating risks to existing derivatives contracts 

referencing LIBOR. Market participants that 

do not sufficiently prepare for this inevitable 

transition could face significant legal, operational, 

and economic risks. Market participants that have 

determined that SOFR is an appropriate rate for 

their LIBOR transition should not wait for the 

possible introduction of the forward-looking SOFR 

term rates to execute the transition. The Council 

recommends that market participants formulate 

and execute transition plans so that they are fully 

prepared for the anticipated discontinuation or 

degradation of LIBOR. Because of the uncertainty 

around the exact timing of the cessation of LIBOR, 

including the potential of LIBOR to be deemed nonrepresentative by the FCA under UK regulations, 

market participants should formulate and execute 

plans to transition prior to year-end 2021, taking 

into account their business requirements. Market 

participants must understand the exposure of their 

firm to LIBOR in every business and function, assess 

the impact of LIBOR’s cessation or degradation 

on existing contracts, and remediate risks from 

existing contracts that do not have robust fallback 

provisions to transition the contract to an alternate 

rate. It is also important that participants consider 

potential LIBOR exposure in services provided by 

third parties, such as contract servicing, systems, 

and models. Market participants should evaluate 

whether any new agreements contain sufficiently 

robust fallback provisions, such as those endorsed 

by the ARRC, to mitigate risk that the contract’s 

interest rate benchmark becomes unavailable. 

The Council commends the efforts of the ARRC and 

recommends that it continue to facilitate an orderly 

transition to alternative reference rates. Council 

member agencies should determine whether 

further guidance or regulatory relief is required to 

encourage market participants to address legacy 

LIBOR portfolios. Council member agencies should 

also use their supervisory authority to understand 

the status of regulated entities’ transition from 

LIBOR, including their legacy LIBOR exposure and 

plans to address that exposure. 

5.4.3 Financial Market Structure

The extreme volatility in financial markets early in 

the pandemic further emphasized the importance 

of ensuring that appropriate market structures 

are in place so that financial markets can function 

effectively during stress events. Advances in 

information and communications technologies, as 

well as regulatory developments, have altered the 

structure of financial markets over the last decade. 

The Council and member agencies are closely 

monitoring how changes in market structure have 

affected the robustness and efficiency of capital 

markets and the stability of the financial system. 

Interlinkages among dollar funding markets:

In the decade since the 2008 financial crisis, 

new regulations on bank capital and liquidity, 

structural reforms in MMFs, and a new operating 

environment for bank-affiliated broker dealers have 

fundamentally altered how market participants 

interact and the various interlinkages among the 

federal funds market, the repo market, and the 

Eurodollar market. 

Some market participants are active in both secured 

and unsecured short-term funding markets. 

Commercial banks, affiliated broker dealers, and 

the FHLBs operate in the secured repo market as 

well as the unsecured federal funds market. While 

money funds lend in the repo and the Eurodollar 

market, they cannot participate in the federal funds 

market. Meanwhile, borrowing options in the dollar 

funding market for some entities, such as hedge 

funds, are limited to the repo market. Given the 

myriad of participants and strong interlinkages 

between them, disruptions in one market can 

transmit to another (see, for example, Box D). 

There are benefits from interdependencies among 

markets, including enhanced price discovery and 

more options for hedging risks. At the same time, 

interdependencies create transmission risks from 

volatile or inaccurate pricing that have the potential 

to amplify market shocks across different markets. 

Pressures on dealer intermediation: The financial 

fallout from the pandemic was disruptive in the 

markets for critical securities such as Treasuries (see 

Box B), MBS (see Section 3.3.5), and corporate 
Potential Emerging Threats, Vulnerabilities, and Council Recommendations 179

bonds (see Box A). Market disruptions not only have 

implications for financial stability but also affect the 

implementation of monetary policy. 

Traditionally, market-making and arbitrage 

mechanisms involving securities dealers have helped 

in the orderly functioning of the secondary market 

for Treasury and MBS. Bank-affiliated brokerdealers are also the principal participants in the 

tri-party and GCF repo markets that use these 

securities as collateral. 

However, two developments in the post-crisis 

financial landscape have imposed significant 

pressures on dealer intermediation. First, issuance 

volumes of these marketable securities, especially 

Treasury securities, have increased significantly. 

Second, the post-crisis regulatory framework has 

also imposed balance sheet constraints at bankaffiliated broker-dealers. With the implementation 

of Basel III regulations on capital and leverage, 

major bank-affiliated broker-dealers have reduced 

the amount of their balance sheet that is allocated 

to trading and repo transactions. Together, these 

developments may have contributed to episodes of 

illiquidity in Treasury, MBS, and corporate bond 

markets in March 2020 (see Box B and Section 

3.4.2.2).

Role of non-traditional market participants: Nontraditional market participants, including principal 

trading firms, play an increasingly important role 

in securities and other markets. These firms may 

improve liquidity and investor outcomes under 

normal circumstances, but they may also introduce 

new potential risks. For instance, the trading 

strategies that non-traditional market participants 

employ and the incentives and constraints that 

they operate under may not be as well understood, 

leading to uncertainty about how these firms might 

behave during periods of market stress. 

Recommendations

Episodes of volatility in wholesale funding 

markets over the past two years have highlighted 

the importance of interdependencies across the 

different dollar funding markets. Policy measures 

to address imbalances in one funding market can 

potentially create imbalances in another funding 

market. For example, the volatility experienced 

in September 2019 and March 2020 has renewed 

attention on the dealers’ traditional role of direct 

liquidity provision through market-making. To 

the extent that dealers have reduced their market 

footprint over time, this could contribute to 

market volatility, particularly during stress events. 

The significant role of non-traditional market 

participants may have also amplified market 

volatility. The temporary solution has been to 

provide more balance sheet space to BHCs in the 

form of relief on capital and liquidity regulation so 

that affiliates of the BHCs are better positioned to 

intermediate investors’ demands for liquidity. In 

addition, the Federal Reserve has increased the size 

of its balance sheet to absorb selling pressures on 

Treasury and MBS to a significant degree.

In light of these developments, there should be 

active collaboration among regulators across 

jurisdictions to ensure coordination of efforts. 

The Council recommends that member agencies 

conduct an interagency operational review of 

market structure issues that may contribute to 

market volatility in key markets, including shortterm funding, Treasuries, MBS, and corporate bond 

markets, and study the interlinkages between them. 

Market participants should also regularly assess how 

market developments affect the risk profile of their 

institutions. The Council recommends that financial 

regulators continue to monitor and evaluate 

ongoing changes that might have adverse effects on 

markets, including on market integrity and liquidity. 

5.4.4 Cybersecurity

Financial institutions continue to invest in and 

expand their reliance on information technology 

and cloud-based computing to reduce costs and to 

increase efficiency and resiliency. The COVID-19 

pandemic may accelerate this trend as financial 

institutions have implemented business continuity 

plans through increased use of teleworking systems 

and dual work locations, for example. However, 

greater reliance on technology, particularly across a 

broader array of interconnected platforms, increases 

the risk that a cybersecurity incident may have 

severe consequences for financial institutions. In 

fact, a recent analysis by economists at the FRBNY 

details how impairment of payment systems at any 
180 2020 FSOC // Annual Report

of the five most active U.S. banks would result in 

significant spillovers to other banks. 

The financial sector, like other critical sectors, is 

vulnerable to malware attacks, ransomware attacks, 

denial of service attacks, data breaches, and other 

events. Such incidents have the potential to impact 

tens or even hundreds of millions of Americans and 

result in financial losses of billions of dollars due to 

disruption of operations, theft, and recovery costs.

The implementation of teleworking strategies 

using virtual private networks, virtual conferencing 

services, and other technologies can increase 

cybersecurity vulnerabilities, insider risks, and other 

operational exposures (see Section 3.6.2). Market 

participants have observed a spike in COVID-19 

related phishing attacks, as attackers seek to exploit 

less secure home networks. At the same time, 

financial institutions have increased their reliance 

on third-party service providers for teleworking tools 

and services. The interdependency of these networks 

and technologies supporting critical operations 

magnifies cyber risks, threatening the operational 

risk capabilities not just at individual institutions, 

but also of the financial sector as a whole. 

A destabilizing cybersecurity incident could 

potentially threaten the stability of the U.S. financial 

system through at least three channels: 

The incident could disrupt a key financial service or 

utility for which there is little or no substitute. This 

could include attacks on central banks; exchanges; 

sovereign and sub-sovereign creditors, including 

U.S. state and local governments; custodian banks, 

payment clearing and settlement systems; or other 

firms or services that lack substitutes or are sole 

service providers. 

The incident could cause a loss of confidence among 

a broad set of customers or market participants. If 

it causes customers or participants to question the 

safety of their assets or transactions and leads to 

significant withdrawal of assets or activity, the effects 

could be destabilizing to the broader financial 

system. 

The incident could compromise the integrity of 

critical data. Accurate and usable information 

is critical to the stable functioning of financial 

firms and the system; if such data is corrupted 

on a sufficiently large scale, it could disrupt the 

functioning of the system. The loss of such data also 

has privacy implications for consumers and could 

lead to identity theft and fraud.

Recommendations

Improving the cybersecurity and operational 

resilience of the financial sector requires continuous 

assessment of cyber vulnerabilities and critical 

connections across firms. Sustained senior-level 

commitment to mitigate cybersecurity risks and 

their potential systemic implications is necessary at 

both member agencies and private firms. 

The Council recommends that federal and state 

agencies continue to monitor cybersecurity risks 

and conduct cybersecurity examinations of financial 

institutions and financial infrastructures to ensure, 

among other things, robust and comprehensive 

cybersecurity monitoring, especially in light 

of new risks posed by the pandemic. However, 

the authority to supervise third-party service 

providers varies across financial regulators. To 

further enhance third-party service provider 

information security, the Council recommends 

that Congress pass legislation that ensures that 

FHFA, NCUA, and other relevant agencies have 

adequate examination and enforcement powers to 

oversee third-party service providers. The Council 

also recommends that federal banking regulators 

continue to coordinate third-party service provider 

examinations, work collaboratively with states, 

and also work with the State Liaison Committee 

to identify additional ways to support information 

sharing among state and federal regulators. 

The Council encourages continued cooperation 

across government agencies and private firms 

to improve cybersecurity through the adoption 

of authenticable digital identities that offer 

agencies and firms the ability to mitigate the 

risk of cybersecurity incidents through digital 

authentication of parties (e.g. trading partners, 

vendors, customers) to enhance the financial 

sector’s strong cybersecurity posture. 
Potential Emerging Threats, Vulnerabilities, and Council Recommendations 181

The Council supports the ongoing work of 

partnerships between government agencies and 

private firms, including the Financial and Banking 

Information Infrastructure Committee (FBIIC), 

the Financial Services Sector Coordinating Council, 

and the Financial Services Information Sharing 

and Analysis Center (FS-ISAC). These partnerships 

focus on improving the financial sector’s ability 

to rapidly respond to and recover from significant 

cybersecurity incidents, thereby reducing the 

potential for such incidents to threaten the stability 

of the financial system and the broader economy. 

The Council recommends that the FBIIC continue 

to promote processes to strengthen response and 

recovery efforts, including efforts to address the 

systemic implications of significant cybersecurity 

incidents. The FBIIC should continue to work 

closely with the Department of Homeland Security, 

law enforcement, and industry partners to carry 

out regular cybersecurity exercises recognizing 

interdependencies with other sectors, such as 

telecommunications and energy. 

The Council further recommends that agencies 

work to improve information sharing among 

private firms and government partners. Sharing 

timely and actionable cybersecurity information 

can reduce the risk that cybersecurity incidents 

occur and can mitigate the impacts of those that 

do occur. Treasury and relevant agencies should 

carefully consider how to appropriately share 

information and, where possible, continue efforts 

to declassify (or downgrade classification) to the 

extent practicable, consistent with national security 

imperatives. The Council encourages efforts to 

enhance information sharing with the FS-ISAC 

and its growing community of financial sector 

institutions. 

Financial institutions are rapidly adopting new 

technologies, including cloud computing and 

artificial intelligence. The Council supports the 

efforts of the FBIIC Technology Working Group, 

which examines the extent to which financial 

services firms using emerging technologies 

introduce new cyber vulnerabilities into the 

financial services critical infrastructure. The 

Council recommends agencies consider how such 

emerging technologies change the sector’s risk 

profile, and consider the need for any corresponding 

change to supervision and regulation.

5.4.5 Data Gaps and Challenges

The 2008 financial crisis exposed several major 

gaps and deficiencies in the range and quality of 

data available to financial regulators to identify 

emerging risks in the financial system. These gaps 

and shortcomings include firm-level structure and 

ownership information; transaction data in certain 

important financial markets, including short-term 

funding, securities lending arrangements, repo 

contracts, and OTC derivatives; and limitations 

in financial statement reporting for certain types 

of institutions. The usefulness of data was often 

limited by institutional or jurisdictional differences 

in reporting requirements. These types of 

inconsistencies created challenges for data sharing 

and increased the reporting burden on market 

participants.

Progress has been made on these fronts. Reporting 

of centrally cleared repurchase rate agreements 

initiated by the OFR in 2019 incorporates the use 

of the LEI. Trade Information Warehouse data on 

credit derivatives provided to OFR is currently being 

revised to also include the LEI. 

Council member agencies have been actively 

engaged with each other, regulators in other 

jurisdictions, and firms in the financial sector to 

develop standards and protocols and to execute on 

data collection initiatives. Staff of the OFR, CFTC, 

SEC, and Federal Reserve meet regularly with their 

international regulatory counterparts from the 

FSB to implement UTIs, UPIs, and CDE standards 

for OTC derivatives and have recently developed 

a governance structure for oversight. Member 

agencies have also been working to facilitate the 

adoption of LEIs and Universal Loan Identifiers 

(ULIs) for mortgage loans.

Recommendations

High-quality financial data is an essential input 

into the financial regulatory process. The Council 

and member agencies rely on data collected from 

market participants to monitor developments in the 

financial system, identify potential risks to financial 
182 2020 FSOC // Annual Report

stability, and prioritize and execute supervisory 

and examination work. The Council encourages 

member agencies to collaborate and expand their 

data resources and analytical capabilities to assess 

interconnectedness and concentration risks in their 

respective areas of responsibility. 

The establishment of uniform standards for 

reporting and collection enhances the usefulness 

of market data and reduces the reporting 

burdens on market participants. The failure to 

adopt broadly shared granular data standards 

for financial products, transactions, and entities 

can lead to unnecessary costs and inefficiencies, 

such as duplicate reporting, and may impede the 

ability to aggregate data for risk-management and 

reporting purposes. The Council recommends 

that regulators and market participants continue 

to partner to improve the scope, quality, and 

accessibility of financial data, as well as data sharing 

among relevant agencies. These partnership efforts 

include implementing new identifiers such as the 

UTI, Unique Product Identifier (UPI), and CDE; 

developing and linking data inventories; and 

implementing industry standards, protocols, and 

security for secure data sharing.

Broader adoption of the LEI by financial market 

participants continues to be a Council priority. The 

LEI enables unique and transparent identification of 

legal entities participating in financial transactions. 

ULIs will make it possible to track loan records 

through a loan’s life cycle. The Council recommends 

that member agencies update their regulatory 

mortgage data collections to include LEI and ULI 

fields. The Council also recommends that member 

agencies support adoption and use of standards 

in mortgage data, including consistent terms, 

definitions, and data quality controls, which will 

make transfers of loans or servicing rights less 

disruptive to borrowers and investors. 

Important initiatives are underway at member 

agencies that will improve the functioning of 

financial markets. Among these is the collection of 

repo transaction data, which is used to create SOFR 

benchmark rates for use by market participants. 

The Council recommends that member agencies 

continue to work to harmonize domestic and global 

derivatives data for aggregation and reporting and 

ensure that appropriate authorities have access 

to trade repository data needed to fulfill their 

mandates.

The Council encourages pension regulators and 

FASB to improve the quality, timeliness, and depth 

of disclosures of pension financial statements. 

5.4.6 Financial Innovation

Financial innovation offers considerable benefits 

to consumers and providers of financial services 

by reducing the cost of certain financial services, 

increasing the convenience of payments, and 

potentially increasing the availability of credit. But 

innovation can also create new risks that need to be 

understood. 

Digital assets, which are still a new and relatively 

small sector of the financial market, are a 

particularly good example of both the benefits and 

potential risks associated with innovation. Digital 

assets may present a new means of conducting realtime payment activities. Some nations have begun 

exploring or, in some cases, using central bank 

digital currencies to enhance the global standing 

of their own currencies and enable faster payments. 

Likewise, several nations have begun assessing 

whether and how privately-issued stablecoins may 

serve a role in facilitating faster and more efficient 

payments, provided that such activities are subject to 

appropriate regulation and oversight. 

However, if a stablecoin became widely adopted as 

a means of payment or store of value, disruptions 

to the stablecoin system, as with any payment or 

value system, could affect the financial system and 

the wider economy, warranting greater regulatory 

scrutiny. A decline in the value of assets involved in 

a traditional or new payment or value system can 

result in the transmission of risk to the financial 

sector through financial institution exposures, risks 

to the payment system involved, wealth effects and 

confidence effects. Risks to payment systems, if not 

properly managed, can present financial stability 

risks, given the importance of a well-functioning 

payments system in facilitating commercial activities.
Potential Emerging Threats, Vulnerabilities, and Council Recommendations 183

The benefits and potential risks associated with 

digital assets underscore the importance of U.S. 

regulators adopting an approach to digital assets that 

will provide for responsible innovation in a manner 

that is safe, fair, and complies with all applicable laws. 

Clear guidance will support the development of a 

payment system that is consistent with the changing 

needs of institutions and consumers within the U.S. 

and that is competitive with payment systems abroad. 

This is particularly important given the European 

Commission’s recently revealed draft framework for 

cryptoassets and stablecoins. 

The continued evolution of the market for digital 

assets highlights the importance of coordinated 

engagement and leadership by relevant U.S. 

regulators. Digital asset arrangements vary widely 

(see Section 3.6.3.1). The risk each digital asset 

poses depends, among other things, on its overall 

usage in the market, the structure of the asset and 

its consensus mechanism, and the risk management 

practices of participants. The potential risks 

presented by different stablecoin systems may vary 

according to the mechanism by which they are 

made stable and the governance policies of the 

administrator. 

As discussed in Section 3.6.3.4, large technology 

and e-commerce companies providing financial 

services may increasingly seek to compete directly 

with incumbent financial service providers, and their 

market presence could grow significantly. These 

firms currently may not be subject to the same type 

of financial services regulation with which incumbent 

financial service providers are required to comply. 

Financial firms’ rapid adoption of fintech innovations 

in recent years may increase operational risks 

associated with financial institutions’ use of thirdparty service providers. Third-party service providers 

may create financial stability risks if financial 

institutions outsource critical services because 

operational failures or faults at a key service provider 

could disrupt the activities of multiple financial 

institutions or financial markets.

Recommendations

The Council encourages financial regulators to 

continue to be proactive in identifying new products 

and services; in evaluating how innovation is used; 

and in monitoring how responsible innovation can 

benefit investors and consumers, regulated entities, 

and financial markets. The Council also encourages 

relevant authorities to evaluate the potential effects 

of new financial products and services on financial 

stability, including operational risk. Agencies should 

ensure that their monitoring and data collection 

systems identify risks associated with financial 

innovations. To ensure comprehensive visibility into 

innovation across the financial system and avoid 

regulatory fragmentation, regulators should share 

relevant information on financial innovation as 

appropriate with the Council and other agencies. 

The Council recommends that federal and state 

regulators continue to support responsible innovation 

by examining the benefits of, and potential risks to 

the financial system posed by, new and emerging uses 

of digital assets and distributed ledger technologies. 

Financial regulators should review existing and 

planned digital asset arrangements and their risks as 

appropriate. 

The Council encourages continued coordination 

among federal and state regulators to support 

responsible financial innovation and competitiveness, 

promote consistent regulatory approaches, as well as 

to identify and address potential risks that arise from 

such innovation. 
184 2020 FSOC // Annual Report

5.5 Global Economic and Financial 

Developments

Downside risks to global economic growth have 

increased significantly since the outbreak of 

the COVID-19 pandemic. In response to the 

collapse of global economic activity in the first 

half of 2020, national authorities in advanced and 

many emerging economies implemented rapid 

and decisive fiscal and monetary policy actions. 

Although these measures helped support incomes 

and employment and eased global financial 

conditions in the initial phase of the pandemic, the 

path of the economic recovery will be dependent on 

continued fiscal and monetary support along with 

health policy responses, including authorities’ ability 

to limit the spread of COVID-19 without re-imposing 

lockdown measures along with the development of 

therapeutics and a vaccine. 

At the onset of the pandemic, many European 

countries introduced lockdowns to reduce the 

spread of the disease. These lockdowns led to a 

sharp contraction in real activity and employment 

that could lead to significant losses in the banking 

system. As part of their response to the crisis, 

European governments undertook fiscal policy 

actions that increased government spending and 

tax relief and likely reduced financial stability risks 

(see Section 3.7.2). Over the longer run, however, 

additional expansionary policies may result in sizable 

increases in government debt and a further increase 

in sovereign risk. If debt sustainability were to worsen 

in the highly indebted countries, it could stress 

European financial institutions and lead to political 

tensions within the euro area. This distress has the 

potential to spill over to the U.S. financial system 

through direct exposures and counterparty risks. 

Although somewhat overshadowed by the COVID-19 

crisis, the prospect of a no-trade-deal Brexit 

represents an ongoing risk to both the European 

and U.S. financial systems. On January 31, 2020, the 

United Kingdom left the EU but remains under EU 

trade rules through the transition period, which 

is set to expire at the end of 2020 (see Section 

3.7.2). Regulators in Europe and the United States 

have taken steps to lessen potential disruptions 

to the financial system of a disorderly Brexit. On 

September 28, 2020, the European Securities and 

Markets Authority granted time-limited equivalence 

to three UK CCPs, which allows them to continue 

providing their services in the EU until mid-2022. 

While this development has reduced financial 

stability risks, risks remain elevated as other UK 

financial services will lose passporting rights under 

MiFD II at the end of the transition period absent 

any agreement. Additionally, the failure of the two 

parties to reach a trade agreement at the end of the 

transition period poses significant downside risks to 

both the UK and the EU because of the disruptions 

it would cause to cross-border supply chains. A 

no-trade-deal Brexit could lead to financial market 

stress through several channels – disruptions in 

cross-border trade, reductions in investor confidence 

in the UK economy, increased FX volatility, and a 

decline in UK asset values.

The size of the Chinese economy and its centrality 

to global supply chains also makes it a potential 

source of risk. After a rapid increase in debt and 

leverage following the 2008 financial crisis, Chinese 

authorities began taking steps to encourage 

financial deleveraging in 2016. In 2020, Chinese 

regulators paused the deleveraging campaign as 

authorities try to balance COVID-19 related credit 

support with longer-term financial stability goals 

(see Section 3.7.3). More significantly, the PBOC 

provided guidance to banks that they should 

sacrifice profits to help stabilize growth. Although 

this guidance is likely to stabilize the Chinese 

economy in the short run, it comes at the expense 

of leaving the banking sector weaker and less likely 

to rebuild capital margins over the medium run. 

At present, U.S. exposures to the Chinese financial 

sector are limited, and financial stability risks 

associated with a potential decline in Chinese asset 

valuations or stress in the Chinese banking sector 

appear manageable. Indirect effects on global 

economic and market confidence, however, could 

adversely impact U.S. economic performance.

Similarly, EMEs represent another indirect source 

of risk to the U.S. financial system. The COVID-19 

shock affected EMEs initially through a reduction 

in Chinese demand and later through the spread of 

the virus globally. In response, many EME central 

banks broke with their usual policy of raising rates 
Potential Emerging Threats, Vulnerabilities, and Council Recommendations 185

in the face of currency depreciation and massive 

portfolio outflows. Instead, they addressed the 

market stress by easing monetary policy, with many 

implementing bond purchase programs. Since the 

initial period of volatility and massive portfolio 

outflows in March and April, flows to EMEs have 

broadly stabilized, with risks to the external sector 

remaining moderate because many EMEs have 

relatively large foreign reserves. The current risks 

EMEs pose to the U.S. financial system are related 

to the build-up of sovereign and nonfinancial debt. 

The accumulation of sovereign debt creates the 

risk that it is not sustainable over the long run and 

that the necessary fiscal space will be unavailable 

to deal with additional contingencies, such as a 

renewed wave of COVID-19 infections. The rise 

in nonfinancial debt levels creates vulnerabilities 

because of a reduced repayment capacity during 

the recession. Although the direct exposures of the 

U.S. financial system to EMEs are limited, spillovers 

to the U.S. economy could manifest themselves in 

the form of shifts in market confidence or increases 

in market stress that lead to a tightening of U.S. 

financial conditions.
186 2020 2020 FSOC // FSOC // Annual Report Annual Report

Box G: “Low-For-Long” Interest Rates and Implications for Financial Stability 

The Federal Reserve’s initial policy response to 

the COVID-19 pandemic and later shift to averageinflation targeting both imply that monetary policy 

will be accommodative for the foreseeable future. 

Although a looser monetary policy stance is 

warranted by the need for immediate support to the 

real economy and the achievement of the Federal 

Reserve’s maximum employment mandate, it also 

raises questions about the medium-term financial 

stability implications of long periods of low shortterm rates and a potentially flatter yield curve. For 

example, there is an inherent tradeoff between the 

evident need for low rates to stimulate economic 

activity now and the possibility that persistently 

low rates may distort risk-taking over a longer time 

horizon. Understanding how such a “low-for-long” 

environment reshapes market participants’ and 

financial institutions’ incentives to borrow, lend, and 

take excessive risk is critical for understanding its 

financial stability implications.

To that end, recent historical experience provides 

some guidance on the possible effects of a lowfor-long interest-rate environment. After the 2008 

financial crisis, a combination of forces created 

conditions under which interest rates were also 

expected to remain low for an extended period, 

reducing yields on many assets and providing market 

participants with the incentive to assume more 

financial risk – the so-called “reach for yield.” This 

reach-for-yield behavior led to increases in asset 

prices in a range of markets, a portfolio reallocation to 

riskier and less liquid asset classes, and an increase 

in corporate leverage. In today’s environment, it is 

possible that we will observe similar types of changes 

in market participants’ behavior.

Key Implications of Low-for-Long and Potential 

Vulnerabilities 

Low rates for an extended period will have broad 

implications for several key market participants. At the 

same time, the types of behavior low interest rates 

will induce, and therefore the extent to which that 

behavior may lead to the build-up of risks, are likely to 

vary across market participants.

Retail investors

One of the main effects on retail investors of 

persistently low rates is a decrease in their interest 

income. As a result, retirees and other fixed-income 

dependent investors may face a decline in their 

primary source of income, which, in principle, 

incentivizes them to reallocate their portfolio to riskier 

assets, as it does for other market participants. But 

predicting the precise effect of how retail investors 

respond is difficult because their balance sheets 

are smaller and their portfolios less diversified than 

institutions, and hence their behavior is more sensitive 

to risk. Empirical studies show that household 

savings are positively related to interest rates, though 

the size of the effect varies widely. In addition, there 

is little systematic evidence on how low rates for 

a prolonged period affect the portfolio allocation 

decisions of individual investors. Thus, while it is 

prudent to monitor possible reach-for-yield behavior 

by retail investors, it is not clear that it has the same 

broad financial stability implications that the decisions 

of larger financial institutions do. 

Banks

Low interest rates are generally expected to reduce 

banks’ profitability: Both low short-term rates and a 

flatter yield curve reduce banks’ interest income and 

compress their net interest margin. How damaging 

this deterioration in profitability will be remains an 

open question. Banks are well capitalized today 

as a result of the post-crisis financial reforms and 

can draw on this capital buffer to absorb losses. 

Nevertheless, the resulting decline in banks’ 

profitability, in principle, gives them an incentive to 

increase fees and other charges, make riskier loans, 

and shift the composition of their balance sheets to 

generate other sources of income.

The evidence that banks’ behavior in a low-for-long 

environment leads to an increase in systemic risk 

is more mixed, however. A retrospective analysis of 
Box G: “Low-For-Long” Interest Rates and Implications for Financial Stability 187 18

the post-financial crisis period conducted by 

the Committee on the Global Financial System 

(CGFS) suggests that while low interest rates 

and flatter yield curves reduce net interest 

margins, as expected, banks in the United 

States and elsewhere adjusted in ways that 

mitigated the effects on their overall return 

on assets. What is more, the study found no 

systematic correlation between the level of 

interest rates, on the one hand, and measures 

of bank soundness and excessive risk-taking, 

on the other. In terms of evidence for the United 

States specifically, research shows that while 

a low interest rate environment is generally 

associated with narrower net interest margins 

and reduced profitability, especially for small 

banks, these negative effects may be offset 

by the positive effects of low rates on profits 

through increased economic activity. Thus, while 

net interest margins do narrow when interest 

rates are lower, the overall effects on profitability 

and excessive risk-taking seem to be more 

muted than might be expected, and the broader 

effects on systemic risk in the banking sector 

modest.

Corporations 

For corporations, low rates affect both their 

borrowing behavior and the willingness of 

investors to supply credit to them. Even before 

we entered the current low-for-long environment, 

the level of corporate indebtedness was high 

by historical standards, driven, in part, by 

the growth in the leveraged loan market to 

lower-rated borrowers. This growth was itself 

a consequence of a prolonged period of low 

rates after the 2008 financial crisis. Today, low 

yields are encouraging borrowers to lock in rates 

with fixed-rate corporate bonds, as opposed 

to leveraged loans, which are floating-rate 

instruments. As a result, high-yield corporate 

bond issuance is at a record level in 2020. 

Moreover, firms that successfully weather the 

current COVID crisis will have easier access to 

financing because of lower credit spreads in the future. 

These easier financing conditions are likely to fuel the 

same trend in debt accumulation that pre-dated the 

current period of low interest rates, creating a potential 

vulnerability in the form of excessive corporate debt levels.

Pension funds

Low interest rates also affect the demand for risky assets 

through their effect on pension funds and insurance 

companies, which face similar issues because of the 

structure of their balance sheets. Both types of institutions 

have long-lived liabilities that make them vulnerable to 

declining or low interest rates. For pension funds, low 

rates increase the present value of their assets and 

liabilities, but the duration of their liabilities is higher 

than that of their assets. As a result, the duration effect 

implies that low interest rates have a net negative effect 

on their balance sheets. To meet their expected return 

targets, pension funds can respond in several ways -- by 

increasing contribution requirements, by switching to 

alternative investments such as private equity, by issuing 

pension obligation bonds to increase leverage, or by 

increasing the duration of their assets. These adjustments 

are likely to happen gradually because pension funds 

have long liability maturities and are hence unlikely to 

pose an immediate risk to financial stability.

The combined effect of low expected returns and state 

and local budget shortfalls also creates a set of risks 

for public pensions. These two factors may force state 

and local governments to make tradeoffs between 

meeting their public pension liabilities, which have strong 

legal protections, and current spending demands that 

will stress public finances. Because most states have 

balanced-budget requirements, these tradeoffs could be 

especially stark. The reconciliation of these underlying 

tensions may manifest themselves in the municipal bond 

market if investors begin to question the long-term ability 

of states and localities to meet their existing obligations.

Insurance companies 

Insurance companies could face greater challenges 

with their balance sheets. Low interest rates compress 

insurers’ investment margins, reduce their ability to meet 

their product guarantees, and weaken their earnings 
188 2020 FSOC // Annual Report

and capital. For example, life insurance product 

reserves are generally determined using a long-run 

interest rate assumption in order to match assets and 

liabilities. However, life insurers’ net investment portfolio 

yields have been declining due to the reinvestment 

of maturing assets at lower rates. The industry’s net 

investment portfolio yield has fallen from 6.0 percent 

in 2007 to 4.6 percent in 2019, and this trend can 

be expected to continue. It provides an incentive to 

increase allocations to riskier debt and less liquid 

assets to achieve the guaranteed returns on in force 

insurance policies. As in the case of pension funds, the 

challenges related to a protracted period of low interest 

rates confronting insurance companies manifest 

themselves over time, giving insurance companies 

some latitude in how they adapt to the low-rate 

environment. This flexibility reduces the likelihood of a 

broader financial disruption.

Longer-Term Risks Related to Future Rate 

Increases 

The discussion thus far has focused on current or 

medium-term implications of low-for-long. A longerterm risk is how the market participants’ exposures to 

greater levels of duration risk affect financial stability 

when rates eventually increase. The 2013 Taper 

Tantrum is an example of this potential dynamic, 

although the wider financial stability implications of 

that episode were limited. The potential risk here is 

that unexpected increases in rates negatively affect 

the balance sheets of financial institutions in such a 

way that leads to financial instability. Banks without 

adequate capital buffers could face solvency issues, 

while pension funds and insurance companies could 

experience liquidity problems related to losses on 

derivatives positions or increases in early liquidations.

Additionally, with valuations in both equity and credit 

markets relatively high by historical standards and 

likely to become further stretched in a low-for-long 

environment, the risk of a sharp correction becomes 

more likely, especially in conjunction with high levels of 

leverage or excessive reliance on short-term wholesale 

funding. Even small changes to expectations of farin-the-future cash flow may have a disproportionate 

effect on current valuations when interest rates are 

low. As a result, such rate changes can lead to sharp 

adjustments in valuations. The potential negative effects 

that an unexpected increase in rates would have across 

a variety of market participants make this longer-term 

risk worth monitoring. Adequate guidance on the timing 

and pace of any such policy-related increase will likely 

reduce this risk.

Box G: “Low-For-Long” Interest Rates and Implications for Financial Stability 
Abbreviations 189

AANA Average Aggregate Notional Amount

ABS Asset-Backed Security

ACL Allowances for Credit Losses

Advisers

Act

Investment Advisers Act of 1940

AML Anti-Money Laundering

ANPR Advance Notice of Proposed Rulemaking

APP Asset Purchase Programme

ARM Adjustable Rate Mortgage

ARRC Alternative Reference Rates Committee 

AUM Assets Under Management

BCBS Basel Committee on Banking Supervision

BDC Business Development Company

BHC Bank Holding Company

BIS Bank for International Settlements

BOE Bank of England 

BOJ Bank of Japan

BTP Italian Government Bond

Bund German Government Bond

C&I Commercial and Industrial

CARES Coronavirus Aid, Relief, and Economic 

Security

CCAR Comprehensive Capital Analysis and Review

CCP Central Counterparty 

CD Certificate of Deposit

CDB China Development Bank

CDE Critical Data Elements

CDO Collateralized Debt Obligation

CDS Credit Default Swap

CECL Current Expected Credit Losses

CEM Current Exposure Method

CET1 Common Equity Tier 1 

CFPB Consumer Financial Protection Bureau

CFT Countering the Financing of Terrorism

CFTC Commodity Futures Trading Commission

CIF Collective Investment Funds

CLO Collateralized Loan Obligation

CMBS Commercial Mortgage-Backed Security

CME Chicago Mercantile Exchange Inc.

CMG Crisis Management Group

Council Financial Stability Oversight Council

CP Commercial Paper

CPFF Commercial Paper Funding Facility

CPI Consumer Price Index

CPMI Committee on Payments and Market 

Infrastructures

CRA Community Reinvestment Act

CRE Commercial Real Estate

CSBS Conference of State Bank Supervisors

Desk Open Market Trading Desk

DFAST Dodd-Frank Act Stress Tests

DIP Debtor-in-Possession

DoddFrank ActDodd-Frank Wall Street Reform and 

Consumer Protection Act

DSB Derivatives Service Bureau

DSSI Debt Service Suspension Initiative

DTCC Depository Trust & Clearing Corporation

DTI Total Monthly Debt to Total Monthly Income

EBITDA Earnings Before Interest, Taxes, 

Depreciation, and Amortization

ECB European Central Bank

EGRRCPA Economic Growth, Regulatory Relief, and 

Consumer Protection Act

EME Emerging Market Economy

ENN Entity-Netted Notional

Enterprises Fannie Mae and Freddie Mac

ETF Exchange-Traded Fund

ETN Exchange-Traded Note

ETP Exchange-Traded Product

EU European Union

Euro Stoxx 50 Euro Area Stock Index

Exchange

Act

Securities Exchange Act of 1934

Fannie Mae Federal National Mortgage Association

FASB Financial Accounting Standards Board

FATF Financial Action Task Force

FBIIC Financial and Banking Information 

Infrastructure Committee

FBO Foreign Banking Organization

FCA Financial Conduct Authority

6 Abbreviations
190 2020 FSOC // Annual Report

FCM Futures Commission Merchant

FCU Federal Credit Union

FDI Foreign direct investment

FDIC Federal Deposit Insurance Corporation

Federal

Reserve

Board of Governors of the Federal Reserve 

System

FHA Federal Housing Administration

FHFA Federal Housing Finance Agency

FHLB Federal Home Loan Bank

FICC Fixed Income Clearing Corporation

FICO Fair Isaac Corporation

FICU Federally Insured Credit Union

FIMA Foreign and International Monetary 

Authority

FinCEN Financial Crimes Enforcement Network 

FIO Federal Insurance Office

FMI Financial Market Infrastructure

FMU Financial Market Utility

FOMB Financial Oversight and Management Board

FOMC Federal Open Market Committee

FNAV Floating Net Asset 

FRBNY Federal Reserve Bank of New York

Freddie

Mac

Federal Home Loan Mortgage Corporation

FRN Floating Rate Notes

FSB Financial Stability Board

FS-ISAC Financial Services Information Sharing and 

Analysis Center

FSOC Financial Stability Oversight Council

FX Foreign Exchange

G-SIB Global Systemically Important Bank

GAAP Generally Accepted Accounting Principles

GAV Gross Asset Value

GCC Group Capital Calculation

GDP Gross Domestic Product

GLEIF Global LEI Foundation

GNMA Government National Mortgage Association 

(Ginnie Mae)

GSE Government-Sponsored Enterprise

GSD Government Securities Division

GUUG FSB’s Working Group on UTI and UPI 

Governance

HFT High-Frequency Trader

HQLA High-Quality Liquid Asset

HMDA Home Mortgage Disclosure Act

IAIS International Association of Insurance 

Supervisors

ICS International Capital Standard

IHC Intermediate Holding Company

IMF International Monetary Fund

Investment

Company

Act

Investment Company Act of 1940

IPO Initial Public Offering

IOSCO International Organization of Securities 

Commissions

ISDA International Swaps and Derivatives 

Association

ISO International Organization for 

Standardization

JGB Japanese Government Bond

LCR Liquidity Coverage Ratio

LEI Legal Entity Identifier 

LEI ROC Legal Entity Identifier Regulatory Oversight 

Committee

M&A Merger and Acquisition

MBS Mortgage-Backed Security

MBSD Mortgage-Backed Securities Division

MiFID II Markets in Financial Instruments Directive

MLF Municipal Liquidity Facility

MMLF Money Market Fund Liquidity Facility

MMF Money Market Mutual Fund

mREIT Mortgage REITs

MSLP Main Street Lending Program

MSP Major Swap Participant

MSR Mortgage Servicing Right 

NAIC National Association of Insurance 

Commissioners

NAL No-Action Letter

NAV Net Asset Value

NCD Negotiable Certificates of Deposit

NCUA National Credit Union Administration

NIM Net Interest Margin

NMDB National Mortgage Database

NMS National Market System

NPL Non-Performing Loan

NPRM Notice of Proposed Rulemaking

NSCC National Securities Clearing Corporation

NYDFS New York Department of Financial Services

OCC Office of the Comptroller of the Currency

OFR Office of Financial Research
Abbreviations 191

OIS Overnight Index Swap

ON RRPF Overnight Reverse Repurchase Agreement 

Facility

OPEC Organization of Petroleum Exporting 

Countries

OPEC+ OPEC and non-OPEC Participating Countries

OTC Over-the-Counter

P&C Property and Casualty

PBA Puerto Rico Public Buildings Authority

PBGC Pension Benefit Guaranty Corporation

PBOC People’s Bank of China

PDCF Primary Dealer Credit Facility

PEPP Pandemic Emergency Purchase Programme

PFMI Principles for Financial Market 

Infrastructures

PMCCF Primary Market Corporate Credit Facility 

PPP Paycheck Protection Program

PPPLF Paycheck Protection Program Lending 

Facility

PREPA Puerto Rico Electric Power Authority

PROMESA Puerto Rico Oversight, Management, and 

Economic Stability Act

PSPA Preferred Stock Purchase Agreement

PTF Principal Trading Firm

QM Qualified Mortgage

RBIC Rural Business Investment Companies

REIT Real Estate Investment Trust

Repo Repurchase Agreement

RMB Renminbi

RMBS Residential Mortgage-Backed Security

ROAA Return on Average Assets

RRC Regulation and Resolution Committee

RWA Risk-Weighted Asset

S&P Standard & Poor’s

S&P LCD Standard & Poor’s Leveraged Commentary 

& Data

SA-CCR Standardized Approach for Counterparty 

Credit Risk

SBA Small Business Administration

SBSD Security-Based Swap Dealer

SD Swap Dealer

SDR Stressed Default Rate

SEC Securities and Exchange Commission

SEF Swap Execution Facility

SIFMA Securities Industry and Financial Markets 

Association

SIPC Securities Investors Protection Corporation

SLOOS Senior Loan Officer Opinion Survey

SLR Supplementary Leverage Ratio

SMBs Small and Mid-Sized Regional Banks

SMCCF Secondary Market Corporate Credit Facility

SME Small and Medium-Sized Enterprises

SOFR Secured Overnight Financing Rate

SRC Systemic Risk Committee

SPAC Special Purpose Acquisition Company

STFM Short-Term Funding Market

STIF Short-Term Investment Fund

SWIFT Society for Worldwide Interbank Financial 

Telecommunications

TALF Term Asset-Backed Securities Loan Facility 

TBA To Be Announced

TDR Troubled Debt Restructurings

TIPS Treasury Inflation-Protected Securities

TLAC Total Loss Absorbing Capital

TLTRO Targeted Long-Term Refinancing Operations

Treasury Department of the Treasury

TRIA Terrorism Risk Insurance Act of 2002, as 

Amended

TRIP Terrorism Risk Insurance Program

UK United Kingdom 

ULI Universal Loan Identifier

UMBS Uniform Mortgage-Backed Security

UPB Unpaid Principal Balance

UPI Unique Product Identifier

USD U.S. Dollar

USDA U.S. Department of Agriculture

UTI Unique Transaction Identifier

VA U.S. Department of Veterans Affairs

VaR Value at Risk

VRDN Variable-Rate Demand Notes

VIX Chicago Board Options Exchange Volatility 

Index 

WAL Weighted Average Life

WAM Weighted-Average Maturity

WEO World Economic Outlook

WLA Weekly Liquid Assets 

WTI West Texas Intermediate

YTD Year-to-Date

Glossary 193

7 Glossary

Additional Tier 1 Capital

A regulatory capital measure that may include items 

such as noncumulative perpetual preferred stock 

and mandatory convertible preferred securities 

that satisfy the eligibility criteria in the Revised 

Capital Rule, as well as related surplus and minority 

interests.

Advanced Approaches Capital Framework

The Advanced Approaches capital framework 

requires certain banking organizations to use 

an internal ratings-based approach and other 

methodologies to calculate risk-based capital 

requirements for credit risk and advanced 

measurement approaches to calculate risk-based 

capital requirements for operational risk. The 

framework applies to large, internationally active 

banking organizations—generally those that 

are G-SIBs or with at least $700 billion in total 

consolidated assets or at least $75 billion in crossjurisdictional activity with at least $250 billion 

in total consolidated assets or at least $10 billion 

in total on-balance sheet foreign exposure—and 

includes the depository institution subsidiaries of 

those firms.

Affiliate

In general, a company is an affiliate of another 

company if: (1) either company consolidates 

the other on financial statements prepared 

in accordance with U.S. Generally Accepted 

Accounting Principles, the International Financial 

Reporting Standards, or other similar standards; 

(2) both companies are consolidated with a third 

company on financial statements prepared in 

accordance with such principles or standards; (3) 

for a company that is not subject to such principles 

or standards, consolidation as described above 

would have occurred if such principles or standards 

had applied; or (4) a primary regulator determines 

that either company provides significant support to, 

or is materially subject to the risks or losses of, the 

other company.

Asset-Backed Commercial Paper (ABCP)

Short-term debt which has a fixed maturity of up 

to 270 days and is backed by some financial asset, 

such as trade receivables, consumer debt receivables, 

securities, or auto and equipment loans or leases.

Asset-Backed Security (ABS)

A fixed-income or other type of security which is 

collateralized by self-liquidating financial assets that 

allows the holder of the security to receive payments 

that depend primarily on cash flows from the assets.

Bilateral Repo

A repo between two institutions in which 

negotiations are conducted directly between the 

participants or through a broker, and in which the 

participants must agree on the specific securities 

to be used as collateral. The bilateral repo market 

includes both non-cleared trades and trades cleared 

through Fixed Income Clearing Corporation’s 

delivery versus payment repo service.

Central Counterparty (CCP)

An entity which interposes itself between 

counterparties to contracts traded in one or more 

financial markets, becoming the buyer to every seller 

and the seller to every buyer, thereby ensuring the 

performance of open contracts. 

Clearing Bank

A BHC subsidiary that facilitates payment and 

settlement of financial transactions, such as check 

clearing, or facilitates trades between the sellers and 

buyers of securities or other financial instruments or 

contracts.

Collateral

Any asset pledged by a borrower to guarantee 

payment of a debt.

Collateralized Loan Obligation (CLO)

A securitization vehicle backed predominantly by 

commercial loans.
194 2020 FSOC // Annual Report

Commercial Mortgage-Backed Security (CMBS)

A security which is collateralized by a pool of 

commercial mortgage loans and makes payments 

derived from the interest and principal payments on 

the underlying mortgage loans.

Commercial Paper (CP)

Short-term (maturity of up to 270 days), unsecured 

corporate debt.

Commercial Paper Funding Facility (CPFF)

A funding backstop established by the Federal 

Reserve under section 13(3) of the Federal Reserve 

Act to facilitate the issuance of term commercial 

paper by eligible issuers. The CPFF is structured as a 

credit facility to a special purpose vehicle.

Common Equity Tier 1 Capital (CET1)

A regulatory capital measure which includes capital 

with the highest loss-absorbing capacity, such as 

common stock and retained earnings.

Common Equity Tier 1 Capital Ratio

A ratio which divides common equity tier 1 capital 

by total risk-weighted assets. The ratio applies to all 

banking organizations subject to the Revised Capital 

Rule.

Comprehensive Capital Analysis and Review 

(CCAR)

An annual exercise by the Federal Reserve to ensure 

that institutions have robust, forward-looking capital 

planning processes that account for their unique 

risks and sufficient capital to continue operations 

throughout times of economic and financial stress. 

Consumer Price Index (CPI)

A monthly index containing data on changes in the 

prices paid by urban consumers for a representative 

basket of goods and services.

Credit Default Swap (CDS)

A financial contract in which one party agrees to 

make a payment to the other party in the event of a 

specified credit event, in exchange for one or more 

fixed payments. 

Defined Benefit Plan

A retirement plan in which the cost to the employer 

is based on a predetermined formula to calculate 

the amount of a participant’s future benefit. In 

defined benefit plans, the investment risk is borne 

by the plan sponsor.

Defined Contribution Plan

A retirement plan in which the cost to the employer 

is limited to the specified annual contribution. In 

defined contribution plans, the investment risk is 

borne by the plan participant. 

Digital Asset

Digital asset is an asset that is issued/transferred 

using distributed ledger or blockchain technology. 

A cryptocurrency is a digital asset designed to work 

as a medium of exchange. Digital assets include 

instruments that may qualify under applicable U.S. 

laws as securities, commodities, and security- or 

commodity-based instruments such as futures or 

swaps. Other industry terms used for these assets 

include cryptocurrencies, crypto assets, virtual 

currencies, digital currencies, stablecoins, and 

crypto tokens.

Dodd-Frank Act Stress Tests (DFAST)

Annual stress tests required by the Dodd-Frank Act 

for national banks and federal savings associations 

with total consolidated assets of more than $10 

billion. 

Duration

The sensitivity of the prices of bonds and other 

fixed-income securities to changes in the level of 

interest rates. 

Emerging Market Economy (EME)

Although there is no single definition, emerging 

market economies are generally classified according 

to their state of economic development, liquidity, 

and market accessibility. This report has grouped 

economies based on the classifications used by 

significant data sources such as the MSCI and 

Standard & Poor’s, which include, for example, 

Brazil, China, India, and Russia. 
Glossary 195

Entity-Netted Notional (ENN)

A risk-based measure of size for the interest rate 

swap market. To describe ENNs intuitively, imagine 

that each pair of swap counterparties established 

its net interest rate risk position with bonds instead 

of swaps. More precisely, within each pair of 

counterparties, the counterparty that is net long has 

purchased a 5‐year equivalent risk position in bonds 

from the counterparty that is net short. Then, the 

sum of those hypothetical bond positions across all 

pairs of counterparties is a measure of the size of the 

market and is equal to ENNs.

Exchange-Traded Product (ETP)

An investment fund or note that is traded on an 

exchange. ETPs offer continuous pricing—unlike 

mutual funds, which offer only end-of-day pricing. 

ETPs are often designed to track an index or a 

portfolio of assets. ETPs include: (1) exchangetraded funds (ETFs), which are registered as 

investment companies under the Investment 

Company Act of 1940 (’40 Act); (2) non-’40 Act 

pooled investment vehicles, which are generally 

trust or partnership vehicles that do not invest in 

securities; and (3) exchange-traded notes (ETNs), 

which are senior debt instruments issued by 

financial institutions that pay a return based on the 

performance of a “reference asset”.

Federal Funds Rate

The interest rate at which depository institutions 

lend reserve balances to other depository 

institutions overnight. The FOMC sets a target range 

for the level of the overnight federal funds rate. The 

Federal Reserve Bank of New York then uses open 

market operations to influence the rate so that it 

trades within the target range. 

FICO Score 

A measure of a borrower’s creditworthiness based 

on the borrower’s credit data; developed by the Fair 

Isaac Corporation.

Financial and Banking Information Infrastructure 

Committee (FBIIC)

The FBIIC consists of 18 member organizations 

from across the financial regulatory community, 

both federal and state. It was chartered under 

the President’s Working Group on Financial 

Markets following September 11, 2001 to improve 

coordination and communication among financial 

regulators, enhance the resiliency of the financial 

sector, and promote public-private partnership. 

Financial Market Infrastructure (FMI)

A multilateral system among participating financial 

institutions, including the operator of the system, 

used for the purposes of recording, clearing, or 

settling payments, securities, derivatives, or other 

financial transactions. Under the Dodd-Frank Act, 

certain FMIs are recognized as FMUs. 

Financial Market Utility (FMU)

An entity, as defined in the Dodd-Frank Act, that, 

subject to certain exclusions, “manages or operates a 

multilateral system for the purpose of transferring, 

clearing, or settling payments, securities, or other 

financial transactions among financial institutions 

or between financial institutions and the person.”

Fire Sale

The disorderly liquidation of assets to meet margin 

requirements or other urgent cash needs. Such 

a sudden sell-off drives down prices, potentially 

below their intrinsic value, when the quantities to 

be sold are large relative to the typical volume of 

transactions. Fire sales can be self-reinforcing and 

lead to additional forced selling by some market 

participants which, subsequent to an initial fire sale 

and consequent decline in asset prices, may also 

need to meet margin or other urgent cash needs.

Fiscal Year

Any 12-month accounting period. The fiscal year for 

the federal government begins on October 1 and 

ends on September 30 of the following year; it is 

named after the calendar year in which it ends.

Futures Contract

An agreement to purchase or sell a commodity 

for delivery in the future: (1) at a price that is 

determined at initiation of the contract; (2) that 

obligates each party to the contract to fulfill the 

contract at the specified price; (3) that is used 

to assume or shift price risk; and (4) that may be 

satisfied by delivery or offset. 
196 2020 FSOC // Annual Report

General Collateral Finance (GCF)

An interdealer repo market in which the Fixed 

Income Clearing Corporation plays the role of CCP. 

Trades are netted at the end of each day and settled 

at the tri-party clearing bank. See Tri-party Repo.

Government-Sponsored Enterprise (GSE)

A corporate entity with a federal charter authorized 

by law, but which is a privately owned financial 

institution. Examples include the Federal National 

Mortgage Association (Fannie Mae) and the Federal 

Home Loan Mortgage Corporation (Freddie Mac).

Gross Domestic Product (GDP)

The broadest measure of aggregate economic 

activity, measuring the total value of all final goods 

and services produced within a country’s borders 

during a specific period.

Gross Notional Exposure (GNE)

The sum of the absolute values of long and short 

notional amounts. The “notional” amount of a 

derivative contract is the amount used to calculate 

payments due on that contract, just as the face 

amount of a bond is used to calculate coupon 

payments. 

Haircut

The discount, represented as a percentage of par or 

market value, at which an asset can be pledged as 

collateral. For example, a $1,000,000 bond with a 5 

percent haircut would collateralize a $950,000 loan. 

The purpose of a haircut is to provide a collateral 

margin for a secured lender.

High-Quality Liquid Asset (HQLA)

An asset—such as a government bond—which is 

considered eligible as a liquidity buffer in the U.S. 

banking agencies’ liquidity coverage ratio. Highquality liquid assets should be liquid in markets 

during times of stress and, ideally, be central bankeligible.

Initial Margin

Collateral that is collected to cover potential 

changes in the value of each participant’s position 

(that is, potential future exposure) over the 

appropriate closeout period in the event the 

participant defaults.

Initial Public Offering (IPO)

The first time a company offers its shares of capital 

stock to the general public.

Institutional Leveraged Loan

The term portion of a leveraged loan that is sold to 

institutional investors.

Interest Rate Swap

A derivative contract in which two parties swap 

interest rate cash flows on a periodic basis, 

referencing a specified notional amount for a fixed 

term. Typically, one party will pay a predetermined 

fixed rate while the other party will pay a short-term 

variable reference rate which resets at specified 

intervals.

Index Tranche Credit Default Swap (CDS)

A synthetic collateralized debt obligation (CDO) 

based on a CDS index where each tranche (equity, 

mezzanine, senior, and super senior) references 

a different segment of the loss distribution of the 

underlying CDS index.

Intermediate Holding Company (IHC)

A company established or designated by an FBO 

under the Federal Reserve Board’s Regulation YY. 

Regulation YY requires that an FBO with U.S. nonbranch assets of $50 billion or more must hold its 

entire ownership interest in its U.S. subsidiaries, 

with certain exclusions, through a U.S. IHC.

Legal Entity Identifier (LEI)

A 20-character alpha-numeric code that connects to 

key reference information which enables clear and 

unique identification of legal entities participating 

in global financial markets. The LEI system is 

designed to facilitate many financial stability 

objectives, including improved risk management 

in firms; better assessment of microprudential 

and macroprudential risks; expedition of orderly 

resolution; containment of market abuse and 

financial fraud; and provision of higher-quality and 

more accurate financial data.

Leveraged Buyout (LBO)

An acquisition of a company financed by a private 

equity contribution combined with borrowed funds, 
Glossary 197

with debt constituting a significant portion of the 

purchase price.

Leveraged Loan

While numerous definitions of leveraged lending 

exist throughout the financial services industry, 

generally a leveraged loan is understood to be a type 

of loan that is extended to companies that already 

have considerable amounts of debt and/or have a 

non-investment grade credit rating or are unrated 

and/or whose post-financing leverage significantly 

exceeds industry norms or historical levels. 

LIBOR 

A rate based on submissions from a panel of banks. 

LIBOR is intended to reflect the rate at which large, 

globally-active banks can borrow on an unsecured 

basis in wholesale markets. 

Limit (Up or Down)

The maximum price advance or decline from the 

previous day’s settlement price permitted during one 

trading session, as fixed by the rules of an exchange. 

Effective October 12, 2020, S&P 500 e-mini futures 

are subject to a hard upside and downside limit of 

7 percent during non-U.S. trading hours. Prior to 

that, S&P 500 e-mini futures were subject to a hard 

upside and downside limit of 5 percent during nonU.S. trading hours.

Liquidity Coverage Ratio (LCR)

A standard to ensure that covered companies 

maintain adequate unencumbered, high-quality 

liquid assets to meet anticipated liquidity needs for a 

30-day horizon under a standardized liquidity stress 

scenario.

Loan-to-Value Ratio

The ratio of the amount of a loan to the value of 

the asset that the loan funds, typically expressed as 

a percentage. This is a key metric when considering 

the level of collateralization of a mortgage. 

Major Swap Participant

A person that is not a swap dealer and maintains 

a substantial position in swaps, creates substantial 

counterparty exposure, or is a financial entity that is 

highly leveraged and not subject to federal banking 

capital rules.

Margin

In the context of clearing activity, collateral that 

is collected to protect against current or potential 

future exposures resulting from market price 

changes or in the event of a counterparty default. 

Money Market Fund Liquidity Facility (MMLF)

A facility established by the Federal Reserve under 

section 13(3) of the Federal Reserve Act that 

provides funding to U.S. depository institutions and 

bank holding companies to finance their purchases 

of certain types of assets from MMFs under certain 

conditions. The MMLF is intended to assist MMFs in 

meeting demands for redemptions by investors and 

to foster liquidity in the markets for the assets held 

by MMFs.

Money Market Mutual Fund (MMF)

A type of mutual fund which invests in short-term, 

high-quality, liquid securities such as government 

bills, CDs, CP, or repos. 

Mortgage-Backed Security (MBS)

An ABS backed by a pool of mortgages. Investors 

in the security receive payments derived from the 

interest and principal payments on the underlying 

mortgages. 

Mortgage Servicing Company

A company which acts as an agent for mortgage 

holders by collecting and distributing mortgage 

cash flows. Mortgage servicers also manage defaults, 

modifications, settlements, foreclosure proceedings, 

and various notifications to borrowers and investors.

Mortgage Servicing Right (MSR)

The right to service a mortgage loan or a portfolio 

of mortgage loans. 

Municipal Bond

A bond issued by states, cities, counties, local 

governmental agencies, or certain nongovernment 

issuers to finance certain general or project-related 

activities.

Net Asset Value (NAV)

An investment company’s total assets minus its total 

liabilities.
198 2020 FSOC // Annual Report

Net Interest Margin (NIM)

Net interest income as a percent of interest-earning 

assets.

Net Stable Funding Ratio (NSFR)

A liquidity standard to promote the funding 

stability of internationally active banks, through the 

maintenance of stable funding resources relative to 

assets and off-balance sheet exposures.

Open Market Operations

The purchase and sale of securities in the open 

market by a central bank to implement monetary 

policy.

Operational Resilience

The ability of an entity’s personnel, systems, 

telecommunications networks, activities or processes 

to resist, absorb, and recover from or adapt to an 

incident that may cause harm, destruction, or loss of 

ability to perform mission-related functions.

Option

A financial contract granting the holder the 

right but not the obligation to engage in a future 

transaction on an underlying security or real asset. 

The most basic examples are an equity call option, 

which provides the right but not the obligation to 

buy a block of shares at a fixed price for a fixed 

period, and an equity put option, which similarly 

grants the right to sell a block of shares.

Overnight Reverse Repurchase Agreement Facility 

(ON RRPF)

A supplementary policy tool that the Federal Reserve 

uses to set the floor on rates to keep the federal 

funds rate in the target range set by the FOMC. 

Over-the-Counter (OTC)

A method of trading which does not involve a 

registered exchange. An OTC trade could occur on 

purely a bilateral basis or could involve some degree 

of intermediation by a platform that is not required 

to register as an exchange. An OTC trade could, 

depending on the market and other circumstances, 

be centrally cleared or bilaterally cleared. The 

degree of standardization or customization of 

documentation of an OTC trade will depend on 

the whether it is cleared and whether it is traded 

on a non-exchange platform (and, if so, the type of 

platform). 

Paris Club

An informal group of official creditors whose role is 

to find coordinated and sustainable solutions to the 

payment difficulties experienced by debtor countries

Primary Dealer

A financial institution that is a trading counterparty 

of the Federal Reserve Bank of New York. Primary 

dealers are expected to make markets for the 

Federal Reserve Bank of New York on behalf of its 

official accountholders as needed, and to bid on a 

pro-rata basis in all Treasury auctions at reasonably 

competitive prices.

Prudential Regulation

Regulation aimed at ensuring the safe and sound 

operation of financial institutions, set by both state 

and federal authorities.

Public Debt

All debt issued by Treasury and the Federal 

Financing Bank, including both debt held by 

the public and debt held in intergovernmental 

accounts, such as the Social Security Trust Funds. 

Not included is debt issued by government agencies 

other than Treasury.

Qualifying Hedge Fund

A hedge fund advised by a Large Hedge Fund 

Adviser that has a net asset value (individually or in 

combination with any feeder funds, parallel funds, 

and/or dependent parallel managed accounts) of 

at least $500 million as of the last day of any month 

in the fiscal quarter immediately preceding the 

adviser’s most recently completed fiscal quarter. 

Large Hedge Fund Advisers are advisers that have at 

least $1.5 billion in hedge fund AUM.

Real Estate Investment Trust (REIT)

An operating company which manages incomeproducing real estate or real estate-related assets. 

Certain REITs also operate real estate properties in 

which they invest. To qualify as a REIT, a company 

must have three-fourths of its assets and gross 

income connected to real estate investment and 

must distribute at least 90 percent of its taxable 
Glossary 199

income to shareholders annually in the form of 

dividends.

Repurchase Agreement (Repo)

The sale of a security combined with an agreement 

to repurchase the security, or a similar security, on a 

specified future date at a prearranged price. A repo 

is a secured lending arrangement. 

Residential Mortgage-Backed Security (RMBS)

A security which is collateralized by a pool of 

residential mortgage loans and makes payments 

derived from the interest and principal payments on 

the underlying mortgage loans.

Risk-Weighted Assets (RWAs)

A risk-based concept used as the denominator of 

risk-based capital ratios (common equity tier 1, tier 

1, and total). The total RWAs for an institution are a 

weighted total asset value calculated from assigned 

risk categories or modeled analysis. Broadly, total 

RWAs are determined by calculating RWAs for 

market risk and operational risk, as applicable, and 

adding the sum of RWAs for on-balance sheet, offbalance sheet, counterparty, and other credit risks.

Rollover Risk

The risk that as an institution’s debt nears maturity, 

the institution may not be able to refinance the 

existing debt or may have to refinance at less 

favorable terms.

Run Risk

The risk that investors lose confidence in an 

institution—stemming from concerns about 

counterparties, collateral, solvency, or related 

issues—and respond by pulling back their funding.

Secured Overnight Financing Rate (SOFR)

A broad measure of the cost of borrowing cash 

overnight collateralized by Treasury securities. The 

rate is calculated as a volume-weighted median 

of transaction-level tri-party repo data as well as 

GCF Repo transaction data and data on bilateral 

Treasury repo transactions. 

Securities Lending/Borrowing

The temporary transfer of securities from one party 

to another for a specified fee and term, in exchange 

for collateral in the form of cash or securities.

Securitization

A financial transaction in which assets such as 

mortgage loans are pooled, securities representing 

interests in the pool are issued, and proceeds from 

the underlying pooled assets are used to service and 

repay the securities.

Security-Based Swap Dealer

A person that holds itself out as a dealer in securitybased swaps, makes a market in security-based 

swaps, regularly enters into security-based swaps 

with counterparties, or engages in any activity 

causing it to be known as a dealer or market maker 

in security-based swaps; does not include a person 

entering into security-based swaps for such person’s 

own account. 

Short-Term Wholesale Funding

Short-term funding instruments not covered by 

deposit insurance which are typically issued to 

institutional investors. Examples include large 

checkable and time deposits, brokered CDs, CP, 

Federal Home Loan Bank borrowings, and repos.

Special Purpose Acquisition Company (SPAC)

Companies formed through an IPO to raise funds 

to purchase businesses or assets to be acquired after 

the IPO.

Supplementary Leverage Ratio (SLR)

Tier 1 capital of an advanced approaches banking 

organization divided by total leverage exposure. All 

advanced approaches banking organizations must 

maintain an SLR of at least 3 percent. The SLR is 

effective January 1, 2018, and organizations must 

calculate and publicly disclose their SLRs beginning 

March 31, 2015. 

Swap

An exchange of cash flows with defined terms and 

over a fixed period, agreed upon by two parties. A 

swap contract may reference underlying financial 

products across various asset classes including 

interest rates, credit, equities, commodities, and FX. 
200 2020 FSOC // Annual Report

Swap Data Repository (SDR)

A person that collects and maintains information 

or records with respect to transactions or positions 

in, or the terms and conditions of, swaps entered 

into by third parties for the purpose of providing 

a centralized recordkeeping facility for swaps. In 

certain jurisdictions, SDRs are referred to as trade 

repositories. The Committee on Payments and 

Settlement Systems and IOSCO describe a trade 

repository as “an entity that maintains a centralized 

electronic record (database) of transaction data.”

Swap Dealer

Section 1a(49) of the Commodity Exchange Act 

defines the term “swap dealer” (SD) to include any 

person who: (1) holds itself out as a dealer in swaps; 

(2) makes a market in swaps; (3) regularly enters 

into swaps with counterparties as an ordinary course 

of business for its own account; or (4) engages in any 

activity causing the person to be commonly known 

in the trade as a dealer or market maker in swaps. 

Swap Execution Facility (SEF)

A term defined in the Dodd-Frank Act as a trading 

system or platform which market participants use to 

execute and trade swaps by accepting bids and offers 

made by other participants, through any means of 

interstate commerce.

Swap Future

A futures contract which mimics the economic 

substance of a swap.

Swaption

An option granting the right to enter into a swap. 

See Option and Swap.

Syndicated Loan

A loan to a commercial borrower in which financing 

provided by a group of lenders. The loan package 

may have a revolving portion, a term portion, or 

both

Tier 1 Capital 

A regulatory capital measure comprised of common 

equity tier 1 capital and additional tier 1 capital. See 

Common Equity Tier 1 Capital and Additional Tier 

1 Capital.

Tier 2 Capital 

A regulatory capital measure which includes 

subordinated debt with a minimum maturity of 

five years and satisfies the eligibility criteria in the 

Revised Capital Rule.

Time Deposits

Deposits that the depositor generally does not have 

the right to withdraw before a designated maturity 

date without paying an early withdrawal penalty. A 

CD is a time deposit.

Total Capital 

A regulatory capital measure comprised of tier 1 

capital and tier 2 capital. See Tier 1 Capital and Tier 

2 Capital.

Tri-Party Repo

A repo in which a clearing bank acts as third-party 

agent to provide collateral management services and 

to facilitate the exchange of cash against collateral 

between the two counterparties.

Underwriting Standards

Terms, conditions, and criteria used to determine 

the extension of credit in the form of a loan or 

bond.

Variation Margin

Funds that are collected and paid out to reflect 

current exposures resulting from actual changes in 

market prices.

VIX (Chicago Board Options Exchange Market 

Volatility Index)

A standard measure of market expectations of shortterm volatility based on S&P equity index option 

prices. 

Weighted Average Life (WAL)

A weighted average of the maturities of all securities 

held in a MMF’s portfolio. 

Weighted-Average Maturity (WAM)

A weighted average of the time to maturity on all 

loans in an asset-backed security.
Glossary 201

Window-Dressing

Period-ending transactions that are reflected on a 

statement or report. 

Yield Curve

A graphical representation of the relationship 

between bond yields and their respective maturities.

List of Charts 203

8 List of Charts

3.1.1 Household Debt as a Percent of Disposable Personal Income ............................................11

3.1.2 Household Debt Service Ratio ..........................................................................................12

3.1.3 Owners’ Equity as Share of Household Real Estate ...........................................................12

3.1.4 Components of Consumer Credit.......................................................................................13

3.1.5 Change in Inquiries Relative to First Week of March 2020 .................................................13

3.1.6 Percentage of Mortgages in Forbearance .........................................................................14

3.1.7 Share Of Open Accounts that Transitioned to Delinquent ..................................................14

3.2.1.1 Nonfinancial Corporate Credit as Percent of GDP............................................................15

3.2.1.2 U.S. Nonfinancial Business Leverage..............................................................................15

3.2.1.3 Bank Business Lending Standards .................................................................................16

3.2.1.4 Investment Grade Corporate Bond Spreads ...................................................................16

3.2.1.5 Gross Issuance of Corporate Bonds................................................................................16

3.2.1.6 High-Yield Corporate Bond Spreads................................................................................17

3.2.1.7 Leveraged Loan Spreads ...............................................................................................17

3.2.1.8 Institutional Leveraged Loan Issuance............................................................................17

3.2.1.9 Nonfinancial Corporations Liquid Assets ........................................................................18

3.2.1.10 Maturity Profile of U.S. Nonfinancial Corporate Debt.....................................................18

A.1 U.S. Corporate Defaults ......................................................................................................19

A.2 Chapter 11 Bankruptcy Filings .............................................................................................19

A.3 U.S. Nonfinancial Corporate Downgrade-Upgrade Ratio...................................................... 20

A.4 Fallen Angel Debt ............................................................................................................... 20

3.2.2.1 S&P 500 Volatility ......................................................................................................... 22

3.2.2.2 S&P 500 Forward Price-to-Earnings Ratio.................................................................... 22

3.2.2.3 S&P 500 1-Year Price Returns by Sector ...................................................................... 22

3.2.2.4 Performance of Global Stock Indices .............................................................................23

3.3.1.1 Federal Debt Held by the Public......................................................................................24

3.3.1.2 Publicly Held Treasury Securities Outstanding................................................................24

3.3.1.3 Treasury General Account Balance.................................................................................25

3.3.1.4 U.S. Treasury Yields .......................................................................................................25

3.3.1.5 10-Year TIPS Yield and 10-Year Break Even ...................................................................25

3.3.1.6 FRBNY Open Market Operations: Treasury Purchases ................................................... 26

B.1 Intraday Volatility for 10-Year Treasury Yields.......................................................................27

B.2 Bid-Ask Spread for 30-Year Treasury Bonds........................................................................27

B.3 Primary Dealer Inventories ..................................................................................................28

3.3.2.1 Changes in State and Local Government Tax Revenues................................................. 30

3.3.2.2 Municipal Bond Mutual Fund Flows .............................................................................. 30
204 2020 FSOC // Annual Report

3.3.2.3 Municipal Bonds to U.S. Treasuries............................................................................... 30

3.3.2.4 Municipal Bond Issuance ...............................................................................................31

C.1 Breakdown of State Tax Revenues ..................................................................................... 34

C.2 Breakdown of Local Tax Revenues ..................................................................................... 34

C.3 Liabilities of Severely Underfunded Public Pension Plans .................................................... 34

3.4.1.1 CP Outstanding by Issuer Type ...................................................................................... 35

3.4.1.2 CP Issuance by Issuer Type and Rating ......................................................................... 35

3.4.1.3 CP Outstanding & MMF Holdings................................................................................... 36

3.4.1.4 Three Month CP Interest Rate Spreads ......................................................................... 36

3.4.1.5 Weekly CP Issuance by Tenor........................................................................................ 36

3.4.1.6 Commercial Bank Deposit Growth..................................................................................37

3.4.2.1 FICC Repo Balances and MMF Holdings........................................................................ 38

3.4.2.2 Primary Dealer Repo Agreements ................................................................................. 38

3.4.2.3 Overnight Repo Volumes and Dealer Inventories ........................................................... 38

3.4.2.4 Primary Dealer Reverse Repo Agreements.....................................................................39

3.4.2.5 Primary Dealer Repo Collateral ......................................................................................39

3.4.2.6 Collateral in the Tri-Party Repo Market ..........................................................................39

3.4.2.7 Repo Rate Spreads ....................................................................................................... 40

3.4.2.8 Value of Securities on Loan............................................................................................41

3.4.2.9 U.S. Securities Lending Cash Reinvestment...................................................................42

3.4.2.10 U.S. Securities Lending Cash Reinvestment Collateral..................................................42

3.4.3.1 U.S. Futures Markets: Volume....................................................................................... 46

3.4.3.2 3-Month Implied Volatility ............................................................................................ 46

3.4.3.3 U.S. Futures Markets Open Interest .............................................................................. 46

3.4.3.4 Micro Futures: Open Interest..........................................................................................47

3.4.3.5 U.S. Treasury Futures: Open Interest..............................................................................47

3.4.3.6 Exchange-Traded Equity Option Volume........................................................................ 48

3.4.3.7 Call Option Volume for Select Technology Stocks .......................................................... 48

3.4.3.8 Options on Futures: Open Interest................................................................................. 48

3.4.3.9 Options on Futures: Volume .......................................................................................... 49

3.4.3.10 Options on Futures: Delta Adjusted Open Interest........................................................ 49

3.4.3.11 Delta Adjusted Options on Futures by Asset Classes ................................................... 49

3.4.3.12 Options on 10-Year Treasury Futures........................................................................... 50

3.4.3.13 OTC Options: BHC Gross Notional Outstanding............................................................ 50

3.4.3.14 OTC Options: BHC Net Notional Outstanding................................................................ 50

3.4.3.15 Derivatives Notional Volume .........................................................................................51

3.4.3.16 Derivatives Notional Amount Outstanding.....................................................................51

3.4.3.17 Size of Interest Rate Swap Market................................................................................51

3.4.3.18 Global OTC Positions ...................................................................................................52

3.4.3.19 Commodity Index Swaps: Annual Open Interest............................................................52
List of Charts 205

3.4.3.20 Commodity Index Swaps: Monthly Open Interest .........................................................52

3.4.3.21 Commodity Swaps: Open Interest............................................................................... 53

3.4.3.22 Commodity Swaps by Asset Class.............................................................................. 53

3.4.3.23 Margin Funds Held at CFTC Registered FCMs ............................................................ 53

3.4.3.24 FCM Concentration: Customer Futures Balances ........................................................ 54

3.4.3.25 FCM Concentration: Customer Swap Balances ........................................................... 54

3.4.3.26 Concentration of Swap Positions for Registered SDs................................................... 54

3.4.3.27 Interest Rate Swap SEF Trading Volumes.................................................................... 55

3.4.3.28 Credit Default Swap SEF Trading Volumes .................................................................. 55

3.4.4.1 Commodities Futures & Options: Open Interest ............................................................ 56

3.4.4.2 Total Net Asset Value – Commodity ETFs...................................................................... 56

3.4.4.3 Metals Indices .............................................................................................................. 56

3.4.4.4 Cash-Futures Spread: Gold............................................................................................57

3.4.4.5 Agriculture Prices ..........................................................................................................57

3.4.4.6 Cash-Futures Spread: Cattle......................................................................................... 58

3.4.4.7 Net Farm Income ......................................................................................................... 58

3.4.4.8 Energy Futures & Options: Open Interest........................................................................59

3.4.4.9 Energy Futures & Options by Product.............................................................................59

3.4.4.10 Global Petroleum Consumption and Production ........................................................... 60

3.4.4.11 WTI Crude Oil Futures ................................................................................................. 60

3.4.4.12 Natural Gas Inventories ............................................................................................... 60

3.4.4.13 Natural Gas Forward Curves ........................................................................................61

3.4.5.1 House Prices by Census Division....................................................................................61

3.4.5.2 Home Sales ...................................................................................................................62

3.4.5.3 New Housing Starts and Price Changes.........................................................................62

3.4.5.4 Homeownership and Vacancy Rates ............................................................................. 63

3.4.5.5 Mortgage Originations and Rates.................................................................................. 63

3.4.5.6 Purchase Origination Volume by Credit Score................................................................ 64

3.4.5.7 Shares of Mortgages by Equity Percentage................................................................... 64

3.4.5.8 Mortgage Delinquency.................................................................................................. 65

3.4.5.9 Forbearance Rates by Investor Type ............................................................................. 66

3.4.5.10 Mortgage Originations by Product ................................................................................67

3.4.5.11 RMBS Issuance............................................................................................................67

3.4.5.12 Cumulative MBS Purchases by the Federal Reserve .................................................... 68

3.4.6.1 Conduit CMBS Delinquency and Foreclosure Rate..........................................................70

3.4.6.2 Conduit CMBS Delinquency Rates by Industry................................................................70

3.4.6.3 CMBS Issuance .............................................................................................................71

3.4.6.4 Commercial Property Price Growth................................................................................72

3.4.6.5 Capitalization Rates and Spreads...................................................................................72

E.1 Sector Equity REIT Indices ...................................................................................................74
206 2020 FSOC // Annual Report

3.5.1.1 Categorization of Large U.S. BHCs................................................................................. 77

3.5.1.2 Total Assets by BHC Type...............................................................................................78

3.5.1.3 Common Equity Tier 1 Ratios .........................................................................................78

3.5.1.4 Common Equity Tier 1 Ratios at U.S. G-SIBs ..................................................................79

3.5.1.5 Payout Rates at U.S. G-SIBs.......................................................................................... 80

3.5.1.6 Supplementary Leverage Ratios at U.S. G-SIBs............................................................. 80

3.5.1.7 Return on Assets............................................................................................................81

3.5.1.8 Net Interest Margins.......................................................................................................81

3.5.1.9 Selected Sources of Funding at U.S. G-SIBs...................................................................81

3.5.1.10 Deposit Growth, All Commercial Banks.........................................................................82

3.5.1.11 Effective Deposit Rates by BHC Category......................................................................82

3.5.1.12 Delinquency Rates on Real Estate Loans.......................................................................82

3.5.1.13 Delinquency Rates on Selected Loans.......................................................................... 83

3.5.1.14 Provisions to Loans Ratios at BHCs.............................................................................. 83

3.5.1.15 C&I Loan Growth, All Commercial Banks ..................................................................... 84

3.5.1.16 Loans to Nondepository Financial Institutions .............................................................. 84

3.5.1.17 High-Quality Liquid Assets by BHC Type ...................................................................... 84

3.5.1.18 Selected Liquid Assets at All BHCs .............................................................................. 85

3.5.1.19 Liquidity Coverage Ratios at U.S. G-SIBs ..................................................................... 85

3.5.1.20 Held-to-Maturity Securities ........................................................................................ 85

3.5.1.21 Duration Gap............................................................................................................... 86

3.5.1.22 Bank Stock Performance ............................................................................................ 86

3.5.1.23 Price-to-Book of Select U.S. G-SIBs............................................................................ 86

3.5.1.24 5-Year CDS Premiums of Select U.S. G-SIBs ................................................................87

3.5.1.25 5-Year CDS Premiums of Select Foreign Banks ...........................................................87

3.5.1.26 Initial and Stressed Capital Ratios............................................................................... 88

3.5.1.27 Minimum CET1 Capital Ratios in the Severely Adverse and 

Alternative Downside Scenarios.................................................................................. 89

3.5.1.28 FDIC-Insured Failed Institutions ................................................................................. 89

3.5.1.29 Commercial Bank and Thrift Net Income..................................................................... 90

3.5.1.30 Total Assets of Largest Insured Depository Institutions ...............................................91

3.5.1.31 U.S. Branches and Agencies of Foreign Banks: Assets .................................................91

3.5.1.32 U.S. Branches and Agencies of Foreign Banks: Liabilities............................................ 92

3.5.1.33 Credit Union Income.................................................................................................... 93

3.5.1.34 Credit Union Deposits.................................................................................................. 95

3.5.1.35 Credit Union Net Long-Term Assets............................................................................. 95

3.5.1.36 Credit Union Composition of Assets............................................................................. 95

3.5.2.1 Number of Broker-Dealers and Industry Net Income...................................................... 96

3.5.2.2 Broker-Dealer Revenues ............................................................................................... 96

3.5.2.3 Broker-Dealer Assets and Leverage...............................................................................97
List of Charts 207

3.5.2.4 REITs Total Assets ........................................................................................................ 98

3.5.2.5 mREIT Stock Performance ........................................................................................... 98

3.5.2.6 Agency MBS Spread to Treasuries ............................................................................... 99

3.5.2.7 MMF Assets by Fund Type...........................................................................................100

3.5.2.8 Liquid Asset Shares of Prime MMFs ............................................................................101

3.5.2.9 Weighted Average Maturities by Fund Type..................................................................101

3.5.2.10 Net Assets of the Investment Company Industry ........................................................103

3.5.2.11 Monthly Bond Mutual Fund Flows ..............................................................................103

3.5.2.12 Monthly Equity Mutual Fund Flows.............................................................................103

3.5.2.13 Monthly Bank Loan Mutual Fund Flows......................................................................104

3.5.2.14 Monthly High-Yield Mutual Fund Flows.......................................................................104

3.5.2.15 Cumulative Equity Fund Flows....................................................................................104

3.5.2.16 Cumulative Equity and Fixed Income Fund Flows .......................................................105

3.5.2.17 U.S.-Listed ETF AUM..................................................................................................105

3.5.2.18 ETF Assets by Category of Investment .......................................................................105

3.5.2.19 Monthly ETF Flows: Fixed Income Funds....................................................................106

3.5.2.20 Monthly ETF Flows: Equity Funds ..............................................................................106

3.5.2.21 Monthly Inverse and Leveraged ETF Flows ................................................................106

3.5.2.22 Hedge Fund Gross and Net Assets.............................................................................107

3.5.2.23 Hedge Fund Secured Financing ................................................................................108

3.5.2.24 Hedge Fund Borrowing: Composition of Creditors .....................................................108

3.5.2.25 Hedge Fund Financing Liquidity .................................................................................108

3.5.2.26 Hedge Fund Gross Exposures by Asset Class ............................................................109

3.5.2.27 Hedge Fund Treasury Exposures................................................................................110

3.5.2.28 M&A Loan Volume for Private Equity-Backed Issuers................................................. 111

3.5.2.29 Public Plan Allocation to Alternative Assets................................................................113

3.5.2.30 Insurance Industry Net Income ..................................................................................115

3.5.2.31 Insurance Industry Capital and Surplus......................................................................115

3.5.2.32 Consumer Loans and Leases Outstanding .................................................................117

3.5.2.33 Business Loans and Leases Outstanding...................................................................117

3.5.2.34 ABS Issuance ............................................................................................................118

3.6.1.1 Initial Margin Requirements: DTCC ...............................................................................119

3.6.1.2 Maximum Uncovered Exposure for DTCC .....................................................................119

3.6.1.3 Liquidity Demand at Derivatives Clearing Organizations ..............................................121

3.6.1.4 Initial Margin: U.S. Exchange Traded Derivatives ..........................................................121

3.6.1.5 Initial Margin: OTC Derivatives......................................................................................121

3.6.1.6 Global OTC Central Clearing Market Share ...................................................................122

3.6.1.7 Average Clearing Rates for OTC Trading .......................................................................122

3.6.3.1 Market Capitalization of Blockchain-Based Digital Assets ............................................126

3.7.1.1 Federal Reserve Swap Lines .........................................................................................129
208 2020 FSOC // Annual Report

3.7.1.2 Change in USD Exchange Rates, Advanced Economies.................................................129

3.7.1.3 Change in USD Exchange Rates, Emerging Markets .....................................................129

3.7.1.4 Real U.S. Dollar Trade-Weighted Index..........................................................................130

3.7.2.1 Advanced Economies Real GDP Growth........................................................................130

3.7.2.2 General Government Gross Debt to GDP.......................................................................130

3.7.2.3 Outstanding Negative Yielding Debt .............................................................................131

3.7.2.4 Euro Area H1 2020 Real GDP .......................................................................................131

3.7.2.5 Euro Area Business and Consumer Surveys .................................................................131

3.7.2.6 Euro Area 10-Year Sovereign Yields..............................................................................133

3.7.2.7 Euro Area 10-Year Spreads ..........................................................................................133

3.7.2.8 UK COVID-19 Business Loan Schemes .........................................................................134

3.7.2.9 Japanese Consumer Price Inflation ..............................................................................134

3.7.2.10 Japan 10-Year Government Bond Yield .......................................................................135

3.7.3.1 2020 Real GDP Revisions for Developing Economies ....................................................136

3.7.3.2 COVID-19 Impact on 2020 Current Account Balances ..................................................136

3.7.3.3 Emerging Market Sovereign Bond Spreads...................................................................136

3.7.3.4 Foreign Investor Capital Inflows to EMEs......................................................................137

3.7.3.5 Foreign Investor Portfolio Inflows to EMEs....................................................................137

3.7.3.6 Chinese Overseas Lending ...........................................................................................138

3.7.3.7 Chinese Real GDP Growth and its Components ...........................................................139

3.7.3.8 Credit to the Chinese Nonfinancial Private Sector.........................................................139

3.7.3.9 Chinese Credit Growth .................................................................................................139

4.1.1 Total Assets of the Federal Reserve.................................................................................143

4.1.2 Net Portfolio Holdings of 13(3) Facilities .........................................................................143

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