2018

ANNUAL REPORT

FINANCIAL STABILITY OVERSIGHT COUNCIL

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 Chairman of the Board of Governors of the Federal Reserve System;

• the Comptroller of the Currency; 

• the Director of the Bureau of Consumer Financial Protection;

• the Chairman of the Securities and Exchange Commission;

• the Chairperson of the Federal Deposit Insurance Corporation;

• the Chairperson 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
ii 2018 FSOC // Annual Report

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 approved unanimously by the voting members of the 

Council on December 19, 2018. 

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)

• Bureau of Consumer Financial Protection (BCFP)

• 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 Annual Report Recommendations............................... 7

3.1 Cybersecurity .....................................................................................7

3.2 Central Counterparties........................................................................8

3.3 Reference Rates .................................................................................8

3.4 Capital, Liquidity, and Resolution.........................................................9

3.5 Wholesale Funding Markets ................................................................9

3.6 Financial Innovation .........................................................................10

3.7 Data Quality, Collection, and Sharing.................................................10

3.8 Managing Vulnerabilities amid Prolonged 

Credit Expansion ..............................................................................11

3.9 Housing Finance Reform...................................................................11

3.10 Changes in Financial Market Structure.............................................12

3.11 Asset Management Products and Activities .......................................12

3.12 Regulatory Efficiency and Effectiveness ...........................................13

4 Financial Developments............................................. 15

4.1 U.S. Treasuries .................................................................................15

4.2 Sovereign Debt Markets....................................................................17

4.3 Corporate Credit ..............................................................................25

4.4 Household Credit ..............................................................................28

4.5 Real Estate Markets.........................................................................30

4.6 Foreign Exchange .............................................................................39

4.7 Equities ...........................................................................................41

4.8 Commodities ....................................................................................42

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

4.10 Derivatives Markets ..........................................................................47

Box A: A New Way to Measure Risk in the Interest Rate Swaps Market..........50
iv 2018 FSOC // Annual Report

4.11 Bank Holding Companies and Depository Institutions.........................57

4.12 Nonbank Financial Companies ..........................................................72

4.13 Investment Funds .............................................................................78

4.14 New Financial Products and Services ...............................................87

Box B: The Council’s Digital Assets Working Group......................................89

5 Regulatory Developments and Council Activities..... 93

5.1 Safety and Soundness ......................................................................93

5.2 Financial Infrastructure, Markets, and Oversight ...............................98

5.3 Mortgages, Consumer Protection, and Community 

Reinvestment Act............................................................................101

5.4 Data Scope, Quality, and Accessibility .............................................102

5.5 Council Activities ............................................................................103

6 Potential Emerging Threats and Vulnerabilities ..... 107

6.1 Cybersecurity: Vulnerabilities to Attacks on Financial Services.........107

6.2 Ongoing Structural Vulnerabilities....................................................107

Box C: The Transition to Alternative Reference Rates.........................................109

6.3 Managing Vulnerabilities amid Prolonged Credit Expansion.............. 112

6.4 Changes in Financial Market Structure and Implications 

for Financial Stability ...................................................................... 112

Box D: U.S. Equity Volatility Event on February 5, 2018 .....................................114

6.5 Asset Management Products and Activities ..................................... 115

6.6 Global Economic and Financial Developments ................................. 115

Box E: Risks Associated with United Kingdom Exit from the 

European Union .............................................................................. 117

Abbreviations.................................................................119

Glossary ........................................................................ 127

List of Charts ............................................................... 137

This publication was revised on June 20, 2019, to add text in Section 6.4 that was originally 

omitted due to a production error.
Member Statement 1

The Honorable Paul D. Ryan

Speaker of the House

United States House of Representatives

The Honorable Nancy Pelosi

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

1 Member Statement

Steven T. Mnuchin

Secretary of the Treasury 

Chairperson, Financial Stability Oversight Council

Joseph Otting

Comptroller of the Currency

Office of the Comptroller of the Currency

Jay Clayton 

Chairman 

Securities and Exchange Commission

J. Christopher Giancarlo

Chairman

Commodity Futures Trading Commission

J. Mark McWatters

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

Melvin L. Watt 

Director 

Federal Housing Finance Agency

Thomas E. Workman.

Independent Member Having Insurance Expertise

Financial Stability Oversight Council

Executive Summary 3

Since the publication of the Council’s last annual 

report in December 2017, the U.S. economy 

continued its long expansion, unemployment 

declined to long-term lows, and financial conditions 

remained broadly stable, notwithstanding short 

bouts of volatility. U.S. interest rates increased 

further from the extraordinarily low levels of the 

post-crisis period, as the Federal Reserve continued 

to tighten monetary policy. Key U.S. asset prices 

appreciated further, in part reflecting the economy’s 

strength, with valuations notably elevated in U.S. 

equities, corporate debt, and some residential and 

commercial real estate (CRE) markets. 

Overall, risks to U.S. financial stability remain 

moderate, though they have evolved since the last 

annual report, as described in Section 6. At the 

same time, financial stability risks outside the U.S. 

appear to have increased; most notably, the potential 

for a disorderly United Kingdom (UK) exit from the 

European Union (EU) in March 2019 could have 

serious implications for the functioning of some 

global financial markets and firms. Maintaining a 

resilient financial system is important in large part 

because the economic well-being of Americans 

depends on the financial system’s ability to provide 

capital to businesses and individuals, to provide 

vehicles for savings, and to intermediate financial 

transactions even in the face of adverse events. As 

a result of post-crisis regulatory reforms, the U.S. 

financial system is clearly stronger and much better 

positioned to withstand a shock or an economic 

downturn than it was before the financial crisis. 

The Council is encouraged by the strong economic 

growth in the past two years; nonetheless, the Council 

remains vigilant regarding potential emerging threats 

to financial stability. 

Since the Council’s last annual report, actions 

by financial regulatory agencies have included 

the application of supervisory and company-run 

stress tests; supervisory review and feedback on 

large banking organizations’ resolution plans; 

implementation of additional reforms of the 

derivatives markets and amendments to disclosure 

requirements for mutual funds and exchangetraded funds (ETFs); enhanced safeguards related 

to operational risks for technological systems and 

cybersecurity; and improvements in data scope, 

quality, and accessibility. Notably, the Economic 

Growth, Regulatory Relief, and Consumer Protection 

Act (EGRRCPA) was signed into law in May 2018. 

Consistent with EGRRCPA, regulators have taken 

steps to further tailor existing regulations.

In October 2018, the Council rescinded its previous 

determination that material financial distress at 

Prudential Financial, Inc. (Prudential) could pose a 

threat to U.S. financial stability and that Prudential 

shall be subject to supervision by the Federal 

Reserve and enhanced prudential standards. The 

Council’s decision was based on extensive analysis 

that indicated there is not a significant risk that the 

company could pose a threat to financial stability.

Over the past year, Council member agencies have 

also taken steps designed to make financial services 

regulations more efficient and effective. Five 

agencies proposed changes to modify requirements 

under the Volcker Rule, without diminishing the 

safety and soundness of banking entities. The 

Federal Reserve removed enhanced prudential 

standards and other requirements for bank holding 

companies (BHCs) with less than $100 billion in 

assets; additionally, it proposed to create a single, 

integrated capital requirement by combining the 

quantitative assessment of the Comprehensive 

Capital Analysis and Review (CCAR) program with 

the buffer requirements in the Federal Reserve’s 

regulatory capital rule. The SEC proposed a rule 

to create a consistent, transparent, and efficient 

regulatory framework for ETFs. The OCC issued an 

advance notice of proposed rulemaking (ANPR) 

seeking public comment on ways to transform or 

modernize the regulations that implement the 

Community Reinvestment Act (CRA). Council 

member agencies should, where possible and 

without reducing the resilience of the financial 

2 Executive Summary
4 2018 FSOC / / Annual Report

system, continue to address regulatory overlap and 

duplication, modernize outdated regulations, and, 

where authority exists, tailor regulations based on 

the size and complexity of financial institutions. 

The EGRRCPA, signed into law in May 2018, should 

provide more tools for Council member agencies to 

achieve these objectives.

Separately, the Council notes the potential for 

an increasing federal government debt burden 

to negatively impact long-term financial stability. 

Government budgets were strained by the cyclical 

response of revenues and expenditures after the 

financial crisis as well as the fiscal actions taken 

to ease the recession and aid the recovery. U.S. 

federal government debt held by the public stood 

at 76 percent of gross domestic product (GDP) as of 

September 2018. The Congressional Budget Office 

(CBO) projects that the debt burden could increase 

in an accelerating manner in the coming decades. 

Achieving long-term sustainability of the national 

budget is important to maintain global market 

confidence in U.S. Treasury securities and the 

financial stability of the United States.

The Council also remains focused on promoting 

market discipline to reduce the risk of future 

financial crises. While financial institutions may be 

more resilient to market disruptions due in part to 

increased capital and liquidity requirements since 

the financial crisis, market discipline reduces the 

likelihood of future market disruptions resulting 

from unwarranted risk-taking. The Council will 

work with regulators to analyze ways to promote 

market discipline and reduce any lingering 

perceptions that some institutions are too big to fail.

Cybersecurity

As the financial system increases its reliance on 

information technology, the risk increases that 

a cybersecurity event in the industry will have 

severe negative consequences, potentially entailing 

systemic implications for the financial sector and 

the U.S. economy. The Council recommends that 

member agencies ensure a robust and consistent 

standard of cybersecurity monitoring and 

examinations of financial markets, institutions, and 

infrastructures. 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 use and development of 

these partnerships, including efforts to increase 

harmonization of cybersecurity examinations across 

regulatory authorities. 

Central Counterparties

Due to the critical role central counterparties 

(CCPs) play in financial markets, effective 

regulation and risk management of CCPs is 

essential to financial stability. Consistent with the 

requirements adopted by the financial regulators, 

CCPs have made considerable progress in improving 

risk management practices and providing greater 

transparency in their functioning. Member agencies 

should continue to evaluate whether existing rules 

and standards for CCPs and their clearing members 

are sufficiently robust to mitigate potential threats 

to financial stability. Agencies should also continue 

working with international standard-setting bodies 

to identify and address areas of common concern 

as additional derivatives clearing requirements are 

implemented in other jurisdictions. Supervisory 

agencies should continue to conduct evaluations of 

the performance of CCPs under stress scenarios. 

Agencies should also continue to monitor and 

assess interconnections among CCPs, their clearing 

members, and other financial institutions; assess 

appropriate quantitative data disclosure standards; 

and promote further recovery planning and 

development of resolution plans for systemically 

important CCPs.

Reference Rates

The weaknesses of the London Interbank Offered 

Rate (LIBOR) may undermine market integrity 

and the uncertainty surrounding its sustainability 

could threaten U.S. financial institutions and the 

U.S. financial system more broadly. The Council 

commends the progress of the Alternative Reference 

Rates Committee (ARRC) in identifying the 

Secured Overnight Financing Rate (SOFR) as an 

appropriate alternative reference rate and in its 

subsequent steps to facilitate a transition to SOFR. 

The Council encourages the ARRC to complete 

its work to achieve a smooth transition away from 

LIBOR. The Council also encourages market 

participants to consider potential uses of SOFR in 
Executive Summary 5

new transactions. Where participants choose to 

continue to reference LIBOR, they are encouraged 

to make the LIBOR-linked contracts more robust 

in the event that the publication of LIBOR were 

to cease, in accordance with guidance provided by 

the ARRC. The Council recommends that member 

agencies work closely with market participants 

to identify and mitigate risks from potential 

dislocations during the transition process.

Capital, Liquidity, and Resolution

In the years since the financial crisis, financial 

institutions have made significant progress in 

improving their resiliency by decreasing their 

leverage and improving their ability to respond to 

draws on their liquidity. Large BHCs engaged in 

the resolution planning process have also made 

important changes to their structure and operations 

in order to improve resolvability. The banking and 

financial regulatory agencies have adopted rules 

intended to further increase the robustness of these 

institutions and enhance financial stability. Agencies 

should ensure that the largest financial institutions 

maintain sufficient capital and liquidity to reduce 

their vulnerability to economic and financial shocks. 

Regulators should also continue to monitor and 

assess the impact of rules on financial institutions 

and markets, including on market liquidity and 

incentives to centrally clear derivatives.

Wholesale Funding Markets 

Since the financial crisis, considerable progress 

has been made in the reduction of counterparty 

risk exposures in repurchase agreement (repo) 

markets; nonetheless, the potential for post-default 

fire sales of collateral in these markets remains 

a vulnerability. The Council recommends that 

financial regulators continue to closely monitor 

these important markets, including an assessment 

of the increased concentration risk in the tri-party 

repo market. Understanding of the bilateral repo 

market can also be improved considerably and 

could be aided by the proposed data collection on 

centrally cleared repo transactions by the OFR. 

Separately, the Council recommends that the SEC 

continue to monitor the impact of its 2016 reforms 

of money market mutual funds (MMFs), and that 

regulators assess the potential risks that might be 

posed by other types of cash management vehicles. 

Financial Innovation

New financial products and practices can offer 

substantial benefits to consumers and businesses, 

including by meeting emerging needs or reducing 

costs. These new products and practices may also 

create new risks and vulnerabilities. Agencies should 

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. 

These efforts should take into account the fact that 

existing monitoring and data collection systems may 

not identify new products or practices, requiring 

additional information gathering and sharing by 

agencies, as appropriate. 

Data Quality, Collection, and Sharing

The financial crisis revealed gaps in the data needed 

for effective oversight of the financial system and 

internal firm risk management and reporting 

capabilities. Since the financial crisis, important 

steps have been taken, including developing and 

implementing new identifiers of 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 and inhibit data 

sharing. Regulators and market participants should 

continue to work together to improve the coverage, 

quality, and accessibility of financial data, as well as 

data sharing among relevant agencies.

Managing Vulnerabilities amid Prolonged 

Credit Expansion

U.S. credit growth and asset prices reflect, in 

part, strong economic conditions amid the long 

economic expansion. Certain metrics indicate 

that nonfinancial corporate debt and leverage are 

elevated. In addition, there are some indications 

that valuations may be elevated in key U.S. 

financial markets, including equities, corporate 

debt, and some commercial and residential real 

estate. Downturns in these markets can occur 

with little warning and in response to a range of 

factors. Elevated leverage and asset valuations can 

make such downturns more severe. The Council 

recommends that agencies continue to monitor 

levels of nonfinancial business leverage, trends in 

asset valuations, and potential implications for the 
6 2018 FSOC / / Annual Report

entities they regulate in order to assess and reinforce 

their ability to manage severe, simultaneous losses in 

those markets. Assuring that the relevant investors 

and intermediaries can manage such losses, rather 

than amplify or transmit them, will reduce the risk 

to financial stability such a scenario could pose. 

Housing Finance Reform

Fannie Mae and Freddie Mac (the Enterprises) are 

now into their eleventh year of conservatorship. 

While regulators and supervisors have taken 

great strides to work within the constraints of 

conservatorship to promote greater investment of 

private capital and improve operational efficiency 

with lower costs, the Council reaffirms its view 

that housing finance reform is urgently needed 

to address the present conservatorships of the 

Enterprises, codify existing reforms, and implement 

a more durable and vibrant housing financial system 

that enhances financial stability. 

Changes in Financial Market Structure

Changes in market structure—such as the increased 

use of automated trading systems, the ability to 

quote and execute transactions at higher speeds, the 

increased diversity in the types of liquidity providers 

in such markets, and the expansion in trading 

venues—have the potential to make financial 

markets more efficient and transparent. Such 

changes and complexities also have the potential to 

create unanticipated risks that can interrupt normal 

financial market functioning or, in a severe case, 

amplify threats to financial stability. It is therefore 

important that financial regulators and market 

participants continue to evaluate any changes that 

might have adverse effects on markets, assess the 

complex linkages among markets and other factors 

that could cause stress to propagate across markets, 

and consider potential ways to mitigate these risks. 

The Council encourages member agencies to 

continue to evaluate the use of coordinated tools 

such as trading halts across interdependent markets, 

while being mindful of the tradeoffs such tools 

might entail. 

Asset Management Products and Activities

Ensuring that adequate information is available 

to evaluate risks in the asset management industry 

remains a Council focus. The Council notes that 

the SEC issued and amended rules for registered 

investment companies designed to promote effective 

liquidity risk management and provide for enhanced 

data reporting; the SEC is also considering reproposing a rule regarding the use of derivatives by 

these companies. The Council recommends that the 

SEC monitor the implementation of these rules and 

evaluate the extent to which they address potential 

risks in the asset management industry. For private 

funds, the Council recommends that relevant 

agencies continue to review their data collections 

and assess whether they are sufficient to allow the 

Council to monitor whether and how private funds 

may pose risks to financial stability.
Annual Report Recommendations 7

3 Annual Report Recommendations

3.1 Cybersecurity

The financial system’s increasing reliance on 

information technology, particularly across a 

broader array of interconnected platforms, increases 

the risk that a cybersecurity event could have severe 

negative consequences for the provision of financial 

services. As discussed in Section 6.1, there are 

several channels through which a cybersecurity 

event could threaten the stability of the broader 

financial system. 

Sustained senior-level attention on cybersecurity 

risks and their potential systemic implications is 

necessary. The Council recommends that member 

agencies ensure a robust and consistent standard 

of cybersecurity monitoring and examination of 

financial markets, institutions, and infrastructures. 

The Council also encourages continued partnership 

across government agencies and private firms to 

enhance financial sector capabilities to mitigate 

vulnerabilities and maintain a strong cybersecurity 

posture. The Council supports the work of such 

partnerships, including the Financial and Banking 

Information Infrastructure Committee (FBIIC), 

the Financial Services Sector Coordinating Council 

(FSSCC), and the Financial Services Information 

Sharing and Analysis Center (FS-ISAC). 

The financial sector’s ability to rapidly respond to 

and recover from cybersecurity incidents is critical 

to reducing the potential threat to financial stability. 

The Council therefore 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. It is important that this 

work include an emphasis on attaining a level 

of cybersecurity preparedness and operational 

resiliency in the sector that reduces the likelihood 

of a systemic disruption of business activity or 

significant exfiltration of data. Furthermore, the 

Council encourages FBIIC agencies to jointly 

catalog and analyze regulatory tools, expertise, and 

authorities to respond to cybersecurity incidents, 

and address any identified gaps. The Council also 

recommends that the FBIIC continue to work closely 

with the Department of Homeland Security (DHS), 

law enforcement, and industry partners to carry 

out regular cybersecurity exercises—recognizing 

the interdependencies with other sectors, such as 

telecommunications and energy—and the Council 

encourages continued involvement in such efforts. 

Sharing timely and actionable cybersecurity 

information among private sector firms and the 

government is critical. Relevant agencies, through 

DHS, should carefully consider how to share 

information appropriately and, where possible, 

continue efforts to declassify (or downgrade 

classification) of information to the extent 

practicable, consistent with national security 

needs. Separately, the Council recommends that 

agencies continue to support efforts to implement 

the Automated Indicator Sharing (AIS) program 

developed by the DHS and other efforts to encourage 

automated information sharing on cybersecurity. 

The Council recommends that agencies work to 

harmonize cybersecurity supervision and regulation, 

where appropriate. The Council supports the efforts 

of the FBIIC Harmonization Working Group, which 

considers how cybersecurity examinations can be 

further coordinated across regulators and how to 

establish a common cybersecurity lexicon.

The Council encourages the relevant agencies 

to continue to work with international partners 

in appropriate forums, such as the work of the 

Financial Stability Board (FSB) to promote a 

common international lexicon on cybersecurity.

Maintaining confidence in the security practices 

of third-party service providers has become 

increasingly important, particularly because 

different financial institutions are often serviced 

by the same providers. The Council supports 

efforts to ensure agencies have the authorities 
8 2018 FSOC / / Annual Report

necessary to supervise and enhance third-party 

service provider information security. Some 

Council member agencies that supervise financial 

institutions have examination, regulatory and, in 

some cases, enforcement powers over certain thirdparty service providers. The Council recommends 

that Congress pass legislation that ensures that 

the federal banking agencies, FHFA, and NCUA 

have adequate examination and enforcement 

powers to oversee third-party service providers. The 

Council also recommends that the federal banking 

regulators continue to work together to coordinate 

third-party service provider oversight and work with 

the Conference of State Bank Supervisors (CSBS) 

to identify additional ways to support information 

sharing between state and federal regulators. 

3.2 Central Counterparties

CCPs can improve financial stability by enhancing 

market functioning, reducing counterparty risk, and 

increasing transparency. CCPs must be highly robust 

and resilient to deliver these benefits. Consistent 

with the requirements adopted by the financial 

regulators, CCPs have made considerable progress 

in improving risk management practices and 

providing greater transparency in the functioning 

of these institutions, including CCPs that have 

been designated as systemically important financial 

market utilities (FMUs) by the Council. As discussed 

in Section 6.2.1, due to the critical role CCPs 

play in financial markets, effective regulation and 

risk management of CCPs is essential to financial 

stability, and should continue to evolve accordingly. 

The Council recommends that the CFTC, Federal 

Reserve, and SEC coordinate in the supervision 

of all CCPs that are designated by the Council as 

systemically important FMUs. Relevant agencies 

should continue to evaluate whether existing rules 

and standards for CCPs and their clearing members 

are sufficiently robust to mitigate potential threats 

to financial stability, in consultation with each 

other and the Council. Member agencies should 

also continue working with global counterparts and 

international standard-setting bodies to identify and 

address areas of common concern. 

The Council also encourages agencies to monitor 

and assess interconnections among CCPs, their 

clearing members, and other financial institutions. 

They should consider the potential effects of distress 

of one or more of these entities on other stakeholders 

in the clearing system and on financial stability, with 

an eye towards identifying measures that would 

enhance the resiliency of the financial system. 

Finally, the Council encourages regulators’ 

continued focus on CCP recovery and resolution 

planning for systemically important CCPs.

3.3 Reference Rates

As discussed in Section 6.2.2, the weaknesses 

of LIBOR and the uncertainty surrounding its 

sustainability may undermine market integrity and 

could threaten individual financial institutions and 

the U.S. financial system more broadly.

To address the need for a robust, sustainable 

alternative reference rate, a group of U.S. agencies 

in 2014 convened the ARRC. The ARRC was 

reconstituted in 2018 to include a broader set of 

market participants and regulatory agencies. The 

Council commends the progress of the ARRC 

to date, including identification of the SOFR as 

an appropriate alternative reference rate; daily 

publication of SOFR as of April 2018; launching 

of SOFR futures in May 2018; clearing of SOFR 

overnight indexed swap (OIS) and basis swaps 

beginning in July 2018; and the publication of 

guiding principles and public consultations for 

contract fallback language. 

The Council encourages the ARRC to complete its 

work developing a credible implementation plan 

to achieve a smooth transition to SOFR, including 

settling on recommended fallback language across 

contract types, creating a proposal for a fair and 

transparent spread adjustment methodology, and 

developing robust market structures for hedging 

SOFR-linked products (see Box C). The Council also 

encourages market participants to consider potential 

uses of SOFR in new transactions and, where they 

choose to continue to reference LIBOR, to make 

existing LIBOR-linked contracts more robust in the 

event that the publication of LIBOR were to cease, 
Annual Report Recommendations 9

in accordance with guidance provided by the ARRC. 

These steps will minimize potential disruptions that 

might arise during the transition to a new reference 

rate, encourage market participants to follow the 

proposed terms of the transition, and discourage 

market participants from divesting contracts tied to 

LIBOR in a disorderly manner. 

The Council recommends that member agencies 

work closely with market participants to identify and 

mitigate risks from potential dislocations during the 

transition process.

3.4 Capital, Liquidity, and Resolution

As discussed in Section 4, since the financial 

crisis many financial institutions have become 

more resilient to potential disruptions. They have 

done so, in part, by raising more capital; taking 

steps to ensure that they have sufficient liquid 

assets to withstand greater demands for funding 

withdrawals; improving loan portfolio quality 

for residential real estate; implementing better 

risk-management practices; and developing plans 

for their orderly resolution. Financial regulatory 

agencies have developed and implemented rules 

intended to further increase the robustness of 

these institutions and enhance financial stability 

(see Section 5). The Council recommends that 

financial regulators ensure that the largest financial 

institutions maintain sufficient capital and liquidity 

to reduce their vulnerability to economic and 

financial shocks, as discussed in Section 6.2.3. The 

Council further recommends that the appropriate 

regulatory agencies continue to review resolution 

plans submitted by large financial institutions, 

provide guidance to such institutions, and ensure 

there is an effective mechanism for resolving large, 

complex institutions. 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 incentives to centrally clear derivatives, 

and ensure that BHCs are appropriately monitored 

based on their size, risk, concentration of activities, 

and offerings of new products and activities.

3.5 Wholesale Funding Markets

Repo Markets

In recent years, progress has been made in the 

reduction of counterparty risk exposures in repo 

markets. However, given the key role these markets 

play in facilitating the flow of cash and securities in 

the U.S. financial system, the Council recommends 

that financial regulators continue to closely monitor 

these markets. Because the possibility of fire sales 

of collateral by creditors of a defaulted brokerdealer remains a vulnerability, the Council also 

recommends assessing the degree to which recent 

reforms have mitigated this risk. 

Key to mitigating vulnerabilities in the repo market 

is bolstering policymakers’ and market participants’ 

understanding of how these markets function, how 

participants interact, and how risks are changing. 

Though visibility into the tri-party repo market has 

improved since the financial crisis, understanding of 

the bilateral market can be improved considerably. 

Following the Council’s recommendation in this 

area in its 2016 annual report, in July 2018 the OFR 

proposed a rule to establish a permanent collection 

of data on centrally cleared repo transactions (see 

Section 5.4.1). This rule, if finalized, will allow 

monitoring of potential risks to financial stability 

in an important segment of the repo market, and 

will also support the calculation of reference rates 

replacing LIBOR.

In addition, the Council recommends that relevant 

authorities continue to monitor repo markets for any 

signs of changes in liquidity conditions and assess the 

impact of such developments on financial stability.

The Council also recommends assessing the 

potential risks from the increased concentration 

in the tri-party repo market, where a single private 

financial institution is now effectively responsible for 

all settlement (see Section 6.2.4). 
10 2018 FSOC / / Annual Report

Money Market Mutual Funds and Other Cash 

Management Vehicles

In October 2016, the SEC implemented reforms of 

MMFs that were intended to reduce the likelihood 

of runs on these cash management vehicles. The 

Council recommends that the SEC continue to 

monitor the impact of the reforms in light of the 

approximately $1 trillion shift from prime MMFs to 

government MMFs since the adoption of the reforms. 

In addition, the Council recommends that relevant 

agencies assess the potential financial stability 

risks that might be posed by other types of cash 

management vehicles, such as short-term investment 

funds, local government investment pools, and 

private liquidity funds that offer stable net asset 

values (NAV). Regulators should consider whether 

regulatory gaps exist for such vehicles, and evaluate 

the extent to which additional data would be helpful 

in monitoring and addressing such gaps. Finally, 

in light of the regulatory and market developments 

described above, some institutions may choose to 

implement new strategies that could produce new 

risks and vulnerabilities. The Council recommends 

that financial regulators monitor such activities for 

any financial stability risk implications.

3.6 Financial Innovation 

Financial innovation can benefit firms, households, 

and financial institutions in a number of ways, 

including potentially reducing the cost of financial 

services, increasing the convenience of payments, 

and potentially increasing the availability of credit. 

As discussed in Sections 4.14 and 6.2.5, financial 

innovation has been especially important in the 

post-crisis period, particularly in the realm of 

technology-enabled products and services. 

Financial innovations can also create new risks. 

Accordingly, the Council encourages financial 

regulators to continue to be vigilant in identifying 

new products and services, in order to evaluate 

how they are used and can be misused; monitor 

how they affect consumers, regulated entities, 

and financial markets; and coordinate regulatory 

approaches, as appropriate. Relevant authorities 

should also evaluate the potential effects of new 

financial products and services on financial stability, 

including operational risk. Because financial 

innovations are new, they may not be identified by 

agencies’ existing monitoring and data collection 

systems. To ensure comprehensive visibility into 

innovations across the financial system, regulators 

should share relevant information on financial 

innovations with the Council and appropriate 

agencies. The Council also encourages regulators 

to consider appropriate approaches to regulation to 

reduce regulatory fragmentation while supporting 

the benefits of innovation. 

3.7 Data Quality, Collection, and Sharing

As discussed in Section 6.2.6, the absence of broadly 

shared standards on financial transaction entity data 

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 between relevant agencies. 

These partnership efforts include developing and 

implementing new identifiers such as the Unique 

Transaction Identifier (UTI) and Unique Product 

Identifier (UPI); developing and linking data 

inventories; and implementing industry standards, 

protocols, and security for secure data sharing.

Further, the Council encourages market participants 

to use current initiatives, forums, and publicprivate partnerships to identify existing critical 

infrastructure protection and cyber threat 

intelligence data-sharing protocols and standards 

that could be synchronized across the industry. 

Regarding information collections, member 

agencies should continue to ensure that existing 

and proposed collections do not lead to unnecessary 

regulatory reporting burdens. 

Broader adoption of the Legal Entity Identifier 

(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. To facilitate 

the broad adoption of the LEI, the Council 
Annual Report Recommendations 11

recommends that, where appropriate, member 

agencies move to adopt the use of the LEI in 

regulatory reporting and other data collections.

The Council recommends that member agencies 

update their regulatory mortgage data collections 

to include LEI and Universal Loan Identifier (ULI) 

fields, which will make it possible to track loan 

records through a loan’s life cycle. 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 encourages federal and 

state regulators conducting oversight over nonbank 

mortgage activities to coordinate closely to enhance 

data integrity, quality, and consistency, and to identify 

and address gaps in data collected on these activities.

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 (see Section 5.4.2). 

The Council supports efforts by pension regulators 

and accounting standards boards to improve the 

quality, timeliness, and depth of disclosures of 

pension financial statements. The Council also 

supports the use of market valuation for pension 

data as described in the guidance issued by the 

Governmental Accounting Standards Board.

3.8 Managing Vulnerabilities amid Prolonged 

Credit Expansion 

According to certain metrics, nonfinancial 

corporate debt and leverage have reached elevated 

levels (see Section 4.3). In addition, there are 

some indications that valuations may be elevated 

in key U.S. financial markets, including equities, 

some commercial and residential real estate, and 

corporate debt (see Sections 4.3, 4.5, and 4.7). 

Downturns in these markets can occur with little 

warning and in response to a range of factors. As 

discussed in Section 6.3, the impact of corrections 

in these markets on financial stability will depend on 

the severity of the losses, spillovers across markets, 

and the ability of investors and intermediaries to 

manage the fallout. It is important that the relevant 

investors and intermediaries assess and reinforce 

their ability to manage a scenario of severe losses 

across these markets, in order to reduce the risks of 

such a scenario. 

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 their ability to manage severe, 

simultaneous losses in those markets. Assuring 

that the relevant investors and intermediaries can 

manage such losses, rather than amplify or transmit 

them, will reduce the threat to financial stability 

posed by such a scenario. 

3.9 Housing Finance Reform

The domestic housing market has continued to 

improve over the past several years as sales of 

new and existing homes have increased, prices 

have risen, the share of mortgages with negative 

home equity has declined, and mortgage loan 

performance has improved. As discussed in Section 

4.5.2, the federal government continues to back 

the majority of new mortgages, either directly 

through the Federal Housing Administration 

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

and U.S. Department of Agriculture (USDA), or 

indirectly through the Enterprises. Since 2013, the 

Enterprises have engaged in a credit risk transfer 

program to transfer mortgage credit risk to 

private market participants. The Enterprises have 

transferred a portion of the credit risk on over $2 

trillion in unpaid principal balance (UPB). The 

Council recommends that regulators and market 

participants continue to take steps to encourage 

private capital to play a larger role in the housing 

finance system. 

FHFA and the Enterprises, through their joint venture 

Common Securitization Solutions (CSS), have also 

continued the development of a new housing finance 

infrastructure, including migration of securitization 

activities by the Enterprises to the Common 
12 2018 FSOC / / Annual Report

Securitization Platform (CSP) operated by CSS and 

progress toward a single agency mortgage-backed 

security (MBS), the Uniform Mortgage-Backed 

Security (UMBS). The Council recommends that 

efforts to advance both the CSP and UMBS continue. 

As discussed in Section 5.3.1, in 2018, FHFA 

issued a proposed rule on capital requirements 

for the Enterprises. Under the proposal, the 

Enterprises would be subject to new risk-based 

capital requirements and a revised minimum 

leverage capital requirement. Any final rule 

would be suspended while the Enterprises remain 

in conservatorship. The Council recommends 

that FHFA continue to develop these capital 

requirements, which may help inform the 

development of capital standards for future 

secondary market housing finance entities upon 

completion of housing finance reform.

The Enterprises are now into their eleventh year 

of conservatorship. The Council reaffirms its view 

that housing finance reform is urgently needed 

to address the conservatorships, codify existing 

reforms, and implement a durable and vibrant 

housing finance system.

3.10 Changes in Financial Market Structure

Changes in the way that financial markets work—

such as the increased use of automated trading 

systems, the increased speed of executing financial 

transactions, and a wider variety of trading venues 

and liquidity providers—can make financial 

markets more efficient and transparent. However, 

financial regulators and market participants should 

assess the extent to which these developments 

could negatively impact market functioning and 

contribute to financial instability (see Box D). It 

is therefore important that financial regulators 

continue to monitor and evaluate any changes that 

might have adverse effects on markets, including 

on trading liquidity. Financial regulators and 

market participants should continue to assess the 

complex linkages among markets, factors that 

could cause “flash events” to propagate across 

markets, and potential ways to mitigate risks. As 

markets are global in nature, there should be active 

collaboration with regulators across jurisdictions to 

ensure coordination of efforts. 

Recent changes to the market for Treasury 

securities, discussed in Section 6.4, raise questions 

as to whether clearance and settlement practices 

have adequately evolved to address potential risks 

associated with the changes. Agencies should 

actively encourage risk management practices that 

keep pace with developments in this market. A key 

component of these efforts is to identify the gaps 

in our understanding of market structure and, if 

necessary, to fill these gaps through the collection 

of data and subsequent analysis. Such efforts are 

underway. The reporting of secondary transactions 

in Treasury securities through the Trade Reporting 

and Compliance Engine (TRACE) has the 

potential to promote greater understanding of, and 

transparency in, the Treasury securities market. The 

Council supports this development and recommends 

that agencies assess other areas in which improved 

data-gathering might be fruitful. 

The Council encourages member agencies to 

continue to evaluate the use of coordinated tools 

such as trading halts across interdependent markets, 

particularly in periods of overall market stress, 

operational failure, or other incidents that might 

pose threats to financial stability, while being 

mindful of the tradeoffs such tools might entail. 

Finally, Council member agencies should work 

collaboratively to monitor and analyze developments 

in market liquidity.

3.11 Asset Management Products and 

Activities

Ensuring that adequate information is available 

to evaluate risks in the asset management 

industry remains a Council focus. As discussed in 

Section 5.2.2 and Section 6.5, the SEC has issued 

and amended rules for registered investment 

companies designed to promote effective liquidity 

risk management and provide for enhanced data 

reporting, and is also considering re-proposing a 

rule regarding the use of derivatives by registered 

investment companies. The Council recommends 

that the SEC monitor the implementation of these 
Annual Report Recommendations 13

rules and evaluate the extent to which they address 

potential risks in the asset management industry. 

The Council also supports efforts to improve 

metrics and analytical tools used to evaluate 

asset management risks, as well as continued 

collaboration among regulators and industry on 

reporting standards. The Council recommends 

that relevant agencies continue to review their data 

collections and assess whether they are sufficient 

to allow the Council to monitor whether and how 

private funds—pooled investment vehicles such 

as hedge funds and private equity funds that are 

exempt from the definition of “investment company” 

under the Investment Company Act of 1940—may 

pose risks to financial stability. 

3.12 Regulatory Efficiency and Effectiveness

While the regulatory environment has contributed 

to improvements in financial stability and the 

resiliency of financial institutions since the financial 

crisis, new regulations have also raised concerns 

about increased compliance costs and regulatory 

burdens for financial institutions, especially for 

smaller institutions. 

Over the last year, Council member agencies have 

taken steps to make financial services regulations 

more efficient and effective. Some examples 

include proposed changes by the Federal Reserve, 

FDIC, OCC, SEC, and CFTC to eliminate or 

modify requirements under the Volcker Rule, 

without diminishing the safety and soundness 

of banking entities (see Section 5.1.4); proposed 

amendments by the CFTC to rules related to swap 

execution facilities (SEFs) and the trade execution 

requirement to promote more SEF trading and pretrade price transparency (see Section 5.2.1); an SEC 

proposal to create a consistent, transparent, and 

efficient regulatory framework for ETFs to facilitate 

greater competition and innovation (see Section 

5.2.2); and an ANPR by the OCC seeking public 

comment on ways to transform or modernize the 

regulations that implement the CRA, to better align 

CRA activity with the needs of the communities that 

banks serve, while also seeking to ensure that such 

activity is conducted in a manner consistent with a 

bank’s safety and soundness (see Section 5.3.2).

The Council recommends that federal and state 

financial regulators continue to work together 

to evaluate regulatory overlap and duplication, 

modernize outdated regulations, and, where 

authority exists, tailor regulations based on the size 

and complexity of financial institutions. 

Financial Developments 15

Percent As Of: 31-Oct-2018

4.1.2 U.S. Treasury Yields and Yield Curve 

Source: U.S. Department of the Treasury

-50

0

50

100

150

200

250

300

350

0

1

2

3

4

5

6

7

2005 2007 2009 2011 2013 2015 2017

Basis Points

10-Year 

(left-axis)

2-Year 

(left-axis)

10-Year – 2-Year 

Spread (right-axis)

0

25

50

75

100

125

0

25

50

75

100

125

1940 1950 1960 1970 1980 1990 2000 2010 2020

Source: CBO, Haver Analytics

Percent of GDP As Of: 2017

4.1.1 Federal Debt Held by the Public

Note: Data for fiscal years. 

Years after 2017 are projected.

Percent of GDP

CBO Baseline 

Projection

4.1.1 Federal Debt Held by the Public

4.1.2 U.S. Treasury Yields and Yield Curve

4.1 U.S. Treasuries

Publicly held U.S. sovereign debt outstanding 

grew to $15.8 trillion as of October 2018. The 

ratio of that debt to U.S. GDP was 76 percent, 

little changed from September 2017. The 

public debt-to-GDP ratio has been relatively 

stable since 2014, but the CBO projects the 

ratio to grow sharply in the next decade (Chart 

4.1.1). The average maturity of outstanding 

marketable debt decreased from 70 months in 

September 2017 to 69 months as of September 

2018. During the same period, foreign holdings 

of U.S. sovereign debt decreased by 1 percent to 

$6.2 trillion. China and Japan continue to be the 

largest foreign holders of U.S. sovereign debt at 

$1.2 trillion and $1.0 trillion, respectively.

Ten-year Treasury yields have traded near 

3 percent since rising in early 2018. Market 

participants considered expansionary fiscal 

policy and higher inflation and growth to be 

important factors driving the long-term yield 

increase. Yields on 2-year Treasury notes have 

risen significantly in 2018, continuing a trend 

from 2017. Federal Reserve policy is considered 

a key driver of the increase in short-term 

interest rates. Since December 2015, the Federal 

Open Market Committee (FOMC) raised its 

target range for the federal funds rate by 25 

basis points eight times through October 2018. 

The Treasury yield curve has continued to 

flatten in 2018 as short-term rates have risen 

faster than longer-term rates. The difference 

between 2- and 10-year yields dropped from 

86 basis points in September 2017 to 28 basis 

points in October 2018 (Chart 4.1.2). 

4 Financial Developments
16 2018 FSOC / / Annual Report

0

50

100

150

200

250

300

0

50

100

150

200

250

300

2005 2007 2009 2011 2013 2015 2017

Merrill Lynch Option 

Volatility Estimate 

(MOVE) Index

1994-Present

MOVE Average

4.1.4 Fixed Income Implied Volatility

Basis Points Basis Points

Source: Bloomberg, L.P.

As Of: 31-Oct-2018

Note: Implied volatility is calculated using a 

yield curve-weighted index of the normalized 

implied volatility on 1-month Treasury options.

4.1.4 Fixed Income Implied Volatility

From September 2017 to October 2018, the 

yield on 10-year Treasury Inflation-Protected 

Securities (TIPS) has risen 61 basis points 

to 1.10 percent (Chart 4.1.3). Break-even 

inflation compensation, the difference between 

nominal and TIPS yields, rose in early 2018 and 

remained steady before rising in October above 

one percent. Implied fixed income volatility, 

as measured by prices of options on U.S. 

Treasuries, was below its long-term average in 

2017 and 2018 despite a short spike in early 2018 

(Chart 4.1.4). 

The three major credit ratings for U.S. 

sovereign debt were unchanged since the 

Council’s last annual report. 

Percent As Of: 31-Oct-2018

4.1.3 10-Year Treasury Yields

Source: U.S. Department of the Treasury

-2

-1

0

1

2

3

4

5

-2

-1

0

1

2

3

4

5

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Percent

Treasury Notes

Treasury InflationProtected Securities

4.1.3 10-Year Treasury Yields
Financial Developments 17

4.2 Sovereign Debt Markets

4.2.1 Developed Economies

Economic growth in most advanced economies 

decelerated in 2018, following strong growth 

in 2017. That said, 2018 growth rates varied 

meaningfully, as the U.S annualized growth 

averaged 3.3 percent for the first three 

quarters of 2018, while euro area, UK, and 

Japanese annualized growth respectively 

averaged 1.3 percent, 1.5 percent, and 0.2 

percent (Chart 4.2.1).

Euro Area

Euro area real GDP growth decelerated to 

0.8 percent in the third quarter of 2018, after 

reaching a multi-year high of 3.2 percent in the 

fourth quarter of 2016. (Chart 4.2.2). Economic 

growth in Spain continued to outpace the 

broader euro area, while Italian growth 

continued to lag it. 

On aggregate, euro area sovereign debt 

yields remained fairly stable in 2017, and the 

European Central Bank (ECB) left its deposit 

facility rate unchanged at -0.40 percent (Chart 

4.2.3). However, spreads between Italian and 

German sovereign bonds widened in 2018 amid 

concerns regarding Italy’s fiscal outlook. (Chart 

4.2.4). In May, the Italian 2-year bond spread 

experienced its largest one day spike in over 20 

years, and in October, the 10-year spread rose to 

its highest level since 2014.

-2

0

2

4

6

-2

0

2

4

6

2016

Q1

2016

Q2

2016

Q3

2016

Q4

2017

Q1

2017

Q2

2017

Q3

2017

Q4

2018

Q1

2018

Q2

2018

Q3

4.2.1 Advanced Economies Real GDP Growth

Percent As Of: 2018 Q3 Percent

Source: Eurostat, CAO, 

BEA, Haver Analytics

Note: Data represents seasonally adjusted quarterover-quarter annualized real GDP growth rates.

United Kingdom

Japan

Euro Area

United States

4.2.1 Advanced Economies Real GDP Growth

4.2.2 Euro Area GDP Growth

-6

-4

-2

0

2

4

6

-6

-4

-2

0

2

4

6

2002 2005 2008 2011 2014 2017 2020 2023

Percent As Of: 2017 Percent

Spain

France

Euro Area

Italy

Germany

Source: IMF, Haver Analytics

Note: Year-over-year percent change. 

Data after 2017 are projected.

4.2.2 Euro Area Real GDP Growth

-8

0

8

16

24

32

40

-4

0

4

8

12

16

20

2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: Bloomberg, L.P.

Percent As Of: 31-Oct-2018

4.2.3 European 10-Year Yields

Percent

Greece (right axis)

Portugal (left axis)

Spain (left axis)

Italy (left axis)

United Kingdom (left axis)

Germany (left axis)

4.2.3 European 10-Year Yields
18 2018 FSOC / / Annual Report

In August 2018, Greece received its final 

disbursement from the European Stability 

Mechanism (ESM), marking the conclusion 

of eight years of international financial 

stabilization programs. Over the past several 

years, Greece has made significant progress 

implementing fiscal reforms, and has reported 

primary surpluses in excess of its 3.5 percent 

target (Chart 4.2.5). However, Greece’s longterm fiscal sustainability remains uncertain, 

given high levels of public debt, persistently 

low productivity growth, and working age 

population emigration.

United Kingdom

UK economic growth continued to decelerate 

from its recent peak in 2014, with year-over-year 

GDP growth averaging 1.3 percent in the three 

quarters of 2018 (Chart 4.2.6). The slowdown 

in economic growth can be primarily attributed 

to deceleration in household consumption and 

capital formation since the 2016 referendum to 

exit the EU. 

Despite the slowdown in economic growth, 

employment growth has remained steady, 

and the UK unemployment rate has fallen 

to historic lows. Inflation tracked above the 

Bank of England’s (BoE’s) 2 percent target in 

2017 and 2018 as the impact of the sterling’s 

depreciation pushed up import costs; however, 

inflation expectations remain anchored. 

Against this backdrop, the BoE has raised its 

base policy rate twice over the past year to 0.75 

percent, while longer-term Gilt yields remained 

below two percent, resulting in some flattening 

of the UK yield curve (Chart 4.2.7).

-12

-8

-4

0

4

8

-12

-8

-4

0

4

8

2006 2008 2010 2012 2014 2016 2018 2020 2022

4.2.5 Greece Fiscal Projections

Percent As Of: 2017 Percent

Source: IMF, Haver

Analytics

Note: Projections from IMF WEO. Years after 

2017 are projected. 

Eurozone – Primary Balance % GDP

Greece - GDP Growth

Greece – Primary Balance % GDP

Eurozone - GDP Growth

4.2.5 Greece Fiscal Projections 

-5.0

-2.5

0.0

2.5

5.0

-5.0

-2.5

0.0

2.5

5.0

2014 2015 2016 2017 2018

General Government

Gross Capital Formation

Household & Non-profits

Total

Net Trade Balance

4.2.6 Contributions to UK GDP Growth

Percent Percent

Source: UK Office of National 

Statistics, Haver Analytics

As Of: 2018 Q3

Note: Data represents year-over-year real 

GDP growth rates. Components may not 

sum to total due to statistical discrepancies.

4.2.6 Contributions to UK GDP Growth

Percent As Of: 31-Oct-2018

4.2.4 Italian Sovereign Bond Spreads

Source: Haver Analytics

0

1

2

3

4

0

1

2

3

4

Jan-16 Jun-16 Nov-16 Apr-17 Sep-17 Feb-18 Jul-18

Percent

10-Year BTP-Bund Spread

2-Year BTP-Bund Spread

Note: Spreads between Italian and 

German sovereign bonds.

4.2.4 Italian Sovereign Bond Spreads
Financial Developments 19

Japan

Japanese real GDP growth declined in 2018, 

with Japan posting negative sequential growth 

in the first and third quarters of 2018. That 

said, year-over-year GDP growth remained 

slightly positive at 0.3 percent as of the third 

quarter of 2018. Inflation turned positive in 

2017 and 2018, with core Consumer Price 

Index (CPI) inflation rising to 1.0 percent as of 

October 2018 (Chart 4.2.8).

Japanese 10-year government bond yields 

hovered just above zero throughout 2017 and 

2018, in line with the Bank of Japan’s (BoJ) 

stated target of a zero yield on the 10-year bond 

(Chart 4.2.9). In July 2018, the BoJ announced 

new forward guidance and increased flexibility 

to its asset purchase program while maintaining 

its target yield for the 10-year bond.

4.2.7 UK Yield Curve

-3

-2

-1

0

1

2

3

-3

-2

-1

0

1

2

3

1998 2001 2004 2007 2010 2013 2016

4.2.8 Japanese Consumer Price Inflation

Percent Percent

Source: Bank of Japan, 

Haver Analytics

As Of: Oct-2018

Note: Data represents year-over-year percent change. 

CPI excludes fresh food and is adjusted for the 

consumption tax increase that took effect in April 2014.

4.2.8 Japanese Consumer Price Inflation

-50

-25

0

25

50

75

100

125

150

-50

-25

0

25

50

75

100

125

150

2010 2011 2012 2013 2014 2015 2016 2017 2018

4.2.9 Japan 10-Year Government Bond Yield

Basis Points Basis Points

Source: Bloomberg, L.P.

As Of: 31-Oct-2018

4.2.9 Japan 10-Year Government Bond Yield

Percent As Of: 31-Oct-2018

4.2.7 UK Yield Curve

Source: Haver Analytics

0.0

0.5

1.0

1.5

2.0

0.0

0.5

1.0

1.5

2.0

0 Years 5 10 15 20 25 30

Percent

Oct-2017

Oct-2018
20 2018 FSOC / / Annual Report

4.2.2 Emerging Market Economies

Economic growth in emerging markets picked 

up slightly in 2017 and early 2018, following 

mixed growth in preceding years. Developing 

Asian economies continue to outpace other 

emerging economies, and the region continues 

to report an annual growth rate above six 

percent. On aggregate, Latin American 

economies returned to growth in the latter 

half of 2017 and early 2018; however, growth 

in Latin America remains tepid amid weak 

consumer and business confidence and political 

uncertainty in some countries. 

In 2017 and the first half of 2018, emerging 

market economies (EMEs) were net recipients 

of foreign investor capital, with quarterly net 

inflows averaging over $250 billion (Chart 

4.2.10). Gross bond issuance was at a record 

pace in 2017 and during the first four months 

of 2018, averaging $67 billion and $82 billion 

per month, respectively (Chart 4.2.11). Issuance 

declined thereafter, against the backdrop 

of tightening dollar liquidity and increased 

financial market stress in emerging markets.

Sovereign bond spreads in most emerging markets narrowed or remained flat in 2017, before 

widening slightly in 2018 (Chart 4.2.12). Brazilian, Argentine, and Turkish sovereign bonds 

were among the worst performers in 2018, with 

credit default swap (CDS) spreads respectively 

peaking at 310, 574, and 835 basis points on 

September 4, 2018. 

-300

-100

100

300

500

-300

-100

100

300

500

2006 2008 2010 2012 2014 2016 2018

 Net Flows

Portfolio Inflows

Bank Inflows

Foreign Direct Investment

4.2.10 Gross Foreign Investor Capital Inflows to EMEs

Billions of US$ Billions of US$

Source: IMF, Haver Analytics

As Of: 2018 Q2

4.2.10 Gross Foreign Investor Capital Inflows to EMEs

0

150

300

450

600

750

900

0

150

300

450

600

750

900

2004 2006 2008 2010 2012 2014 2016 2018

4.2.11 Emerging Market Gross Global Bond Issuance

Billions of US$ Billions of US$

Source: Dealogic

As Of: 30-Sep-2018

Note: Bonds have maturities greater than one year and have 

been internationally marketed or placed. “Public” includes 

issuance by municipal and state-owned enterprises.

Private

Public

Sovereign

YTD

4.2.11 Emerging Market Gross Global Bond Issuance
Financial Developments 21

4.2.12 Emerging Market Sovereign CDS Spreads

Source: Bloomberg, L.P.

0

300

600

900

0

300

600

900

Jan:15 Jul:15 Jan:16 Jul:16 Jan:17 Jul:17 Jan:18 Jul:18

Index As Of: 31-Oct-2018 Index

Argentina 

Turkey

Brazil 

Markit CDX EM Index

Note: 5-year USD spreads. 

4.2.12 Emerging Market Sovereign CDS Spreads Brazil 

Brazilian CDS spreads widened in May 

2018, primarily due to concerns around 

the nationwide truck driver strike, and 

again in late summer in the lead-up to the 

October 2018 presidential election. That 

said, Brazilian spreads remain significantly 

below levels reached during 2015 and 2016, 

and the Brazilian economy has undergone 

macroeconomic adjustments, including 

narrowing its current account deficit and 

reducing its reliance on external financing 

(Chart 4.2.13, 4.2.14). While Brazil’s fiscal 

deficit has declined, the amount of public debt 

outstanding has remained elevated and, absent 

deeper structural reforms, gross public debt is 

expected to approach 100 percent of GDP in 

the coming years. 

Argentina

Beginning in April 2018, Argentina’s economy 

came under significant financial pressure, 

and in June 2018, the Argentine government 

entered into a three-year, $50 billion stand-by 

agreement with the International Monetary 

Fund (IMF). While the Argentine government 

has enacted a series of domestic reforms, the 

economy has become increasingly reliant on 

external financing since it regained access to 

international debt markets in 2016. Between the 

fourth quarter of 2015 and the second quarter 

of 2018, Argentina’s external debt-to-GDP ratio 

increased from 24 percent to 39 percent and 

its current account deficit increased from 1.6 

percent to 5.6 percent of GDP. Additionally, 

inflation remains persistently high, with core 

CPI inflation ranging 23 to 41 percent since 

2013 (Chart 4.2.15). Financial conditions 

deteriorated further in late summer, with the 

peso falling over 25 percent in August 2018. 

Argentine policymakers have since taken 

emergency steps to stabilize its currency, 

including raising its official interest rate to 60 

percent, announcing plans to reduce its fiscal 

deficit, and requesting early cash disbursements 

tied to its June stand-by agreement with the 

IMF. After an agreement was reached on 

September 26, Argentina’s IMF program now 

totals $57 billion.

0

15

30

45

60

0

15

30

45

60

2010 2011 2012 2013 2014 2015 2016 2017 2018

Turkey

Argentina

Brazil

4.2.14 Emerging Market External Debt

Percent Percent

Source: World Bank, BCB, 

CBRT, INDECM, Haver Analytics

As Of: 2018 Q2

Note: Data represents four quarter rolling 

average external debt as a % of GDP

-10

-8

-6

-4

-2

0

2

-10

-8

-6

-4

-2

0

2

2010 2011 2012 2013 2014 2015 2016 2017 2018

Turkey

Argentina

Brazil

4.2.13 Emerging Market Current Account Deficits

Percent Percent

Source: BCB, CBRT, 

INDECM, Haver Analytics

As Of: 2018 Q2

Note: Data represents four quarter rolling 

average current account as a % of GDP

4.2.14 Emerging Market External Debt 

4.2.13 Emerging Market Current Account Deficits 
22 2018 FSOC / / Annual Report

Turkey 

Turkey’s macroeconomic imbalances have 

grown in recent years, making it particularly 

vulnerable to a balance of payment crises. Since 

the July 2013 Taper Tantrum, Turkey’s large 

current account deficit has persisted, inflation 

has been steadily increasing, and external debt 

now exceeds 50 percent of GDP. Against this 

backdrop, Turkish financial market conditions 

deteriorated rapidly, and by early September 

2018, the Turkish lira was down over 40 percent 

on the year and Turkish Credit Default Swap 

(CDS) spreads rose over 400 basis points from 

December 2017 levels. While Turkish financial 

market conditions improved somewhat in 

October 2018, CDS spreads remained elevated 

and core inflation jumped to 24 percent due to 

exchange-rate pass-through.

China 

Chinese economic growth continued to 

decelerate in 2018, with year-over-year real 

GDP growth slowing to 6.5 percent in the 

third quarter of 2018, compared to 6.9 percent 

in 2017 (Chart 4.2.16). The deceleration has 

primarily been driven by slower credit growth 

and weaker external demand. Manufacturing 

sector growth, which stabilized around 6.3 

percent in 2016 and the first half of 2017, fell 

to 5.3 percent in the third quarter of 2018. In 

contrast, services sector growth has remained 

relatively stable, and was reported at 7.9 percent 

in the third quarter of 2018 (Chart 4.2.17). 

0

4

8

12

16

0

4

8

12

16

2000 2003 2006 2009 2012 2015 2018

4.2.16 Chinese Real GDP Growth

Percent Percent

Source: China National Bureau 

of Statistics, Haver Analytics

As Of: 2018 Q3

Note: Year-over-year percent change. 

0

10

20

30

40

50

0

5

10

15

20

25

2010 2011 2012 2013 2014 2015 2016 2017 2018

Turkey (Right)

Argentina (Right)

Brazil (Left)

4.2.15 Emerging Market Core CPI

Percent Percent

Source: IBGE, DGEC, TRSTAT, 

INDECM, Haver Analytics

As Of: Oct-2018

Note: Data represents year-over-year change 

in core CPI. Argentina represents Buenos 

Aires CPI Ex seasonal and regulated goods.

4.2.16 Chinese Real GDP Growth 

4.2.15 Emerging Market Core CPI

Percent As Of: 2018 Q3

4.2.17 Chinese Manufacturing and Services Growth

Source: China National Bureau 

of Statistics, Haver Analytics

0

5

10

15

20

0

5

10

15

20

2000 2003 2006 2009 2012 2015

Percent

Manufacturing

Services

Note: Year-over-year percent change.

4.2.17 Chinese Manufacturing and Services Growth
Financial Developments 23

The rate of Chinese credit growth slowed 

in 2017 and the first half of 2018, as the 

People’s Bank of China (PBOC) introduced 

macroprudential policies to reduce growth in 

nonbank lending (Chart 4.2.18). The stock of 

nonfinancial private credit, which rose from 

approximately 150 percent of GDP in 2011 to 

over 210 percent of GDP in 2016, has stabilized 

and stood at 213 percent of GDP as of the first 

quarter of 2018. More specifically, nonbank 

lending, which grew rapidly over this same 

period, has stabilized at 55 percent of GDP 

as of the first quarter of 2018 (Chart 4.2.19). 

However, in the second half of 2018, Chinese 

policymakers began to relax deleveraging 

policies amid slowing growth and gathering 

external headwinds.

4.2.3 U.S. Municipal Markets

Total state and local government tax revenues 

in the first half of 2018 were six percent 

higher than one year earlier; for 2017, tax 

revenues were 3 percent higher than the prior 

year (Chart 4.2.20). Municipal bond ratings 

improved marginally through the first half of 

2018, with upgrades exceeding downgrades by 

nine percent. In general, pricing of municipal 

bonds remained stable. 

Long-term municipal credit challenges remain, 

led by unfunded healthcare expenses, public 

pension obligations, and the cost of repairs 

to declining infrastructure. Benefit liabilities 

and rising mandatory expenditures raise the 

risk of long-term fiscal imbalances for many 

state and local governments. Non-discretionary 

expenditures have risen from 25 percent to 

nearly 40 percent of state and local budgets over 

the last 30 years.

The fiscal crisis of Puerto Rico is 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 and 

a resolution process for the Commonwealth’s 

$73 billion in debt. Puerto Rico’s fiscal plan 

requires fiscal measures and structural reforms 

0

40

80

120

160

200

240

0

40

80

120

160

200

240

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

4.2.19 Credit to the Chinese Nonfinancial Private Sector 

Percent of GDP As Of: 2018 Q1 Percent of GDP

Source: China National Bureau of 

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

Nonbank Lending

Bank Lending

4.2.19 Credit to the Chinese Nonfinancial Private Sector

Percent As Of: Sep-2018

4.2.18 Chinese Credit Growth

Source: The People’s Bank 

of China, Haver Analytics

0

10

20

30

40

50

0

10

20

30

40

50

2010 2011 2012 2013 2014 2015 2016 2017 2018

Total Social 

Financing

Percent

Note: Year-over-year monthly change. Total credit is defined as the 

sum of total social financing (TSF) and local government bond 

issuance. TSF refers to the total volume of financing provided by the 

financial system to the real economy. 

+ Local Gov’t 

Bond Issuance

4.2.18 Chinese Credit Growth

-6

-3

0

3

6

9

12

-6

-3

0

3

6

9

12

1998 2001 2004 2007 2010 2013 2016

4.2.20 Change in State and Local Government Tax Revenues

Percent Percent

Source: Census Bureau

Note: Data represents year-over-year 

change. Revenue measures includes 

revenues from property, individual income, 

corporate income, and sales taxes. 

As Of: 2018 Q2

4.2.20 Changes in State and Local Government Tax Revenues
24 2018 FSOC / / Annual Report

that are expected to contribute to an annual 

surplus of $2.9 billion before debt service 

payments by 2023, according to the October 

2018 fiscal plan. However, the Commonwealth 

is projecting a return to deficit starting in 

2034. Federal disaster-related funds are having 

an ameliorative effect, but Hurricane Maria 

highlighted the weaknesses of the island’s 

electric, water, and transport infrastructure. As 

the process of fiscal and financial restructuring 

continues, Puerto Rico’s issues have not 

significantly affected market conditions for 

other state and local governments. 

Investor flows to municipal bond funds 

remained modestly positive for most of 2018, 

following some volatility in December 2017 and 

January 2018 after federal tax reform (Chart 

4.2.21). Credit spreads for tax-exempt general 

obligation bonds narrowed slightly in 2017 

and fluctuated within a tight range through 

October 2018 (Chart 4.2.22). In 2018, the 

municipal bond yield curve reflects slightly 

greater compensation for duration than in the 

Treasury securities market. Legislation enacted 

in May 2018 required the federal banking 

agencies to classify certain municipal bonds as 

high-quality liquid assets (HQLA), consistent 

with the treatment of corporate debt securities 

and publicly traded common equity shares. 

Following that legislation, federal banking 

agencies issued an interim final rule that would 

allow municipal bonds that are investment 

grade, liquid, and readily marketable to qualify 

as level 2B HQLA in satisfying the minimum 

requirements under the liquidity coverage ratio 

(LCR) rule.

From January to October 2018, municipal debt 

issuance was down by 14 percent from issuance 

over the same period in 2017. In a change from 

the last three years, issuances of new capital 

outpaced refundings through October 2018, 

a dynamic driven by changes to the tax code 

eliminating the tax exemption for advance 

refundings of tax-exempt bonds (Chart 4.2.23).

-20

-15

-10

-5

0

5

10

15

-20

-15

-10

-5

0

5

10

15

2007 2009 2011 2013 2015 2017

Source: ICI, Haver Analytics

Billions of US$ As Of: Sep-2018 Billions of US$

4.2.21 Long-Term Mutual Fund Flows: Municipal Bonds 4.2.21 Long-Term Mutual Fund Flows: Municipal Bonds

4.2.22 Municipal Bond Spreads

Source: Municipal Market 

Analytics, Bloomberg, L.P.

0

50

100

150

200

250

0

50

100

150

200

250

2005 2007 2009 2011 2013 2015 2017

Percent As Of: 26-Oct-2018 Percent

Note: Spreads between municipal and 

Treasury securities of comparable maturities.

30-Year AAA GO

10-Year AAA GO

5-Year AAA GO 

4.2.22 Municipal Bond Spreads

Billions of US$

0

100

200

300

400

500

600

0

100

200

300

400

500

600

2006 2008 2010 2012 2014 2016 2018

YTD

New Capital

Refunding

4.2.23 Municipal Bond Issuance

Billions of US$

Source: Thomson 

Reuters, SIFMA

As Of: Oct-2018

Note: Excludes maturities of 13 months or less.

4.2.23 Municipal Bond Issuance 
Financial Developments 25

4.3 Corporate Credit 

Corporate Borrowing

Amid an extended credit expansion, 

nonfinancial corporate leverage is elevated 

according to certain measures. Corporate debt 

continued to grow faster than GDP in the past 

year, and the ratio of corporate debt-to-GDP 

is at an all-time high based on available data 

since 1951 (Chart 4.3.1). Key measures of firmlevel leverage are also elevated. The median 

ratio of debt-to-assets remains close to a multidecade high. Despite very strong U.S. corporate 

earnings, the median debt-to-earnings ratio 

for U.S. nonfinancial businesses is also at the 

high end of its long-term range (Chart 4.3.2). 

Firms continue to service these debt burdens 

with delinquency rates at low levels. The long 

economic expansion, continued access to 

financing, strong interest coverage (Chart 4.3.3) 

and a strong aggregate ratio of liquid assets to 

total assets (Chart 4.3.4) have all supported the 

performance of corporate debt.

One factor contributing to the strong pace 

of corporate borrowing has been attractive 

corporate financing terms. While interest rates 

have increased following recent actions by the 

Federal Reserve to raise the target range for 

the federal funds rate, long-term U.S. interest 

rates remain at the lower end of their historical 

range. Meanwhile strong investor appetite for 

higher-yielding products continues to manifest 

itself within the business sector, where spreads 

for corporate bonds are below historical medians 

and at the low end of their post-crisis range. 

The continued growth in corporate debt during 

2017-18 in part reflected an increased reliance 

on syndicated loans, including leveraged 

loans, much of which are ultimately held by 

nonbank investors. In contrast, growth in 

loans to corporates that are held on banks’ 

balance sheets was more modest, decelerating 

significantly in 2017 before stabilizing in 2018.

25

30

35

40

45

50

25

30

35

40

45

50

1980 1985 1990 1995 2000 2005 2010 2015

Source: Federal Reserve, 

Haver Analytics

Percent As Of: 2018 Q2

4.3.1 Nonfinancial Corporate Debt

Note: Gray bars signify NBER recessions.

Percent

4.3.1 Nonfinancial Corporate Debt as a Percent of GDP

1.5

1.9

2.3

2.7

3.1

3.5

0.15

0.18

0.21

0.24

0.27

0.30

1990 1995 2000 2005 2010 2015

Ratio As Of: 2018 Q2 Ratio

Gross Debt / Assets

(left axis)

Gross Debt / EBITDA 

(right axis)

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

Source: Compustat, OFR Includes rated and unrated nonfinancial businesses. 

4.3.2 U.S Nonfinancial Business Leverage

4.3.2 U.S. Nonfinancial Business Leverage

0

1

2

3

4

5

6

0

1

2

3

4

5

6

1990 1995 2000 2005 2010 2015

4.3.3 U.S. Nonfinancial Business Interest Coverage Ratios

Ratio As Of: 2018 Q2 Ratio

EBITDA/Interest Expense

EBIT/Interest Expense

Note: Four-quarter moving average of median ratio. 

Source: Compustat, OFR Includes rated and unrated nonfinancial businesses. 

4.3.3 U.S. Nonfinancial Business Interest Coverage Ratios
26 2018 FSOC / / Annual Report

Corporate Credit Markets 

Across key product types, corporate credit 

spreads remained at the low end of their 

post-crisis range through September 2018 

(Chart 4.3.5). Investment grade bond spreads 

increased somewhat in 2018, after declining 

in 2016-17, but they remained low. Spreads on 

speculative grade bonds were range-bound in 

2017-18. Meanwhile spreads on leveraged loans 

fell in 2017 and remained relatively low in 2018. 

Total corporate debt growth remained 

elevated in 2018, driven largely by loan growth, 

including syndicated loans, rather than bond 

growth. Total nonfinancial corporate debt 

growth was 6.5 percent year-over-year as of the 

second quarter of 2018, roughly the same as 

one year earlier. Corporate bond growth was 

3.2 percent, down from 4.5 percent. Other 

corporate debt growth—including bank loans, 

loans held by non-banks, and commercial paper 

(CP)—was much higher at 14 percent. 

4.3.5 U.S. Cash Corporate Credit Spreads 

4.3.4 Nonfinancial Corporate Liquid Assets 

0

200

400

600

800

1000

0

100

200

300

400

2010 2011 2012 2013 2014 2015 2016 2017 2018

4.3.5 U.S. Cash Corporate Credit Spreads

Source: Bank of America Merrill 

Lynch, Federal Reserve, S&P LCD

As Of: 28-Sep-2018

Leveraged Loans (right axis)

High-Yield (right axis)

Investment Grade (left axis)

Basis Points Basis Points

Note: Secondary market spreads. Investment grade 

and high-yield data represent option-adjusted spreads. 

Dotted lines represent 1997-present median.

0

1

2

3

4

5

6

7

0

1

2

3

4

5

6

7

1980 1985 1990 1995 2000 2005 2010 2015

4.3.4 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.

As Of: 2018 Q2
Financial Developments 27

4.3.6 Gross Issuance of Corporate Bonds

Trillions of US$

0.0

0.4

0.8

1.2

1.6

2.0

0.0

0.4

0.8

1.2

1.6

2.0

2006 2008 2010 2012 2014 2016 2018

YTD

Investment Grade

High-Yield

4.3.6 Gross Issuance of Corporate Bonds

Trillions of US$

Source: Thomson 

Reuters, SIFMA

As Of: Sep-2018

Note: Includes all non-convertible corporate debt, 

MTNs, and Yankee bonds, but excludes all issues 

with maturities of 1 year or less and CDs.

4.3.8 Leveraged Loan Primary Market by Investor Type

Source: S&P LCD

0

10

20

30

40

50

60

70

80

0

10

20

30

40

50

60

70

80

2005 2007 2009 2011 2013 2015 2017

Percent Percent

Hedge Funds

As Of: 2018 Q3

CLOs

Insurance Companies

Finance & Security Companies

Loan Mutual Funds

Banks

0

20

40

60

80

100

120

140

0

20

40

60

80

100

120

140

2002 2004 2006 2008 2010 2012 2014 2016 2018

4.3.7 CLO Issuance

Billions of US$ Billions of US$

Source: S&P LCD

As Of: Sep-2018

YTD

4.3.8 Leveraged Loan Primary Market by Investor Type

4.3.7 CLO Issuance

There are various indications of weak 

underwriting standards in the syndicated loan 

market, particularly in the higher risk leveraged 

loan market. Notably, highly leveraged deals—

as measured by total debt exceeding six times 

earnings before interest, taxes, depreciation, 

and amortization (EBITDA)—have surpassed 

pre-crisis highs. The share of covenant-lite 

deals—those which offer weaker creditor 

protections—exceeded 60 percent of new 

leveraged loan issuance from January to 

October 2018, according to data from S&P 

LCD; that is significantly higher than the 

pre-crisis peak of less than 30 percent. Market 

participants have cited a desire to protect 

against rising interest rates as contributing to 

investor demand for these loans, most of which 

feature floating interest rates. Similar forces 

appear to be increasing demand for securitized 

products, such as collateralized loan obligations 

(CLOs), in the corporate debt market. CLO 

issuance in 2018 is expected to exceed the very 

heavy issuance seen in 2017 (Chart 4.3.7). CLOs 

remain the largest investors in leveraged loans 

(Chart 4.3.8). Investors also continue to allocate 

capital to floating rate loan mutual funds, the 

second largest investors in institutional leveraged 

loans, as floating rate instruments remain 

attractive in a period of rising interest rates.
28 2018 FSOC / / Annual Report

0

25

50

75

100

125

150

0

25

50

75

100

125

150

1992 1996 2000 2004 2008 2012 2016

Source: BEA, Federal Reserve, 

Haver Analytics

Percent As Of: 2018 Q2

4.4.1 Household Debt as a Percent of Disposable Personal Income

Note: Other Household Credit includes 

debts of both households and nonprofits.

Percent

Other Household Credit

Consumer Credit

Mortgages

4.4.1 Household Debt as a Percent of Disposable Personal Income 4.4 Household Credit

Following a sharp decline between 2008 and 

2011, household debt has grown since 2012, 

driven largely by non-mortgage consumer 

credit. As of June 2018, household debt growth 

was 3.4 percent year-over-year, in line with 

2017 growth. The ratio of household debtto-disposable-personal-income continued to 

decline moderately through June 2018, and is 

well below the peak levels recorded in the last 

decade (Chart 4.4.1). Aggregate household net 

worth continued to increase, with the increase 

in household net worth being primarily 

concentrated in upper-income households and 

driven by rising stock and real estate prices.

Most components of consumer credit 

experienced a deceleration from 2017 to 2018, 

but the outstanding stock of debt remains 

historically elevated (Chart 4.4.2). Student loan 

debt, which has increased more than five-fold 

since 2004, totaled $1.4 trillion as of September 

2018. Student loan balances grew 6.3 percent 

from September 2017 to September 2018. By 

contrast, the number of student loans originated 

declined 7.4 percent from June 2017 to June 2018, 

continuing a trend that began in 2012. Auto loan 

growth decelerated in 2018, partially attributed 

to tighter lending standards after years of 

rapid growth; auto loans totaled $1.3 trillion 

in September 2018. Credit card balances have 

continued to increase for all risk groups, though 

aggregate balances of borrowers with non-prime 

scores are well below pre-crisis levels.

0

300

600

900

1200

1500

0

300

600

900

1200

1500

2003 2006 2009 2012 2015 2018

Source: FRBNY Consumer Credit 

Panel/Equifax, Haver Analytics

Billions of US$ As Of: 2018 Q3

4.4.2 Components of Consumer Credit

Note: Gray bar signifies 

NBER recession.

Billions of US$

Credit Card 

Debt

Auto Loans

Student Loans

Other Household

Debt

4.4.2 Components of Consumer Credit
Financial Developments 29

9

10

11

12

13

14

9

10

11

12

13

14

1980 1986 1992 1998 2004 2010 2016

Source: Federal Reserve,

Haver Analytics

Percent As Of: 2018 Q2

4.4.3 Household Debt Service Ratio

Note: Ratio of debt-service payments to 

disposable personal income. Seasonally 

Percent

4.4.3 Household Debt Service Ratio Rising incomes and years of very low interest 

rates helped keep the household debt service 

ratio—the ratio of debt service payments to 

disposable personal income—near a 30-year 

low, little changed in 2017 and the first half of 

2018 (Chart 4.4.3). In line with the growth in 

the respective components of household debt, 

the service ratio for consumer credit was stable 

last year after rising for several years, while the 

service ratio for mortgages has edged down 

further. Similarly, the household financial 

obligation ratio, which includes rent and autolease payments, was relatively low by historical 

standards. The debt service ratio and household 

financial obligation ratio national trends do 

not necessarily reflect local conditions, such as 

areas with notably higher housing costs.

The share of owners’ equity in household real 

estate has increased by over 20 percentage 

points since 2009 and has returned to the range 

prevailing before the financial crisis (Chart 

4.4.4). Credit scores at mortgage origination 

remained above historical averages. Borrowers 

with high or medium credit scores generally have 

access to mortgages backed by the Enterprises. 

Borrowers with low credit scores continue to face 

tight (albeit easing) credit conditions.

30

40

50

60

70

30

40

50

60

70

1990 1994 1998 2002 2006 2010 2014 2018

1990-Present 

Average

4.4.4 Owners’ Equity as Share of Household Real Estate

Percent Percent

Source: Federal Reserve, Haver Analytics

As Of: 2018 Q2

4.4.4 Owners’ Equity as Share of Household Real Estate
30 2018 FSOC / / Annual Report

4.5 Real Estate Markets

4.5.1 Residential Housing Markets

U.S. home prices rose in 2018 for a seventh 

straight year. The strong pace of appreciation 

reflects tight inventories of homes for sale, 

strong macroeconomic conditions, and a high 

level of consumer optimism. As of September 

2018, FHFA’s seasonally adjusted purchaseonly home price index for the U.S. grew by 

6.0 percent from one year earlier, in line with 

average price growth over the prior six years. 

Every Census division posted positive home 

price appreciation (Chart 4.5.1). 

Home affordability continued to decline over 

the past year, as price growth continued to 

exceed income growth and mortgage rates 

increased. Since the summer of 2011, the postrecession low point for U.S. home prices, home 

price appreciation has exceeded income growth 

by a wide margin. 

Strong home price appreciation partly reflects 

the limited supply of homes available for sale. 

During the latter part of 2017 and first half of 

2018, the supply of homes for sale was about 3 

to 4 months at current sales rates, well below the 

6-month mark typically associated with a wellbalanced housing market. The annualized pace 

of existing home sales—existing home sales 

account for roughly 90 percent of all U.S. home 

sales—declined from 5.4 million in September 

2017 to 5.2 million in September 2018. Starting 

in the spring of 2018, existing home sales began 

to trend down, reflecting the limited supply of 

homes for sale in many areas along with the 

more recent drop in affordability.

The pace of new home sales slowed by 

6.3 percent between September 2017 and 

September 2018. The annualized pace of new 

home sales for single-family properties ranged 

from about 600,000 to 700,000. The average 

pace during that period was approximately 

636,000—higher than in recent years, but 

still quite low considering the strength of the 

economy and demographic trends.

Index As Of: Sep-2018

4.5.1 House Prices by Census Region

Source: FHFA, Haver Analytics

50

100

150

200

250

300

350

400

50

100

150

200

250

300

350

400

1991 1995 1999 2003 2007 2011 2015

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 price 

index. Jan-1991 = 100.

4.5.1 House Prices by Census Region
Financial Developments 31

The latter part of 2017 and early 2018 saw no 

significant pickup in the pace of new home 

construction. As in prior years, labor and land 

shortages contributed to the low pace. The 

seasonally adjusted annual rate of new home 

starts increased by 1.3 percent to 1.27 million 

between September 2017 and September 2018, 

which is below the norms of the decades before 

the crisis. This relatively sluggish pace was 

particularly notable given the vast increases in 

home prices, which typically spur new home 

construction. Meanwhile, new construction is 

increasingly concentrated in the higher-price 

end of the market. 

The U.S. homeownership rate peaked at 69.2 

percent in 2004 and then fell to a low of 62.9 

percent in 2016. It has increased since then. By 

September 2018 it rose to 64.4 percent, roughly 

in line with the average observed between 1965 

and 1995.

Mortgage Originations, Servicing, and Loan 

Performance

The interest rate for 30-year fixed-rate 

mortgage loans has increased notably over the 

past year. According to Freddie Mac’s Primary 

Mortgage Market Survey, the average new 

30-year mortgage rate reached 4.83 percent in 

October 2018, from 3.9 percent one year earlier. 

The rate increase broadly reflects the rise in 

long-term U.S. interest rates.

As mortgage rates rose in the latter half of 

2017 and early 2018, the pace of mortgage 

origination slowed (Chart 4.5.2). The decline 

in total mortgage origination was primarily a 

result of decreases in refinancing activity, as 

higher rates made refinancing a less attractive 

option. However, mortgage originations for 

purchases have risen, but not as significantly. 

Purchase origination volume totaled an 

estimated $346 billion in the third quarter 

of 2018, up 3.4 percent from the volume 

originated in the third quarter of 2017.

In the post-crisis period there has been a 

substantial migration in mortgage lending and 

servicing from banks to nonbanks; that trend 

0

2

4

6

8

10

12

0

200

400

600

800

1000

1200

1992 1996 2000 2004 2008 2012 2016

30-Year Mortgage Rate 

(right axis)

4.5.2 Mortgage Originations and Rates

Billions of US$ Percent

Source: Mortgage Bankers 

Association, Freddie Mac 

Primary Mortgage Market Survey

As Of: 2018 Q3

Refinance (left axis)

Purchase (left axis)

Note: Originations represent all 1-4 family homes. 

Originations calculated as 4-quarter moving averages. 

Mortgage rates calculated as quarterly averages.

4.5.2 Mortgage Originations and Rates
32 2018 FSOC / / Annual Report

0

10

20

30

40

50

60

0

250

500

750

1000

1250

1500

1750

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

4.5.3 Mortgage Origination Market

Billions of US$ Percent

Source: Inside Mortgage Finance

As Of: 2018 Q3

Bank (left axis)

Nonbank (left axis) Nonbank Share of Total 

(right axis)

Note: 2018 data through third quarter. Data 

covers top 25 originators in each year.

YTD

4.5.3 Mortgage Origination Market

0

1

2

3

4

5

6

0

1

2

3

4

5

6

2000 2003 2006 2009 2012 2015 2018

Source: Mortgage Bankers 

Association, Haver Analytics

Percent As Of: 2018 Q3

4.5.5 Mortgage Delinquency and Foreclosure

Note: Percent of all mortgages.

Percent

Mortgage

Foreclosure 

Inventory Mortgage Payments

90+ Days Past Due

0

10

20

30

40

50

60

0

2

4

6

8

10

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

4.5.4 Mortgage Servicing Market

Trillions of US$ Percent

Source: Inside Mortgage Finance

As Of: 2018 Q3

Bank (left axis)

Nonbank (left axis) Nonbank Share of Total 

(right axis)

Note: Data is as of fourth quarter each year 

except 2018 is as of third quarter. Data covers 

top 25 servicers in each quarter.

continued in 2018. Nonbanks accounted for 42 

percent of the volume of mortgages originated 

by the top 25 originators in 2018, down from 

43 percent in 2017 but up from 8.5 percent in 

2009 (Chart 4.5.3). Nonbanks also accounted 

for 41 percent of mortgage servicing rights 

(MSR) held by the top 25 servicers in 2018, 

up from 40 percent in 2017 and 4.8 percent in 

2009 (Chart 4.5.4). Moreover, four of the top 

ten mortgage originators are now nonbanks, 

compared to just two in 2009, and five of the 

top ten servicers are nonbanks, compared to 

one in 2009. Nonbanks have become especially 

important in the servicing of governmentbacked mortgages, servicing 61 percent of 

Ginnie Mae mortgages, 40 percent of Fannie 

Mae mortgages, and 36 percent of Freddie Mac 

mortgages, compared to 34 percent, 26 percent, 

and 21 percent, respectively, at the end of 2014. 

The growth of nonbank servicers, coupled with 

the more limited capital and liquidity resiliency 

typically associated with such firms, highlights 

the importance of risk-management procedures 

among these firms. The Enterprises, Ginnie 

Mae, and the BCFP have issued requirements 

for nonbank servicers that may mitigate some of 

these risks.

Buoyed by the continued increases in home 

prices, and low unemployment rates, along with 

other factors, loan performance continued to 

be strong in late 2017 and 2018. Hurricanes 

Irma, Harvey, and Maria caused a temporary 

increase in mortgage delinquencies in the latter 

part of 2017, which in turn affected national 

estimates. Mortgages more than 90-days past 

due rose to 1.7 percent in fourth quarter of 

2017, but returned to 1.1 percent by the third 

quarter of 2018 (Chart 4.5.5). 

4.5.5 Mortgage Delinquency and Foreclosure

4.5.4 Mortgage Servicing Market
Financial Developments 33

0

5

10

15

20

25

30

0

150

300

450

600

750

900

2010 2011 2012 2013 2014 2015 2016 2017 2018

Value of Negative Equity in 

Residential Mortgages 

(left axis) 

Percent of Residential 

Mortgages with Negative Equity 

(right axis)

4.5.6 Mortgages with Negative Equity

Billions of US$ Percent

Source: CoreLogic

As Of: 2018 Q2

4.5.6 Mortgages with Negative Equity Negative housing equity declined as home 

prices continued their robust climb in 2017 and 

2018 (Chart 4.5.6). The share of U.S. residential 

borrowers with negative equity decreased 

from 5.4 percent in the second quarter 2017 to 

approximately 4.3 percent in the second quarter 

of 2018. However, the share of borrowers who 

are “underwater” continued to vary significantly 

across metropolitan areas and states. The 

latest available estimates suggest that Louisiana, 

Illinois, Connecticut, Florida, and New Jersey 

have the highest shares of underwater borrowers. 

One key measure of mortgage borrower credit 

quality—Fair Isaac Corporation (FICO) 

scores—remained relatively strong in 2017 and 

the first part of 2018 (Chart 4.5.7). Since the 

end of the crisis period, the set of borrowers 

receiving mortgage credit continue to exhibit 

much higher credit scores on average than 

was observed at any point since 2000. Since 

2012, average FICO scores for new mortgage 

borrowers have remained about the same, 

although FICOs improved slightly between 2016 

and 2017. The highest FICO score category—

above 760, has grown from approximately 20 

percent of dollars lent in 2000, to 30 percent in 

2008, to nearly 40 percent of the market in 2017. 

Bank mortgage lending standards appeared 

stable in the last year, while there were continued 

signs of easing in secondary mortgage markets, 

which may reflect easing by nonbank lenders. 

Federal Reserve surveys of bank mortgage 

lending standards in 2017 and 2018 were broadly 

similar to 2016. When asked to characterize 

quarterly changes in mortgages lending 

standards, the vast majority of bank loan officers 

regularly reported that they were “basically 

unchanged.” It is also noted that banks continue 

to maintain their share of the market for jumbo 

mortgages, those with amounts above the 

conventional conforming limit.

0

20

40

60

80

100

0

20

40

60

80

100

2000 2002 2004 2006 2008 2010 2012 2014 2016

4.5.7 Purchase Origination Volume by Credit Score

Percent of Originations Percent of Originations

Source: McDash, FHFA calculations

As Of: 2017

Note: Includes first 

lien purchases only.

<600

600-659

660-699

700-719

720-759

>760

4.5.7 Purchase Origination Volume by Credit Score 
34 2018 FSOC / / Annual Report

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

2003 2006 2009 2012 2015 2018

4.5.9 RMBS Issuance

Trillions of US$ Trillions of US$

Source: Fannie Mae, Freddie Mac, Ginnie Mae, 

Bloomberg, L.P., Thomson Reuters, SIFMA

As Of: Sep-2018 

Non-Agency

Agency

YTD

0

20

40

60

80

100

0

20

40

60

80

100

2000 2003 2006 2009 2012 2015 2018

4.5.8 Mortgage Originations by Product

Percent of Originations Percent of Originations

Source: Inside Mortgage Finance

As Of: 2018 Q3

FHA / VA 

GSE

Private Portfolio 

and Securitized

4.5.9 RMBS Issuance 

4.5.8 Mortgage Originations by Product 4.5.2 Government-Sponsored Enterprises and 

Secondary Mortgage Market 

The federal government continues to 

back the majority of new mortgages either 

directly through the FHA, VA, and USDA, or 

indirectly through the Enterprises. The federal 

government share of mortgage originations 

was stable in the first three quarters of 2018 at 

approximately 71 percent (Chart 4.5.8). This is 

the fifth consecutive year that the government 

share of mortgage originations has hovered 

around 70 percent, after averaging over 80 

percent from 2008 to 2013. 

New mortgages not securitized by Ginnie Mae 

or the Enterprises continue to be held mostly in 

lender portfolios rather than securitized in the 

private-label market. However, in the first nine 

months of 2018, more than 6 percent of nongovernment-backed mortgages were securitized, 

which is up from less than 3 percent in 2017 and 

is the highest share since 2009. While the share 

of these loans being securitized remains well 

below pre-crisis levels, there are signs that the 

private label securitization market is improving. 

Nonagency MBS issuance doubled in the first 

nine months of 2018, compared to the same 

period in 2017. Agency residential mortgagebacked security (RMBS) issuance was roughly 

the same in the first nine months of 2018 as in 

the same period last year (Chart 4.5.9).
Financial Developments 35

Fannie Mae and Freddie Mac

Fannie Mae issued the first-ever SOFR securities 

in July 2018. The offering was issued in three 

tranches of 6-, 12-, and 18-month maturities and 

was met with strong investor demand. 

Fannie Mae also continues to lay off risk to 

private capital in the mortgage market and 

reduce taxpayer risk through its credit risk 

transfer transactions. This is done primarily 

through its issuance of its Connecticut Avenue 

Securities (CAS) and its Credit Insurance Risk 

Transfer (CIRT) transactions. In the first half 

of 2018, Fannie Mae transferred a portion of 

the credit risk on single-family mortgages with 

UPB of $150 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 over $1.0 trillion. 

Freddie Mac transferred a portion of the 

credit risk on $192 billion in UPB of singlefamily mortgage loans in the first half of 2018, 

primarily through its issuance of Structured 

Agency Credit Risk (STACR) securities and 

through its Agency Credit Insurance Structure 

(ACIS) transactions. Since it began undertaking 

credit risk transfers, as of the second quarter 

of 2018, Freddie Mac has executed transactions 

covering $1.0 trillion in UPB.

A wide array of institutional investors have 

purchased mortgage credit risk from the 

Enterprises, with over 170 investors participating 

in the CAS and STACR programs. More than 80 

percent of the credit risk transferred through 

these programs has been purchased by asset 

managers and hedge funds, but the list of 

investors also includes a mix of banks, insurance 

companies, real estate investment trusts (REITs), 

and sovereign wealth funds.
36 2018 FSOC / / Annual Report

Federal Home Loan Banks

The Federal Home Loan Banks (FHLBs) 

continued to be an important source of 

liquidity for the mortgage market. They 

reported aggregate net income of $3.4 billion 

in 2017 near an all-time high, but marginally 

lower than in 2016 because of lower securities 

settlements, as continued increases in advances 

drove asset growth. Advances are a credit 

product FHLBs extend to their members to 

help them meet short- and long-term liquidity 

needs; they carry a yield slightly higher than 

a FHLB debt obligation of similar maturity. 

FHLB advances have now reached their highest 

quarter-end level in the post-crisis period, 

though outstanding advances remain below 

the levels experienced during the height of the 

financial crisis. The growth of advances in 2017 

was concentrated primarily in maturities of less 

than one year, which accounted for 56 percent 

of outstanding advances at year-end 2017, 

compared to 41 percent at year-end 2016.

Outstanding FHLB debt has grown to support 

increases in advances and liquidity holdings. 

The increased debt has been supported 

by increased demand from money funds 

following the 2016 implementation of money 

fund reform. Total short-term FHLB debt—

debt maturing in one year or less—has been 

stable over the past three years at about 76 

percent of debt outstanding. The short-term 

share of FHLB assets is lower, but above 50 

percent of total assets. The composition of 

debt outstanding has shifted over the past two 

years as the FHLBs have reduced their use of 

discount notes, which have a maturity of one 

year or less, from a 55 percent share of debt 

outstanding at year-end 2015 to a 38 percent 

share at year-end 2017.
Financial Developments 37

0

1

2

3

4

5

3

4

5

6

7

8

9

2001 2004 2007 2010 2013 2016

4.5.11 Multifamily Capitalization Rates and Spreads

Percent Percent

Source: Real Capital Analytics

Multifamily 

Cap Rate (left 

axis)

Multifamily Cap Rate 

Spread (right axis)

As Of: Sep-2018

Note: Dotted lines represent 

2001-present average. 

4.5.11 Multifamily Capitalization Rates and Spreads 

0

25

50

75

100

125

150

175

200

0

25

50

75

100

125

150

175

200

2000 2002 2004 2006 2008 2010 2012 2014 2016

Retail

Office CBD

4.5.10 Commercial Property Price Indices

Index Index

Source: Real Capital Analytics

National

Note: Jul-2007 = 100.

Apartment

As Of: Sep-2018

4.5.10 Commercial Property Price Indices 4.5.3 Commercial Real Estate

CRE prices continued to grow strongly in 2018, 

with a national aggregate price index growing 

7.2 percent year-over-year as of September 

(Chart 4.5.10). Price growth in apartment 

buildings outpaced that of other CRE sectors. 

The increase in apartment property prices 

contrasts with the slowdown seen in prices for 

office properties located in central business 

districts and for retail properties.

CRE capitalization rates—the ratio of a 

property’s expected annual net operating 

income to its price—remain very low by 

historical standards, though the aggregate rate 

has modestly increased in 2018 as shown for 

multifamily properties (apartment buildings) 

(Chart 4.5.11). One measure of risk premium in 

CRE—the spread between CRE capitalization 

rates and the 10-year Treasury yield—narrowed 

notably, driven by higher Treasury yields. That 

measure of CRE risk premium is now below its 

historical average, though it remains notably 

higher than the lows reached prior to the 

financial crisis, when Treasury yields were higher.

The volume of CRE property sales fell 4.2 

percent year-over-year in 2017, then recovered 

to 2016 levels by June 2018. However, there 

appears to be divergence among property types. 

Warehouses and industrial properties related 

to e-commerce activities have experienced 

a significant increase in volume, whereas 

transactions involving office properties have, 

generally, substantially declined from prior years.
38 2018 FSOC / / Annual Report

As of the second quarter of 2018, outstanding 

CRE loans totaled $4.2 trillion, increasing 

6.3 percent from one year earlier. CRE loans 

are worth approximately 20 percent of GDP, 

somewhat below the peak level of 23 percent 

in 2008. Notably, lending through multifamily 

residential mortgages continued to be 

dominated by the Enterprises, whose collective 

share increased to over 47 percent of total 

outstanding multifamily mortgages. Banks and 

life insurance companies continued to expand 

CRE loan portfolios, albeit at a slower rate 

than observed in 2016. CRE loans outstanding 

at U.S. banks and life insurers reached $2.1 

trillion and $486 billion, respectively, in March 

2018; those figures are 5 percent and 8 percent 

higher than one year earlier. 

CRE delinquency rates generally remained 

stable in 2018. One area that showed notable 

improvement was the delinquency rate of the 

CRE loans held in commercial mortgagebacked securities (CMBS), as problem loans 

originated at the peak of the previous credit 

cycle in 2006-2007 were resolved. 

Overall CMBS issuance was flat in 2018, based 

on data through September 2018. Non-agency 

CMBS issuance decreased 5 percent as of 

September 2018, compared to the same period 

in 2017. That follows very strong 19 percent 

growth in 2017. Agency CMBS issuance rose 6.6 

percent year-over-year as of September 2018; 

that follows record issuance of $148 billion in 

2017 as the Enterprises continued to expand 

their securitization programs. Agency CMBS 

issuance comprised about 61 percent of total 

CMBS issuance from 2017 to September 2018 

(Chart 4.5.12). 

0

50

100

150

200

250

0

50

100

150

200

250

2001 2004 2007 2010 2013 2016

4.5.12 CMBS Issuance

Billions of US$ Billions of US$

Source: Inside Mortgage Finance

As Of: 2018 Q3

Agency

Non-Agency

4.5.12 CMBS Issuance
Financial Developments 39

4.6 Foreign Exchange

After depreciating steadily for most of 2017, the 

U.S. dollar has been gradually strengthening 

since early 2018, rising by 5.8 percent on a 

nominal trade-weighted basis from January to 

October 2018. The U.S dollar is now 13 percent 

stronger than its average level over the last 

20 years, measured on a trade-weighted basis 

(Chart 4.6.1). The dollar has been supported by 

gradual interest rate increases from the Federal 

Reserve, continued strong growth in the United 

States, and concerns about the growth outlook 

in some other large economies.

The euro has weakened relative to the U.S. 

dollar in 2018, after appreciating strongly in 

2017, as the ECB has signaled that policy rates 

will remain at current low levels (Chart 4.6.2). 

Broader concerns about the global growth 

outlook—an important factor for the exportoriented euro area economies—may have also 

weighed on the common currency. 

80

90

100

110

120

80

90

100

110

120

1998 2001 2004 2007 2010 2013 2016

Source: Federal Reserve, 

Haver Analytics

Index As Of: Oct-2018

4.6.1 Nominal U.S. Dollar Trade-Weighted Index

Note: Jan-1998 = 100. Nominal U.S. Dollar Trade-Weighted Index is a 

weighted average of the foreign exchange value of the U.S. dollar 

against the currencies of a broad group of major U.S. trading partners.

Index

50

75

100

125

150

50

75

100

125

150

2010 2011 2012 2013 2014 2015 2016 2017 2018

4.6.2 U.S. Dollar Exchange Rates

Index As Of: Oct-2018 Index

Dollar-RMB

Dollar-Euro

EM Dollar Index

Major Dollar Index

Source: Federal Reserve, 

Haver Analytics

Note: Jan 2010 = 100. EM dollar index is a weighted 

average of the FX values of the dollar against a subset 

of currencies in the broad index that do not circulate 

widely outside the country of issue.

4.6.2 U.S. Dollar Exchange Rates

4.6.1 Nominal U.S. Dollar Trade-Weighted Index
40 2018 FSOC / / Annual Report

The Chinese renminbi (RMB) is near its 

weakest level against the U.S. dollar in the last 

decade. The RMB had strengthened gradually 

over 2017 and into early 2018, both against the 

dollar and on a broader trade-weighted basis. 

This trend reversed in the second quarter, 

however, and over the summer the RMB went 

through its most notable weakening episode 

since mid-2015. As of October, the RMB had 

weakened in 2018 by about 6 percent against 

the dollar and 2.6 percent against a tradeweighted basket of currencies. Depreciation 

pressures have appeared to stem from concerns 

that the Chinese economy could slow, as well 

as uncertainty about the authorities’ exchange 

rate objectives. Since the summer, authorities 

have reportedly used several tools to stem 

depreciation pressures, including implementing 

administrative measures and increasing control 

over daily central parity exchange rate levels 

through reintroduction of a countercyclical 

adjustment factor. 

Financial strains in some emerging markets 

have produced large swings in some foreign 

exchange (FX) markets. As of October 2018, 

the Argentine peso was 51 percent weaker 

against the dollar than one year earlier. The 

Turkish lira was 32 percent weaker against 

dollar than one year earlier. Financial market 

turbulence partially spilled over into other 

emerging markets and weighed more broadly 

on currencies (Chart 4.6.3).

-60

-50

-40

-30

-20

-10

0

10

-60

-50

-40

-30

-20

-10

0

10

4.6.3 Change in U.S. Dollar Exchange Rates

Percent Percent

Source: Wall Street Journal, Haver Analytics

As Of: 31-Oct-2018

Year-over-Year Change

Change Since Mid-May 2018

4.6.3 Change in U.S. Dollar Exchange Rates
Financial Developments 41

4.7 Equities 

U.S. equity prices were 1.4 percent higher 

in October 2018 than at the close of 2017. 

Equity prices across most other developed and 

emerging markets were generally weaker than 

six months and one year earlier (Chart 4.7.1). 

Emerging markets saw the greatest pressure in 

2018 due to trade concerns, a modest growth 

slowdown in China, a strengthening of 

the U.S. dollar, and local financial stresses in 

some markets.

U.S. equity markets rose sharply in January 2018 

before a sell-off in early February with the S&P 

500 experiencing its first ten percent decline 

since 2016. The sudden February 5 sell-off was 

largely attributed to non-fundamental factors 

(see Box D). Market participants noted the 

speed and extent of the January rally in U.S. 

equity prices had further stretched already 

elevated equity market valuations, potentially 

leaving the market vulnerable to a correction. 

U.S. equity markets recovered in the second 

and third quarters of 2018, and reached alltime highs in September 2018. However, equity 

markets sold off again in October as investors 

reassessed high valuations against weaker 

earnings guidance, expectations for slowing 

growth momentum in the United States, and 

increased geopolitical risks. 

The technology sector outperformed broader 

U.S. equity markets in 2017 and the first half 

of 2018, supported by strong earnings growth 

and investor preference for “growth” stocks. 

However, U.S. technology stocks depreciated 

in the latter half of 2018, with particularly 

sharp declines in October. The financial and 

industrial sectors outperformed the broad U.S. 

equity market in 2017, but have lagged modestly 

in 2018.

6 Month Returns

1 Year

Returns

5 Year Annualized 

Returns

Major Economies

U.S. (S&P) 2.4% 5.3% 9.1%

Euro (Euro Stoxx) (9.6%) (11.2%) 2.7%

Japan (Nikkei) (2.4%) (0.4%) 8.9%

U.K. (FTSE) (5.1%) (4.9%) 1.2%

Selected Europe

Germany (DAX) (9.2%) (13.5%) 4.8%

France (CAC) (7.7%) (7.4%) 3.4%

Italy (FTSE MIB) (20.6%) (16.4%) (0.3%)

Spain (IBEX) (10.9%) (15.5%) (2.1%)

Emerging Markets

MSCI Emerging Market Index (17.9%) (14.6%) (1.6%)

Brazil (Bovespa) 1.5% 17.6% 10.0%

Russia (MICEX) 2.0% 14.0% 9.3%

India (Sensex) (2.0%) 3.7% 10.2%

China (Shanghai SE) (15.6%) (23.3%) 4.0%

Hong Kong (Hang Seng) (18.9%) (11.6%) 1.5%

South Korea (KOSPI) (19.3%) (19.6%) (0.0%)

4.7.1 Returns in Selected Equities Indices

Source: Capital IQ

As Of: 31-Oct-2018

4.7.1 Returns in Selected Equities Indices
42 2018 FSOC / / Annual Report

Even after price depreciations in October 

and November 2018, U.S. equity valuations 

remain elevated according to various metrics, 

particularly the cyclically-adjusted price-toearnings (CAPE) ratio, which accounts for the 

long-term earnings of S&P 500 firms (Chart 

4.7.2). Although U.S. equity market volatility 

remained below the historical average for 

most of 2018, there were meaningful spikes in 

February and October (Chart 4.7.3).

4.8 Commodities

Commodity prices rose strongly, on net, in the 

second half of 2017 and the first half of 2018, 

with the overall index rising 31 percent over this 

period. Commodity prices were more varied in 

the third quarter of 2018 (Chart 4.8.1). 

Crude oil prices rose to multi-year highs in 

2018, before falling sharply in October. In June 

2018, the Organization of Petroleum Exporting 

Countries (OPEC) agreed to increase total 

production to compensate for the decline in 

Venezuelan oil production and the anticipated 

decline in Iranian exports related to the reimposition of U.S. sanctions. U.S. production 

has increased steadily over the past two years, 

and the average spread between West Texas 

Intermediate (WTI) and Brent crude oil 

increased from $1.50 in October 2016 to nearly 

$10 in October 2018. WTI peaked at $77 per 

barrel in early October 2018, before falling 

sharply amid concerns regarding a slowdown 

in global economic growth, diminishing 

expectations of Iranian supply decline, and 

rising levels of non-OPEC supply.

Industrial metals rose sharply in 2017, before 

retracing roughly half of that gain in 2018, 

with the S&P GSCI Industrial Metals Index 

falling 17 percent in 2018 through October. In 

particular, copper prices fell over 20 percent in 

the summer of 2018 amid weakening emerging 

market demand and rising concerns over trade 

tensions. Meanwhile, the S&P GSCI Agriculture 

Index was range-bound in 2017 and 2018. 

Index As Of: 31-Oct-2018

4.8.1 Commodities

0

25

50

75

100

125

150

175

200

0

25

50

75

100

125

150

175

200

2008 2010 2012 2014 2016 2018

Index

Industrial Metals (S&P GSCI Industrial Metals Spot Index)

Agriculture (S&P GSCI Agricultural Spot Index)

Natural Gas

Crude Oil (WTI)

Source: Energy Information 

Administration, S&P, Haver Analytics Note: 02-Jan-2008 = 100.

4.8.1 Commodities

Metric Current Historical Percentile 

CAPE Ratio 30.6 96%

Buffett Indicator 146% 96%

Price-to-Book 3.3% 80%

Price-to-Earnings 18.9 71%

Forward Price-to-Earnings 16.2 62%

4.7.2 U.S. Stock Valuations

Source: Bloomberg L.P., 

Wilshire Associates, Haver

Analytics, OFR

Note: Percentiles are based on historical data 

since, respectively, 1881, 1970, 1990, 1954, and 

1990. CAPE, price-to-book, and price-to-earnings 

ratios are based on the S&P 500 aggregate index. 

Buffett Indicator is based on the Wilshire 5000. 

As Of: 30-Nov-2018

4.7.2 U.S. Stock Valuations 

0

20

40

60

80

100

0

20

40

60

80

100

2007 2009 2011 2013 2015 2017

4.7.3 S&P 500 Volatility

Index Index

Source: Bloomberg, L.P.

As Of: 31-Oct-2018

20-Year 

Average

VIX

4.7.3 S&P 500 Volatility 
Financial Developments 43

4.9 Wholesale Funding Markets

4.9.1 Unsecured Borrowing

Commercial Paper

Total Commercial Paper (CP) outstanding has 

grown modestly in 2018 through September, 

after increasing 9.2 percent in 2017 (Chart 

4.9.1). It had reached a multi-decade low of 

about $900 billion in late- 2016 and totaled 

about $1 trillion as of September 2018. 

Domestic financial CP outstanding increased 

to about $236 billion at the end of September 

2018, up 19 percent from one year earlier; over 

40 percent of CP in this segment of the market 

is issued by U.S. subsidiaries of foreign banks. 

Foreign financial CP outstanding increased to 

$307 billion at the end of September 2018, up 

13 percent from one year earlier. Asset-backed 

CP outstanding has been steady at around $240 

billion since the beginning of 2017. 

The decline in assets under management 

(AUM) of prime MMFs leading up to the 

implementation of MMF reforms in October 

2016 diminished MMF demand for CP, driving 

the reduction in CP outstanding in 2016. Since 

early 2017, a partial rebound in prime MMFs’ 

holdings of CP has accounted for most of the 

increase in CP outstanding.

Interest rates on CP increased in 2016-17 

in response to Federal Reserve rate hikes; 

however, in early 2018, rates on longer-tenor 

CP rose by more than the increases in federal 

funds rates, as did many other U.S. money 

market instruments with maturities greater 

than 30 days (Chart 4.9.2). Market participants 

broadly attributed this development to 

higher issuance of short-term Treasury debt 

in early 2018, which increased interest rates 

on Treasury bills and other short-term U.S. 

dollar debt such as CP. Other factors may have 

contributed to this development, including 

corporate foreign earnings repatriation. The 

spread between money market and federal 

funds rates has since narrowed.

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

4.9.1 Commercial Paper Outstanding

Trillions of US$ As Of: Sep-2018 Trillions of US$

Domestic Financial

Domestic Nonfinancial

Foreign Financial

Asset-Backed

Other

Foreign Nonfinancial

Source: Federal Reserve

Note: Domestic includes CP issued in 

the U.S. by entities with foreign parents.

4.9.1 Commercial Paper Outstanding

0.0

0.5

1.0

1.5

2.0

2.5

0.0

0.5

1.0

1.5

2.0

2.5

Jan:15 Jul:15 Jan:16 Jul:16 Jan:17 Jul:17 Jan:18 Jul:18

4.9.2 Commercial Paper Interest Rates

Percent As Of: 28-Sep-2018 Percent

90-Day AA-Rated ABCP

90-Day AA-Rated Financial

90-Day AA-Rated Nonfinancial

Overnight AA-Rated ABCP

Overnight AA-Rated Financial

Overnight AA-Rated Nonfinancial

Source: Federal Reserve Bank of St. Louis

4.9.2 Commercial Paper Interest Rates
44 2018 FSOC / / Annual Report

Large Time Deposits

Large time deposits at commercial banks, 

which include wholesale certificates of deposit, 

increased to $1.7 trillion, or 11 percent of total 

commercial bank liabilities, in September 2018 

from the recent low of $1.5 trillion around the 

implementation of MMF reforms in October 

2016. The current total is still 22 percent below 

its 2008 peak of $2.1 trillion. 

4.9.2 Secured Borrowing

Repo Markets

Activity in the U.S. repo market has been 

stable over the past year, with steady volumes 

and rates broadly moving in line with other 

money market rates. 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. Both segments are served, 

in part, by CCPs. Tri-party repo includes 

the General Collateral Finance (GCF) Repo 

Service, a service operated by the Fixed Income 

Clearing Corporation (FICC) that provides 

blind-brokered trades, while bilateral repo 

includes the FICC Delivery-versus-Payment 

(DVP) Repo Service. Clearing and settlement 

in the tri-party market has undergone a recent 

structural change as Bank of New York Mellon 

is now effectively the sole tri-party repo clearing 

bank for government securities. 

Total repo market borrowing by primary 

dealers ranged between $2.0 and $2.3 trillion 

for the 12 months ending September 2018, as 

in prior years (Chart 4.9.3). The distribution of 

financing between overnight and term remained 

relatively unchanged during the year, with about 

two-thirds of financing occurring overnight. 

As in the past, among term repo, slightly more 

volume was funded at maturities one month or 

longer than at terms shorter than one month, 

except for a brief period in early 2018.

0

1

2

3

4

5

0

1

2

3

4

5

2000 2003 2006 2009 2012 2015 2018

4.9.3 Primary Dealer Repo Agreements

Trillions of US$ As Of: 26-Sep-2018 Trillions of US$

Source: FRBNY

Overnight/Continuing

Term

4.9.3 Primary Dealer Repo Agreements
Financial Developments 45

The proportion of collateral in tri-party repo 

transactions that is high-quality rose slightly 

from September 2017 to September 2018 

(Chart 4.9.4). Fedwire-eligible collateral, which 

includes Treasury and agency securities as well 

as agency MBS and collateralized mortgage 

obligations accounted for 85 percent of the total 

collateral financed. Median haircuts required 

on collateral used in tri-party repo transactions 

were flat from September 2017 to September 

2018 across most collateral classes.

In April 2018, the Federal Reserve Bank of 

New York (FRBNY), in cooperation with the 

OFR, began publishing benchmark rates based 

on overnight repo transactions collateralized 

by Treasury securities. SOFR is the broadest 

measure of the cost of short-term funding 

secured by high-quality collateral. 

Securities Lending

The value of securities on loan globally 

increased to a multi-year high of $2.6 trillion in 

the first half of 2018, declining somewhat in the 

third quarter (Chart 4.9.5). The growth can be 

attributed, in part, to increased valuations of 

equity and credit markets and higher borrowing 

to hedge some of the market gains. The 

estimated U.S. share of the global activity also 

increased, reaching approximately 55 percent.

Government bonds and equities are estimated 

to comprise 88 percent of the securities 

on loan globally. As of September 2018, 

equities represented around 43 percent 

while government securities accounted for 

approximately 45 percent.

0

1

2

3

4

5

0

1

2

3

4

5

2008 2010 2012 2014 2016 2018

4.9.5 Value of Securities on Loan

Trillions of US$ Trillions of US$

Source: Markit Group Limited

Global Market 

(including U.S.)

U.S. Market

As Of: 28-Sep-2018

Note: Data is based on a 

survey of agent-based lenders.

4.9.5 Value of Securities on Loan

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

4.9.4 Collateral in the Tri-Party Repo Market

Trillions of US$ Trillions of US$

Source: FRBNY, 

Haver Analytics

As Of: Sep-2018

Note: Other includes CDOs, international securities, 

money markets, municipal debt, and whole loans.

U.S. Treasury Strips

Agency MBS

Agency Debentures and Strips

U.S. Treasuries excluding Strips

Corporates

ABS

Private Label CMOs

Equities

Agency CMOs Other

4.9.4 Collateral of the Tri-Party Repo Market
46 2018 FSOC / / Annual Report

Collateral management practices have changed 

in recent years. Use of cash collateral declined 

significantly post-crisis, but increased slightly in 

the second quarter of 2018, reaching 54 percent 

of the global securities lending activity. This 

trend can be attributed to higher money market 

rates available to cash collateral managers 

thanks to the rising interest rate environment. 

Some cash reinvestment managers have 

extended the duration of their portfolio in 

recent years: the median weighted average 

maturity (WAM) is near the top of its post-crisis 

range. Meanwhile, the mean WAM has been 

relatively stable in 2017 and 2018, after trending 

down in prior years (Chart 4.9.6).

The share of cash reinvestment portfolios 

allocated to repos backed by non-government 

collateral has grown in recent years to slightly 

over 27 percent as of June 2018. The share of 

government repos declined to under 13 percent 

(Chart 4.9.7). Corporate debt securities, mostly 

floating rate, are the second largest item in cash 

reinvestment portfolios at 16 percent.

0

20

40

60

80

100

0

20

40

60

80

100

2012 2014 2016 2018

4.9.7 U.S. Securities Lending Cash Reinvestment

Percent of Total Percent of Total

Source: The Risk Management 

Association; OFR. 

As Of: 2018 Q2

Note: Nongovernment repos have collateral of 

whole loans, equity, and corporate debt. Data 

is based on a survey of agent-based lenders.

Nongovernment Repo

Corporate Securities

Other Funds

Government Repo

Money Market Funds

Other Instruments

Commercial Paper

Bank Deposits

0

50

100

150

200

250

0.0

0.4

0.8

1.2

1.6

2.0

2000 2003 2006 2009 2012 2015 2018

4.9.6 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: 2018 Q2

Note: Data is based on a 

survey of agent-based lenders.

Total Cash Reinvestment 

(left axis)

4.9.7 U.S. Securities Lending Cash Reinvestment 

4.9.6 U.S. Securities Lending Cash Reinvestment 
Financial Developments 47

4.10 Derivatives Markets

4.10.1 Futures

Prices in a number of futures market segments 

paralleled movements in their underlying assets 

for 2017 and 2018. Equity futures generally 

rose steadily through 2017 and 2018, albeit with 

sudden declines in February and October 2018. 

The U.S. Dollar Index futures fell in 2017, but 

rose in the second quarter of 2018. Commodity 

futures were relatively flat in the first three 

quarters of 2017, then increased sharply as 

discussed in Section 4.8 (Chart 4.10.1). Implied 

volatility in Treasury and oil markets remained 

relatively stable in 2017 and the first ten months 

of 2018, while implied equity market volatility 

reached record lows in 2017 before spiking in 

February and October 2018 (Chart 4.10.2).

Trading volumes and open interest generally 

increased across major futures exchanges in 

2017, continuing a trend from prior years (Charts 

4.10.3, 4.10.4). The number of products offered 

on commodity futures exchanges remained 

relatively flat on most exchanges, with a small 

decline on some exchanges (Chart 4.10.5). 

4.10.1 Normalized Futures Prices

Source: Bloomberg, L.P.

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

Jan:14 Jan:15 Jan:16 Jan:17 Jan:18

Index As Of: 31-Oct-2018 Index

U.S. Dollar

E-mini S&P 500

10-Year Treasury Futures

S&P Commodity Index

Note: 2-Jan-2014 = 1.0.

4.10.1 Normalized Futures Prices

4.10.2 Market Volatility Indices 

Source: Bloomberg, L.P.

0

10

20

30

40

50

60

70

80

0

3

6

9

12

15

Jan:14 Jan:15 Jan:16 Jan:17 Jan:18

Index As Of: 31-Oct-2018 Index

Treasury VIX (left axis)

VIX (right axis)

Crude Oil VIX (right axis)

4.10.2 Market Volatility Indices

4.10.3 Normalized Futures Exchange Volume

Source: CFTC

0.8

1.0

1.2

1.4

1.6

1.8

2.0

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2010 2011 2012 2013 2014 2015 2016 2017

Index As Of: 2017 Index

New York Mercantile Exchange

ICE Futures U.S.

Commodity Exchange Inc.

Chicago Mercantile Exchange

Chicago Board of Trade

4.10.3 Normalized Futures Exchange Volume
48 2018 FSOC / / Annual Report

4.10.2 Options

Currently, there are fifteen registered 

national securities exchanges that list and 

trade standardized equity options. About half 

of these exchanges (or options facilities of 

existing exchanges) were established in the 

last decade. Transactions in securities-based 

standardized options are all centrally cleared by 

a single clearing agency—the Options Clearing 

Corporation, which required approximately 

$64 billion in total initial margin against those 

transactions as of June 2018. The Options 

Clearing Corporation is also the issuer and 

guarantor of each standardized options 

contract. Total exchange-traded equity options 

volume has been relatively steady for much 

of the past ten years. As of June 2018, there 

were over 4,000 equity securities underlying 

exchange-traded equity options. 

With respect to over-the-counter (OTC) equity 

options, Bank for International Settlements 

(BIS) data shows that the global notional 

amount outstanding of OTC equity options 

was approximately $3.8 trillion as of June 

2018, continuing a steady decline from 2008 

(Chart 4.10.6). While the notional amount 

of outstanding OTC equity options is large 

in absolute magnitude, OTC equity options 

accounted for less than 1 percent of the 

global OTC derivatives market on a notional 

basis, or 3.7 percent on a market value basis 

(Chart 4.10.7). BIS data also shows that the 

global market value of OTC equity options 

transactions was $380 billion as of June 2018, 

significantly below record levels reported in the 

fourth quarter of 2008 (Chart 4.10.8).

0

1

2

3

4

5

6

7

8

9

0

1

2

3

4

5

6

7

8

9

1998 2001 2004 2007 2010 2013 2016

4.10.6 OTC Equity Options: Global Notional Outstanding

Trillions of US$ Trillions of US$

Source: BIS, Haver Analytics

As Of: 2018 Q2

Other Financial Institutions

Non-Financial Customers

Reporting Dealers

4.10.6 OTC Equity Options: Global Notional Outstanding 

4.10.4 Normalized Futures Exchange Open Interest

Source: CFTC

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2010 2011 2012 2013 2014 2015 2016 2017

Index As Of: 2017 Index

New York Mercantile Exchange

ICE Futures U.S.

Commodity Exchange Inc.

Chicago Mercantile Exchange

Chicago Board of Trade

4.10.4 Normalized Futures Exchange Open Interest

4.10.5 Normalized Futures Exchange Number of Products

Source: CFTC

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2010 2011 2012 2013 2014 2015 2016 2017

Index As Of: 2017 Index

New York Mercantile Exchange

ICE Futures U.S.

Commodity Exchange Inc.

Chicago Mercantile Exchange

Chicago Board of Trade

4.10.5 Normalized Futures Exchange Number of Products
Financial Developments 49

Within the U.S. banking sector, OTC equity 

option exposures are concentrated in a small 

number of major institutions. The six largest 

BHCs by total assets had written approximately 

96 percent of the $1.3 trillion total OTC equity 

option notional outstanding written by all BHCs 

as of September 2017. Similarly, by that point the 

six largest BHCs also held purchased options 

representing approximately 94 percent of the 

approximately $901 billion in total OTC equity 

option notional outstanding held by all BHCs.

4.10.3 OTC Derivatives

In the United States, the notional amount of 

OTC interest rate derivatives has been steadily 

increasing over the past year, with the notional 

amount increasing 12 percent year-over-year 

as of September 2018, to $278 trillion (Chart 

4.10.9). In particular, uncleared swaps rose 14 

percent year-over-year to $63 trillion. Notional 

amount is just one way of measuring the size 

of the interest rate swaps market, and may 

exaggerate the amount of risk transfer in this 

market (see Box A). 

The notional amount of credit index derivatives 

ticked up slightly in 2017 before falling to 

$4.4 trillion by September 2018. While the 

notional amount of credit index derivatives 

outstanding has remained fairly stable over the 

past two years, the share of cleared products 

has increased meaningfully, from 37 percent in 

August 2016 to 48 percent in September 2018. 

As Of: 2018 Q2

4.10.7 OTC Equity Option Share of All OTC Derivatives

Source: BIS, Haver Analytics

0.0

3.0

6.0

9.0

12.0

15.0

0.0

0.5

1.0

1.5

2.0

2.5

1998 2001 2004 2007 2010 2013 2016

Gross Market Value (Right Axis)

Notional Outstanding (Left Axis)

Percent Percent

4.10.7 OTC Equity Option Share of All OTC Derivatives 

0

200

400

600

800

1000

1200

0

200

400

600

800

1000

1200

1998 2001 2004 2007 2010 2013 2016

4.10.8 OTC Equity Options: Global Market Value

Billions of US$ Billions of US$

Source: BIS, Haver Analytics

As Of: 2018 Q2

Other Financial Institutions

Non-Financial Customers

Reporting Dealers

4.10.8 OTC Equity Options: Global Market Value 

0

100

200

300

400

0

2

4

6

8

10

Jan:14 Jul:14 Jan:15 Jul:15 Jan:16 Jul:16 Jan:17 Jul:17 Jan:18 Jul:18

4.10.9 Derivatives Notional Amount Outstanding

Trillions of US$ Trillions of US$

Source: CFTC

Interest Rate 

Derivatives

(right axis)

Credit Index 

Derivatives

(left axis)

As Of: 28-Sep-2018

4.10.9 Derivatives Notional Amount Outstanding 
50 2018 FSOC / / Annual Report

Box A: A New Way to Measure Risk in the Interest Rate Swaps Market

The size of the interest rate swaps market is 

measured using several metrics, including gross 

and net notional amount, gross fair value, and net 

current credit exposure. The predominant and largest 

measure is gross notional amount, which is the basis 

for computing the interest payments. For example, an 

interest rate swap with a 5 percent fixed interest rate 

and a $100 million notional amount would require one 

counterparty to pay 5 percent of that notional amount 

each year ($5 million). 

In order to compute the gross notional size of the 

interest rate swaps market, the notional amounts of 

the individual contracts are summed together. By this 

measure, the notional size of the interest rate swap 

market—which is limited to fixed-for-floating swaps, 

forward rate agreements (FRAs), OIS, and swaptions 

for this exercise—was $224 trillion in September 

2018, based on entities reporting to the CFTC. While 

notional values provide an indication of the overall 

level of activity in interest rate swaps markets, they 

are a poor indicator of risk transfer in this market for 

two reasons: 

1. A sum of notional amounts implies that each 

new contract adds risk to the market, but entities 

regularly create new swaps contracts to offset, or 

reduce, their existing risk; and 

2. A significant portion of the interest rate swaps 

market has a short duration with lower risk 

characteristics than longer-duration contracts. 

However, the notional amount does not recognize 

that long-term swaps have significantly more 

interest rate risk than short-term swaps. 

Therefore, the notional amount metric tends to 

exaggerate the magnitude of interest rate risk transfer. 

Given these limitations of the notional measure, CFTC 

staff recently developed a new metric called EntityNetted Notionals (ENNs). This new metric: 

1. Expresses the notional amount of each swap in 

5-year risk equivalents; and 

2. For every pair of counterparties, nets positions 

that receive fixed against positions that pay fixed 

in the same currency. 

Using the ENNs metric, the size of the interest rate 

swap market is calculated as $17 trillion, implying 

that the extent of interest rate risk transfer in the 

swaps market is around that of a $17 trillion 5-year 

bond market. 

The ENNs measure provides an alternative way to 

measure risk transfer in interest rate swaps. That 

said, the ENNs metric does not capture counterparty 

or operational risk, and its use in other asset classes 

is limited. 
Financial Developments 51

The weekly trading volumes of interest rate 

derivatives generally increased in 2017 and 

2018, albeit with significant inter-period 

variation. In March 2018, 12-week average 

volumes hit an all-time high of $8.3 trillion, a 47 

percent increase over 12-week average trading 

volumes from December 2017; while trading 

volumes declined over the summer of 2018, 

volumes increased in September 2018, with the 

12-week average volumes rising to $6.7 trillion. 

Over the same period, trading volumes in U.S. 

credit derivatives varied significantly; 12 week 

average trading volumes fluctuated between 

$500 and $800 billion in 2017 before falling to 

a three-year low of $320 billion in September 

2018 (Chart 4.10.10).

The notional amount of global OTC interest 

rate derivatives rose to $481 trillion as of June 

2018, an increase of $46 trillion from one year 

earlier (Chart 4.10.11). While the current level 

of OTC interest rate derivatives remains below 

2014 levels, notional levels over time cannot 

be directly compared due to compression 

activity. Compression is a risk-management 

tool used by market participants to close OTC 

derivatives contracts with offsetting or nearly 

offsetting risk, in effect reducing the number 

of transactions and gross notional amount 

outstanding in market participants’ OTC 

derivatives portfolios. Compression activity has 

grown rapidly in recent years, supported by the 

growth of central clearing and CCP compression 

service offerings. The increased compression 

activity led to a $352 trillion reduction in interest 

rate derivatives notional amount outstanding 

in 2017 and the first half of 2018, and an $875 

trillion reduction since 2013 (Chart 4.10.12).

Adjusted for compression, however, the total 

notional amount of cleared OTC interest rate 

derivatives has increased by 14 percent since 

December 2016 (Chart 4.10.13).

0

1

2

3

4

5

6

7

8

9

0.0

0.2

0.4

0.6

0.8

1.0

Mar:14Sep:14Mar:15Sep:15Mar:16Sep:16Mar:17Sep:17Mar:18Sep:18

4.10.10 Derivatives Notional Volume

Trillions of US$ Trillions of US$

Source: CFTC

Interest Rate Derivatives

(right axis)

As Of: 28-Sep-2018

Note: 12-week moving averages.

Credit Index

(left axis) 

4.10.10 Derivatives Notional Volume 

Trillions of US$

0

100

200

300

400

500

600

700

0

100

200

300

400

500

600

700

2003 2005 2007 2009 2011 2013 2015 2017

4.10.11 Interest Rate Derivatives: Global Notional Outstanding

Trillions of US$

Source: BIS, Haver Analytics

As Of: 2018 Q2

4.10.11 Interest Rate Derivatives: Global Notional Outstanding 

Trillions of US$

0

50

100

150

200

250

0

50

100

150

200

250

2003 2005 2007 2009 2011 2013 2015 2017

CCP

Non-CCP

4.10.12 Interest Rate Derivative Compression Volume

Trillions of US$

Source: TriOptima

As Of: Jun-2018

Note: Gross notional is represented as single-counted 

for notional compressed outside of a CCP and doublecounted for notional compressed inside of a CCP.

4.10.12 Interest Rate Derivative Compression Volume 
52 2018 FSOC / / Annual Report

In contrast, the global amount of notional credit 

derivatives continues to decline, and as of June 

2018, the notional amount of single name CDS 

fell a further 19 percent year-over-year, to $4.1 

trillion (Chart 4.10.14). The notional amount of 

credit index derivatives ticked up slightly to $4.0 

trillion as of June 2018, but remains well below 

the 2011 peak of $10.5 trillion.

Impact of Margin Rule for Non-Cleared Swaps

In September 2016, regulators began 

implementing margin requirements for 

uncleared swaps. These new requirements, 

which will be fully phased in by September 

2020, were intended to promote central clearing 

and reduce counterparty risk by establishing 

initial and variation margin requirements 

for covered swap entities that enter into noncentrally cleared transactions. Regulators in 

other jurisdictions also began implementing 

their own respective rules, with Canada and 

Japan beginning implementation in the third 

quarter of 2016, and the EU, Singapore, Hong 

Kong, Switzerland, and Australia beginning 

implementation in the first quarter of 2017. 

As part of the August 2018 FSB consultative 

document on incentives to centrally clear OTC 

derivatives, the FSB surveyed the largest 21 

OTC derivative dealers on the relative costs 

of trading centrally cleared and uncleared 

derivatives. The results indicate that initial 

margin is generally lower for centrally cleared 

derivatives, suggesting that the implementation 

of initial margin requirements for uncleared 

derivatives incentivizes central clearing. The 

final version of the FSB report was published 

in November 2018. Additionally, anecdotal 

evidence from a recent International Swaps and 

Derivatives Association (ISDA) survey shows 

that the implementation of these rules has led 

to an increase in the amount of initial margin 

posted for uncleared derivative transactions. 

0

10

20

30

40

50

0

400

800

1200

1600

2000

2400

Jul:15 Jan:16 Jul:16 Jan:17 Jul:17 Jan:18 Jul:18

4.10.15 Interest Rate Derivatives Inflation Swap Clearing

Billions of US$ Billions of US$

Cleared 

Volume 

(right axis)

Cleared Notional 

Outstanding 

(left axis)

As Of: 28-Sep-2018

Uncleared Swap 

Margin Rule 

Implementation Date

Source: ClarusFT CCPView

Note: 12-week moving 

averages for volume data. 

4.10.15 Interest Rate Derivatives Inflation Swap Clearing 

Trillions of US$

4.10.13 Global Cleared OTC Interest Rate Derivatives

Trillions of US$

Source: ClarusFT CCPView, 

TriOptima, LCH.SwapClear

As Of: Jun-2018

Note: Maturity weighted cumulative compression volume is 

calculated as the sum of the current and previous year’s 

compression volume, estimating with two year average 

maturity for the compressed trades. 2018 data is year-to-date.

0

100

200

300

400

500

600

0

200

400

600

800

1000

2008 2010 2012 2014 2016 2018

Cleared Notional

Maturity Weighted Cum. Compression Volume

4.10.13 Global Cleared OTC Interest Rate Derivatives 

Trillions of US$

0

10

20

30

40

0

10

20

30

40

Dec:04 Dec:06 Dec:08 Dec:10 Dec:12 Dec:14 Dec:16 Jun:18

4.10.14 Global Credit Derivatives by Product

Trillions of US$

Source: BIS

As Of: 2018 Q2

Note: Gross notional outstanding; prior to 2010, 

index CDS were reported as multi-name CDS.

Multi-Name

Index

Single Name

4.10.14 Global Credit Derivatives by Product 
Financial Developments 53

Additionally, the implementation of these 

rules has pushed certain swaps towards central 

clearing. Within one month of the September 

2016 implementation date, the notional 

outstanding for globally cleared inflation swaps 

increased by approximately 28 percent, and 

the notional outstanding for cleared FX nondeliverable forwards increased by approximately 

65 percent. Over the same period, the cleared 

volumes in both products had nearly tripled, 

and by August 2018, approximately 80 percent 

of U.S. inflation swaps were being cleared 

(Charts 4.10.15, 4.10.16). That said, the 

implementation of the uncleared margin rule 

has not led to increased clearing in all products, 

and more complex products such as swaptions 

continue to be transacted bilaterally.

4.10.4 Central Counterparty Clearing

Measured by gross notional outstanding 

overall, cleared OTC derivatives constituted 

approximately 76 and 53 percent of outstanding 

OTC interest rate and OTC credit derivatives 

globally, respectively, and less than 3 percent 

each for both OTC FX and OTC equity 

derivatives globally in June 2018 (Chart 

4.10.17). Globally, approximately $367 trillion 

in notional of OTC interest rate derivatives 

and $4.5 trillion in notional of OTC credit 

derivatives were cleared by June 2018. 

Both the volume of total compression activity 

and the share of compression activity occurring 

within CCPs continue to increase. In the United 

States, 81 percent of new interest rate derivative 

transaction volumes were centrally cleared 

as of the third quarter of 2018. Within the 

market for CDS on indices, 81 percent of weekly 

notional volumes were centrally cleared during 

the third quarter of 2018 (Chart 4.10.18). 

Clearing volumes remain concentrated with 

LCH.Clearnet Ltd. (LCH Ltd.) and CME Group 

Inc. (CME) for interest rate swaps and with ICE 

Clear Credit (ICC), ICE Clear Europe (ICEU), 

and LCH SA for CDS. 

0

50

100

150

200

0

300

600

900

1200

Jul:15 Jan:16 Jul:16 Jan:17 Jul:17 Jan:18 Jul:18

4.10.16 FX Non-Deliverable-Forward Clearing

Billions of US$ Billions of US$

Cleared 

Volume 

(right axis)

Cleared Notional 

Outstanding 

(left axis)

As Of: 28-Sep-2018

Uncleared Swap 

Margin Rule 

Implementation Date

Source: ClarusFT CCPView

Note: 12-week moving 

averages for volume data.

4.10.16 FX Non-Deliverable-Forward Clearing 

0

100

200

300

400

500

0.0

0.2

0.4

0.6

0.8

1.0

Interest Rate FX Credit Equity

Not Cleared (left axis)

Cleared (left axis)

4.10.17 Global OTC Central Clearing Market Share

Share Trillions of US$

Source: BIS

As Of: 2018 Q2

Total Notional 

Outstanding (right axis)

4.10.17 Global OTC Central Clearing Market Share 

Percent As Of: 2018 Q3

4.10.18 U.S. Central Clearing Market Share 

Source: CFTC

0

20

40

60

80

100

0

20

40

60

80

100

Dec:13 Sep:14 Jun:15 Mar:16 Dec:16 Sep:17 Jun:18

Percent

Cleared Interest 

Rate Derivatives

Note: Percentage of new 

transaction dollar volume.

Cleared CDS 

Index Swaps

4.10.18 U.S. Central Clearing Market Share 
54 2018 FSOC / / Annual Report

Relevant authorities continue to work with CCPs 

and their members to assess and implement 

changes to operational and liquidity policies 

and procedures to mitigate concerns about 

funding liquidity among clearing members 

during periods of high market volatility. 

In July 2017, the CFTC started posting a 

monthly cleared margin report. The report 

aggregates initial margin summary information 

for CME, ICC, ICE Clear U.S. (ICUS), ICEU, 

LCH Ltd., and LCH SA. As of October 31, 2018, 

total futures customer initial margin was $122 

billion, with $70 billion at the top five firms; 

total swaps (interest rate and CDS) customer 

initial margin was $107 billion, with $67 billion 

at the top five firms.

4.10.5 Futures Commission Merchants

Futures Commission Merchants (FCMs) 

registered with the CFTC are the CCP members 

that provide customers the ability to clear 

futures, listed options on futures, and swaps 

transactions. The increased use of central 

clearing for certain derivative products has 

increased the importance of FCMs as market 

intermediaries serving as the conduit for 

customers to participate in the derivatives 

market and access clearing services. 

Under the U.S. agency model of clearing, 

FCMs collect initial and variation margin 

from customers as part of their intermediary 

services, and deposit the required amounts with 

the CCP. Additionally, FCMs guarantee their 

clients’ financial performance to the CCP. This 

guarantee may expose the FCMs to a potential 

loss in a situation where a client defaults without 

having deposited a sufficient initial margin with 

the FCM guaranteeing its account. FCMs also 

may have contingent financial obligations under 

a CCP’s mutualized loss allocation mechanisms. 

0

50

100

150

200

250

300

350

0

50

100

150

200

250

300

350

2002 2004 2006 2008 2010 2012 2014 2016 2018

4.10.19 Margin Funds Held at CFTC Registered FCMs

Billions of US$ Billions of US$

Source: FIA

Part 30

Swaps

Futures

As Of: Sep-2018

4.10.19 Margin Funds Held at CFTC Registered FCMs 
Financial Developments 55

With respect to more established cleared 

businesses, like clearing of futures and options 

on futures, the level of customer margin funds 

held by FCMs has remained fairly flat since the 

financial crisis (Chart 4.10.19). For the cleared 

swaps business, where customer clearing and 

associated data collection have been more 

recently introduced, the level of customer 

margin funds held by FCMs has increased from 

about $44 billion at year-end 2014 to $93 billion 

as of September 2018.

For futures and options on futures, the number 

of FCMs registered with the CFTC as holding 

customer funds has fallen from just over 100 

in 2002 to 54 (of which 27 are bank-affiliated 

FCMs) as of June 2018 (Chart 4.10.20). For the 

cleared swaps business, the number of FCMs 

reporting holding segregated client funds 

decreased from 23 at year-end 2014 to 17 (of 

which 15 are bank-affiliated FCMs) as of June 

30, 2018. While the number of registered FCMs 

has fallen considerably, the concentration of 

the clearing business has remained fairly stable 

over time. Between 2002 and 2017, the top five 

clearing members at futures exchanges held 40 

to 60 percent of client margin, and since 2014, 

the top five swap clearing members have held 

between 70 and 80 percent of client margin 

(Chart 4.10.21 and Chart 4.10.22). 

A portion of the decline in the number of 

FCMs reflects a long-term trend of business 

consolidation due to technology and other 

market structure related changes. In addition, 

some bank-affiliated FCMs have stated that 

Basel-based bank capital requirements, 

including the supplementary leverage 

ratio (SLR), have impacted their decisions 

regarding providing client clearing services 

(see Section 5.2.1). As the structure of OTC 

derivatives’ markets and clearing continues to 

evolve, regulators continue to monitor FCM 

industry trends and the possible implications 

for financial stability, particularly in stressed 

market conditions.

Count As Of: Sep-2018

4.10.20 CFTC Registered FCMs Holding Client Funds

Source: FIA

0

25

50

75

100

125

150

0

25

50

75

100

125

150

2002 2004 2006 2008 2010 2012 2014 2016 2018

Count

Swaps

Part 30

Futures

4.10.20 CFTC Registered FCMs Holding Client Funds 

4.10.22 FCM Concentration: Customer Swap Balances

Source: CFTC 

financial data for FCMs

0

25

50

75

100

0

25

50

75

100

2014Q1 2014Q4 2015Q3 2016Q2 2017Q1 2017Q4

Percent Percent

As Of: 2018 Q2

Top 10 Top 5 Top 3

Note: Represents the amount of funds an FCM is required 

to segregate for customers who trade cleared swaps.

4.10.21 FCM Concentration: Customer 4d(a)(2) Balances

Source: CFTC 

financial data for FCMs

0

25

50

75

100

0

25

50

75

100

2002 2004 2006 2008 2010 2012 2014 2016

Percent As Of: 2017 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. 

4.10.22 FCM Concentration: Customer Swap Balances 

4.10.21 FCM Concentration: Customer 4d(a)(2) Balances 
56 2018 FSOC / / Annual Report

4.10.6 Regulated Platform Trading

Since 2014, the CFTC has granted full 

registration to 25 SEFs. Further, certain interest 

rate swaps and CDS indices have been “made 

available to trade,” and therefore required to be 

executed on a SEF or designated contract market 

(DCM). Combined with mandatory central 

clearing, these regulated trading platforms have 

increased pre-trade price transparency, reduced 

operational risk due to electronic execution, and 

improved end-to-end processing. 

Trading volumes on SEFs continued to increase 

in 2017 and 2018, with average daily notional 

volume for interest rate swaps and CDS indices 

up 25 percent and 38 percent, respectively, 

during the first nine months of 2018 as 

compared to the same period in 2017 (Chart 

4.10.23). The share of interest rate swap trading 

that occurred on SEFs versus off SEFs increased 

from 50 percent to 52 percent during that time 

period, while the share of CDS index trading 

that occurred on SEFs versus off SEFs increased 

from 74 percent to 77 percent (Chart 4.10.24).

Although SEF trading has increased over time, 

on November 5, 2018, the CFTC proposed 

amendments to its rules that are intended to 

strengthen the existing swaps trading framework 

by promoting more SEF trading and pre-trade 

price transparency. For example, no new “made 

available to trade” determinations have been 

implemented since 2014, and SEFs are limited in 

the execution methods they may offer for these 

swaps (order book and request for quote system). 

The CFTC’s proposal addresses these and other 

issues (see Section 5.2.1).

Percent As Of: 28-Sep-2018

4.10.24 U.S. On-SEF Trading Share

Source: CFTC

0

20

40

60

80

100

0

20

40

60

80

100

Jan:14Jul:14 Jan:15Jul:15 Jan:16Jul:16 Jan:17Jul:17 Jan:18Jul:18

Percent

CDS Indices

Interest Rate Derivatives

Note: Share of notional volume. 

20-day moving averages.

4.10.24 U.S. On-SEF Trading Share

Billions of US$ As Of: 28-Sep-2018

4.10.23 U.S. On-SEF Trading Volume

Source: CFTC

0

200

400

600

800

0

20

40

60

80

Jan:14 Jul:14 Jan:15 Jul:15 Jan:16 Jul:16 Jan:17 Jul:17 Jan:18 Jul:18

Billions of US$

CDS Indices

Interest Rate Derivatives

Note: Share of notional volume. 

20-day moving averages.

4.10.23 U.S. On-SEF Trading Volume 
Financial Developments 57

4.11 Bank Holding Companies and 

Depository Institutions

4.11.1 Bank Holding Companies and Dodd-Frank 

Act Stress Tests 

BHCs—inclusive of financial holding 

companies—are companies with at least one 

commercial bank subsidiary. Subsidiaries 

of BHCs may also include nonbanks such 

as broker-dealers, investment advisers, or 

insurance companies. The CCAR) BHCs 

are BHCs with $100 billion or more in total 

consolidated assets and U.S. intermediate 

holding companies (IHCs) of foreign banking 

organizations (FBOs). Among them, there are 

eight domestic global systemically important 

banks (G-SIBs): JP Morgan Chase, Citigroup, 

Morgan Stanley, Bank of America, Goldman 

Sachs, Wells Fargo, Bank of New York Mellon, 

and State Street. As of the second quarter of 

2018, BHCs in the United States held about $19 

trillion in assets. G-SIBs account for 59 percent 

of this total. CCAR BHCs other than G-SIBs 

account for 24 percent. Other BHCs account for 

the remaining 17 percent (Chart 4.11.1).

Capital Adequacy 

Capital levels at BHCs have risen significantly 

since the 2008 financial crisis. At CCAR BHCs, 

the ratio of common equity tier 1 (CET1) 

capital to risk-weighted assets (RWAs) has more 

than doubled since the crisis. For smaller BHCs, 

capital ratios increased by about 50 percent over 

the same period as smaller BHCs’ capital ratios 

did not fall as much during the financial crisis 

(Chart 4.11.2). High levels of equity capital 

provide a buffer to absorb losses that may result 

from operational and legal risks, or from losses 

on loans, securities, or trading portfolios. 

Although the requirements under Basel III 

continue to phase-in over the next few years, 

most of the largest G-SIBs headquartered in the 

United States already meet the new standards 

for the minimum risk-weighted capital ratios, 

the SLRs, capital conservation buffers, and 

surcharges related to their systemic importance. 

0

2

4

6

8

10

12

0

2

4

6

8

10

12

G-SIBs Non-G-SIB CCAR Other

4.11.1 Total Assets by BHC Type

Trillions of US$ Trillions of US$

Source: FR Y-9C

As Of: 2018 Q2

4.11.1 Total Assets by BHC Type

4

6

8

10

12

14

4

6

8

10

12

14

2001 2003 2005 2007 2009 2011 2013 2015 2017

4.11.2 Common Equity Tier 1 Ratios

Percent As Of: 2018 Q2 Percent

Source: FR Y-9C

G-SIBs

Non-G-SIB CCAR

Other

Note: Prior to 2014:Q1, the numerator of the common equity 

tier 1 ratio is tier 1 common capital. Beginning in 2014:Q1 for 

advanced approaches BHCs and in 2015:Q1 for all other 

BHCs, the numerator is common equity tier 1 capital. 

4.11.2 Common Equity Tier 1 Ratios

0

10

20

30

40

50

60

0

10

20

30

40

50

60

2001 2003 2005 2007 2009 2011 2013 2015 2017

4.11.3 Selected Sources of Funding at CCAR BHCs

Percent of Total Assets As Of: 2018 Q2 Percent of Total Assets

Long-Term Funding Deposits Excluding Foreign Deposits 

and Large Time Deposits

Source: FR Y-9C

Note: Long-term funding includes other borrowed money, subordinated 

notes, and large time deposits with maturities >1 year. Short-term 

funding includes such liabilities with maturities <1 year plus trading 

liabilities, repos, CP, and foreign deposits. 

Short-Term Funding

4.11.3 Selected Sources of Funding at CCAR BHCs
58 2018 FSOC / / Annual Report

FBOs with sizeable operations in the United 

States consolidate all non-branch assets under 

a single BHC called an IHC. The 12 IHCs 

operating in the U.S. have an average CET1 

capital ratio of 16.1 percent, with a range from 

11.8 percent to 22.4 percent, as of the second 

quarter of 2018.

Funding Sources

During the 2008 financial crisis, BHCs 

experienced disruptions in their access to 

short-term wholesale funding. Since then 

the ratio of such funding to total assets has 

declined significantly and now stands at about 

half of its 2007 levels. At the same time, BHCs 

experienced large inflows of core deposits. 

BHCs also maintained a steady share of longterm debt in recent years, at about ten percent 

of total assets (Chart 4.11.3). 

Rates on interest-bearing deposits slowly 

increased following the three Federal Reserve 

rate hikes in 2017 and three more in 2018 

through October. The Federal Reserve has 

increased its interest rate target by 200 basis 

points since 2015, but the cumulative increase in 

deposit rates has been less than 40 basis points 

during that time. Deposit rates increased more at 

smaller BHCs than at G-SIBs (Chart 4.11.4). 

The LIBOR-OIS spread, an indicator of the cost 

of unsecured short-term wholesale funding, 

rose markedly in the fourth quarter of 2017 and 

the first quarter of 2018, then declined to more 

normal levels (Chart 4.11.5). The temporary 

increase observed in the first quarter was 

attributed to a greater supply of Treasury bills 

and, to some extent, the repatriation of offshore 

earnings following the enacted tax reform.

-0.05

0.05

0.15

0.25

0.35

0.45

-0.05

0.05

0.15

0.25

0.35

0.45

Nov:15 May:16 Nov:16 May:17 Nov:17 May:18

4.11.4 Cumulative Changes in Deposit Rates

Percent As Of: 26-Oct-2018 Percent

Source: SNL Financial 

Note: Based on average quoted rates for 

Jumbo CD - $100K; up to 1 year maturity. 

G-SIBs

Non-G-SIB CCAR

Other

0

10

20

30

40

50

60

70

0

10

20

30

40

50

60

70

2013 2014 2015 2016 2017 2018

4.11.5 LIBOR-OIS Spread

Basis Points As Of: 31-Oct-2018 Basis Points

Source: Bloomberg, L.P.

Note: SEC money market fund reform 

came into effect on October 14, 2016

4.11.4 Cumulative Changes in Deposit Rates 

4.11.5 LIBOR-OIS Spread

0

2

4

6

8

10

12

14

16

0.0

0.5

1.0

1.5

2.0

2010 2011 2012 2013 2014 2015 2016 2017 2018

4.11.6 Return on Equity and Return on Assets

Percent As Of: 2018 Q2 Percent

ROE (right axis)

ROA (left axis)

Source: FR Y-9C

Note: Dashed lines represent 2003 – 2007 

averages. Return on equity is equal to net income 

divided by average equity. Return on assets is 

equal to net income divided by average assets.

4.11.6 Return on Equity and Return on Assets
Financial Developments 59

Profitability

BHC profitability fell temporarily in the fourth 

quarter of 2017 due to one-time charges 

associated with the tax legislation, but then 

reached post-crisis highs in the second quarter 

of 2018, partly boosted by lower taxes. Return 

on assets (ROA) attained its pre-crisis average 

of 1.1 percent, and return on equity (ROE) was 

around 10.4 percent (Chart 4.11.6).

Net interest margins (NIMs) remained near 

historical lows for G-SIBs, while improving 

toward pre-crisis levels for non-G-SIB CCAR 

and other BHCs (Chart 4.11.7). Although 

interest income has been rising, those gains 

were almost entirely offset by increasing interest 

expenses. Over the past few years, G-SIBs have 

offset smaller NIMs by reducing noninterest 

expenses at a greater rate than other BHCs.

Asset Quality

Overall loan delinquency rates have continued 

to decline modestly for G-SIBs and other 

BHCs, while leveling off for CCAR BHCs that 

are not G-SIBs (Chart 4.11.8). In addition, 

loan loss reserves appeared sufficient based on 

standard measures of reserve adequacy. The 

ratios of loan reserves to delinquent loans and 

net charge-offs are near their pre-crisis values 

(Chart 4.11.9). 

2.0

2.5

3.0

3.5

4.0

2.0

2.5

3.0

3.5

4.0

2010 2012 2014 2016 2018

4.11.7 Net Interest Margins

Percent As Of: 2018 Q2 Percent

Source: FR Y-9C

G-SIBs

Non-G-SIB CCAR

Other

Note: Net interest margin is equal to net interest 

income divided by the quarterly average of interestearning assets.

0

2

4

6

8

10

0

2

4

6

8

10

2001 2003 2005 2007 2009 2011 2013 2015 2017

4.11.8 Delinquency Rates

Percent As Of: 2018 Q2 Percent

Source: FR Y-9C

Note: Includes all loans in foreign and domestic 

offices. Delinquent loans are loans 30 days or 

more past due or in nonaccrual status.

G-SIBs

Non-G-SIB CCAR

Other

4.11.7 Net Interest Margins

4.11.8 Delinquency Rates 

0

200

400

600

800

1,000

0

20

40

60

80

100

2001 2003 2005 2007 2009 2011 2013 2015 2017

4.11.9 Loan-Loss Reserves

Percent As Of: 2018 Q2 Percent

Reserves / Net-Charge-Offs (right axis)

Reserves / Delinquent Loans (left axis)

Source: FR Y-9C

4.11.9 Loan-Loss Reserves
60 2018 FSOC / / Annual Report

Delinquencies on consumer loans continued 

their upward trend. In particular, delinquencies 

for credit card and auto loans have increased 

since mid-2016 (Charts 4.11.10, 4.11.11). 

Delinquencies at G-SIB subsidiary banks 

are at lower levels and have risen less than 

delinquencies at other banks. Delinquency rates 

on auto loans held by non-G-SIB CCAR banks 

have continued their ascent since the third 

quarter of 2016.

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

2011 2012 2013 2014 2015 2016 2017 2018

4.11.11 Auto Loan Delinquency Rates

Percent As Of: 2018 Q2 Percent

Source: Call Report 

Note: Delinquencies are determined using 

nonaccrual loans and loans that are past 

due 30 days or more. 

G-SIBs

Non-G-SIB CCAR

Other

0

2

4

6

8

10

0

2

4

6

8

10

2001 2003 2005 2007 2009 2011 2013 2015 2017

4.11.10 Credit Card Delinquency Rates

Percent As Of: 2018 Q2 Percent

Source: Call Report 

Note: Delinquencies are determined using 

nonaccrual loans and loans that are past 

due 30 days or more. 

G-SIBs

Non-G-SIB CCAR

Other

4.11.11 Auto Loan Delinquency Rates

4.11.10 Credit Card Delinquency Rates

0

1

2

3

4

5

6

0

1

2

3

4

5

6

2010 2011 2012 2013 2014 2015 2016 2017 2018

4.11.12 Loans to Nondepository Financial Institutions 

Percent of Total Loans As Of: 2018 Q2 Percent of Total Loans

Non-CCAR

CCAR

Source: FR Y-9C

4.11.12 Loans to Nondepository Financial Institutions 
Financial Developments 61

Since 2010, the CCAR BHCs have increased 

their lending to nondepository financial 

institutions, while this type of lending has been 

more muted at other institutions over the past 

few years (Chart 4.11.12).

Liquidity Management

All G-SIBs have LCRs above the 100 percent 

requirement (Chart 4.11.13). Holdings of 

HQLA at BHCs subject to the LCR requirement 

have remained relatively flat since the rule went 

into effect on January 1, 2015 (Chart 4.11.14). 

While the accumulation of HQLA leveled 

off in the past three years, the composition 

of HQLA shifted from reserve balances into 

higher yielding agency MBS (Chart 4.11.15). 

All net acquisitions of agency MBS by advanced 

approaches banking organizations since 2012 

have been booked in the held-to-maturity 

(HTM) portfolio, and most HTM securities 

acquired since 2012 could qualify as HQLA 

(Chart 4.11.16). More generally, advanced 

approaches banking organizations have 

increased their proportion of investment 

securities categorized as HTM over the past 

several years; this allows them to avoid lower 

investment securities valuations in regulatory 

capital calculations (Chart 4.11.17).

4

8

12

16

20

24

4

8

12

16

20

24

2010 2011 2012 2013 2014 2015 2016 2017 2018

4.11.14 High-Quality Liquid Assets by BHC Type

Percent of Assets Percent of Assets

Source: FR Y-9C, FR 2900

As Of: 2018 Q2

Standard LCR BHCs

Note: HQLA is estimated by adding excess reserves to 

an estimate of securities that qualify for HQLA. Securities 

are estimated from the FR Y-9C. Haircuts and level 2 

asset limitations are incorporated into the estimate.

Modified LCR BHCs

Other

0

50

100

150

200

0

50

100

150

200

JPM C MS BAC GS WFC BK STT

4.11.13 Liquidity Coverage Ratio

Percent As Of: 2018 Q2 Percent

Source: LCR Disclosures 

from banks’ websites

Note: The solid line represents 

the regulatory minimum.

2017 Q4

2017 Q3

2018 Q1

2018 Q2

4.11.14 High-Quality Liquid Assets by BHC Type

4.11.13 Liquidity Coverage Ratio

0

2

4

6

8

10

0

2

4

6

8

10

2010 2011 2012 2013 2014 2015 2016 2017 2018

4.11.15 Selected Liquid Assets at All BHCs 

Percent of Assets Percent of Assets

Source: FR Y-9C, FR 2900

As Of: 2018 Q2

Ginnie Mae MBS

Treasury Securities 

Fannie Mae and Freddie Mac MBS

Reserve Balances

4.11.15 Selected Liquid Assets at All BHCs
62 2018 FSOC / / Annual Report

Duration gap—a measure of maturity mismatch 

at banks estimated by the approximate duration 

of assets less that of liabilities—remained 

relatively stable for G-SIBs and non-G-SIBs alike 

over the past two years (Chart 4.11.18).

Market Perception of Value and Risk

Stock prices for U.S. G-SIBs appreciated 

significantly in 2017 (20 percent), but reversed 

most of those gains in 2018 through October 

(-13 percent). On the one hand, markets 

expected higher bank earnings and higher 

capital distributions, including the effects of the 

recently enacted tax reform and the reforms 

of supervisory and regulatory requirements by 

federal bank regulatory agencies. On the other 

hand, uncertainty arose due to trade concerns 

and other factors. Political uncertainties, 

among other factors, contributed to a marked 

decline in stock prices of European banks in 

2018 (Chart 4.11.19).

-600

-400

-200

0

200

400

600

-600

-400

-200

0

200

400

600

Available-for-Sale Held-to-Maturity

Billions of US$ Billions of US$

Source: FR Y-9C

As Of: 2018 Q2

U.S. Treasuries & Agencies

Agency MBS

Other MBS & ABS

Municipals 

Other 

Note: At advanced approaches banking organizations. 

Advanced approaches framework generally applies to banks 

with at least $250 billion in total consolidated assets or at least 

$10 billion in total on-balance sheet foreign exposure. 

Cumulative change from 2012 Q4 – 2018 Q2. 

4.11.16 Cumulative Change in Securities 4.11.16 Cumulative Change in Securities

0

5

10

15

20

25

30

35

40

0

5

10

15

20

25

30

35

40

2001 2003 2005 2007 2009 2011 2013 2015 2017

4.11.17 Held-to-Maturity Securities 

Percent of Investment 

Securities

Percent of Investment 

As Of: 2018 Q2 Securities

Non-advanced approaches banking organizations

Advanced approaches banking organizations

Source: FR Y-9C

Note: Investment securities are held-to-maturity 

securities plus available-for-sale securities

4.11.17 Held-to-Maturity Securities 

4.11.18 Duration Gap

Source: Call 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

2001 2003 2005 2007 2009 2011 2013 2015 2017

Years Years

G-SIBs Weighted Average

As Of: 2018 Q2

All Bank Median

Note: Duration gap is the approximate weightedaverage time of cash inflows less the approximate 

weighted-average time of cash outflows.

4.11.18 Duration Gap
Financial Developments 63

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

trended higher in 2017 and slightly decreased in 

2018 (Chart 4.11.20). Wells Fargo experienced 

a 23 percent drop from its peak during the first 

quarter of 2018, following legal and supervisory 

actions related to its sales practices and other 

legal and supervisory issues. Through October 

2018, most of the largest banks had price-tobook ratios above 100 percent, though these 

ratios remained compressed relative to precrisis levels. 

Index As Of: 31-Oct-2018

4.11.19 Stock Prices

Source: Bloomberg, L.P.

50

100

150

200

250

300

350

50

100

150

200

250

300

350

2012 2013 2014 2015 2016 2017 2018

Index

S&P 500

EU Bank Stock Index

U.S. Other BHCs

U.S. G-SIB BHCs

Note: January 3, 2012 = 100. EU Bank Stock Index 

created from stock price information for the following 

banks: BCS, BNP, CS, ACA, DB, SAN, UBS. All 

indexes are created by equally weighting banks.

4.11.19 Stock Prices

Ratio As Of: 31-Oct-2018

4.11.20 Price-to-Book 

Source: Bloomberg, L.P. 

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

2008 2010 2012 2014 2016 2018

Ratio

Wells Fargo 

Morgan Stanley

JPMorgan Chase

Goldman Sachs

Citigroup

Bank of America

4.11.20 Price-to-Book
64 2018 FSOC / / Annual Report

CDS spreads, which measure the cost of 

insuring against credit default risk, stayed at 

very low levels in 2017 for six of the U.S. G-SIBs 

and select foreign banks. Such premiums moved 

up slightly in 2018 in response to episodes of 

equity market volatility but remained low by 

historical standards (Charts 4.11.21, 4.11.22).

Dodd-Frank Act Stress Tests and Comprehensive 

Capital Analysis and Review 

In June 2017 and June 2018, the Federal Reserve 

released the results of that year’s annual DoddFrank Act stress testing (DFAST) and CCAR. In 

2017 34 BHCs with total consolidated assets of 

$50 billion or more participated in the annual 

stress tests and capital planning review; in 2018, 

35 BHCs participated. EGRRCPA exempts firms 

below $100 billion in total assets from enhanced 

prudential standards, including supervisory 

stress test requirements. Any BHC with total 

consolidated assets of $250 billion or more is 

subject to periodic company-run stress-testing 

requirements. The Act further provides the 

Federal Reserve with discretion to require a 

BHC with between $100 and $250 billion in 

total consolidated assets to conduct periodic 

company-run stress tests.

DFAST, a forward-looking exercise conducted 

by the Federal Reserve, evaluates whether the 

participating BHCs have sufficient capital 

to absorb losses over a nine-quarter period 

resulting from stressful economic and financial 

market conditions in hypothetical supervisory 

scenarios designed by the Federal Reserve 

in consultation with the FDIC and the OCC. 

These scenarios are also used for company-run 

stress tests by national banks, state nonmember 

banks, and federal savings associations with 

total consolidated assets of $100 billion or more 

Basis Points As Of: 31-Oct-2018

4.11.21 U.S. Banks 5-Year CDS Spreads

Source: Bloomberg, L.P. 

0

100

200

300

400

500

600

0

100

200

300

400

500

600

2010 2011 2012 2013 2014 2015 2016 2017 2018

Basis Points

Wells Fargo 

Morgan Stanley

JPMorgan Chase

Goldman Sachs

Citigroup

Bank of America

4.11.21 U.S. Banks 5-Year CDS Spreads

Basis Points As Of: 31-Oct-2018

4.11.22 Foreign Banks 5-Year CDS Spreads

Source: Bloomberg, L.P. 

0

100

200

300

400

500

600

0

100

200

300

400

500

600

2010 2011 2012 2013 2014 2015 2016 2017 2018

Basis Points

UBS

Santander

Deutsche Bank

Credit Suisse

Credit Agricole

BNP Paribas

Barclays

4.11.22 Foreign Banks 5-Year CDS Spreads
Financial Developments 65

for 2018. As part of DFAST, the banks must 

report their company-run stress test results to 

the Federal Reserve, their primary regulator, 

and the public. The severely adverse scenario 

used in DFAST 2017 reflected conditions of 

a severe downturn in the U.S. economy with 

a larger decline in CRE prices and a more 

severe recession in the euro area and UK. 

Compared to DFAST 2017, the severely adverse 

scenario in DFAST 2018 featured more severe 

macroeconomic conditions and a deeper 

correction in asset prices. Moreover, the onetime impact of the tax reform reduced the 

starting capital ratios for a large number of 

firms in 2018. Over the nine-quarter horizon 

of the severely adverse scenario in DFAST 2017, 

the aggregate projected CET1 ratio for the 34 

BHCs fell from 12.5 percent to a minimum level 

of 9.2 percent. In DFAST 2018, the aggregate 

projected CET1 ratio for the 35 BHCs fell 

from 12.3 percent to a minimum level of 7.9 

percent, which was still well above the minimum 

requirement of 4.5 percent (Charts 4.11.23).

Through CCAR, the Federal Reserve evaluates 

the capital adequacy and the capital planning 

processes of the BHCs, including the quality 

of the BHCs’ risk-management frameworks 

and the proposed capital actions such as 

dividend payments and stock repurchases. 

The Federal Reserve considers both qualitative 

and quantitative factors in analyzing a firm’s 

capital plan. In 2017, the Federal Reserve 

issued a conditional non-objection to one 

BHC, requiring it to address weaknesses in its 

capital planning process (Chart 4.11.24). In 

2018, the Federal Reserve issued a conditional 

non-objection to three BHCs. The capital ratios 

of Goldman Sachs and Morgan Stanley, under 

the capital plans they originally submitted 

and with the one-time capital reduction from 

the tax law changes, fell below required levels. 

The conditional non-objections require them 

to limit their capital distributions to the levels 

of prior years, allowing them to build capital 

over the next year. State Street is required 

to remediate, within six months, certain 

weaknesses in its management and analysis 

of counterparty exposures under stress. The 

0

2

4

6

8

10

12

14

0

2

4

6

8

10

12

14

Pre-Stress

Post-Stress Minimum

4.11.23 Initial and Stressed Capital Ratios

Percent Percent

Source: Federal Reserve

As Of: Jun-2018

Note: DFAST 2013-2015 bars depict Tier 1 

Common Capital Ratio. DFAST 2016-2018 

bars depict Common Equity Tier 1 Ratio.

DFAST 

2013

2014 2015 2016 2017 2018

4.11.23 Initial and Stressed Capital Ratios

4.11.24 Federal Reserve's Actions in CCAR 2017

Source: Federal Reserve

Non-Objection to Capital Plan

Ally Financial Comerica MUFG Americas

American Express Deutsche Bank Northern Trust

BancWest Discover Financial PNC Financial

Bank of America Fifth Third Bancorp Regions Financial

Bank of New York Mellon Goldman Sachs Santander Holdings USA

BB&T HSBC North America State Street

BBVA Compass Huntington Bancshares SunTrust

BMO Financial JPMorgan Chase TD Group U.S.

CIT Group KeyCorp U.S. Bancorp

Citigroup M&T Bank Wells Fargo

Citizens Financial Morgan Stanley Zions

Conditional Non-Objection to Capital Plan

Capital One Financial

4.11.24 Federal Reserve’s Actions in CCAR 2017
66 2018 FSOC / / Annual Report

Federal Reserve also objected to the capital 

plan of Deutsche Bank USA Corporation due 

to qualitative concerns, including material 

weaknesses in its data capabilities and controls 

supporting its capital planning process, as 

well as weaknesses in its approaches and 

assumptions used to forecast revenues and 

losses under stress (Chart 4.11.25).

Insured Commercial Banks and Savings 

Institutions

At the end of second quarter of 2018, the 

banking industry included 5,542 FDIC-insured 

commercial banks and savings institutions with 

total assets of $17.5 trillion. There were 1,372 

institutions with assets under $100 million and 

771 institutions with assets over $1 billion.

The total number of institutions fell by 243 

during 2017 and 128 in the first half of 2018 

due to failures and mergers while adding ten 

new charters. Failures of insured depository 

institutions are significantly down since 

the financial crisis; eight institutions with a 

combined $5.2 billion in total assets failed 

in 2017; no institutions failed in the first six 

months of 2018 (Chart 4.11.26). 

As of June 30, 2018, 82 institutions—1.5 percent 

of all institutions—were on the FDIC’s “problem 

bank” list, compared to 123 problem banks at 

year-end 2016. Banks on this list have financial, 

operational, or managerial weaknesses that are 

judged to require corrective action in order to 

operate in a safe and sound manner.

Since year-end 2016, total assets increased by 

$753 billion for all U.S. commercial banks 

and savings institutions, with total loans and 

leases increasing by $552 billion. All major loan 

categories grew in 2017 and 2018. The largest 

increases were among commercial and industrial 

(C&I) loans, loans secured by nonfarm 

nonresidential real estate, and residential 

mortgages. Banks increased their investment 

securities by $74 billion since year-end 2016, with 

MBS holdings up 7.6 percent, while Treasury 

securities balances declined 6.4 percent.

4.11.25 Federal Reserve's Actions in CCAR 2018

Source: Federal Reserve

Non-Objection to Capital Plan

Ally Financial Citizens Financial Northern Trust

American Express Credit Suisse Holdings (USA) PNC 

Bank of America Discover Financial Regions Financial

BB&T Fifth Third RBC USA

BBVA Compass HSBC North America Holdings Santander Holdings USA

BMO Financial Huntington SunTrust

Barclays USA JPMorgan Chase TD Group U.S.

BNP Paribas Keycorp UBS Americas

Bank of New York Mellon M&T Bank US Bancorp

Capital One Financial MUFG Americas Wells Fargo

Citigroup

Conditional Non-Objection to Capital Plan

Goldman Sachs Morgan Stanley State Street

Objection to Capital Plan

DB USA

4.11.25 Federal Reserve’s Actions in CCAR 2018

0

1

2

3

4

5

0

100

200

300

400

500

600

1980 1985 1990 1995 2000 2005 2010 2015

Source: BEA, FDIC, 

Haver Analytics

Number of Institutions As Of: 2018 Q2

4.11.26 FDIC-Insured Failed Institutions

Note: No FDIC-insured institutions 

failed during 2005, 2006, and the 

first six months of 2018.

Percent

Number of 

Institutions 

(left axis)

Assets of Failed 

Institutions as a Percent 

of Nominal GDP 

(right axis)

4.11.26 FDIC-Insured Failed Institutions 
Financial Developments 67

Annualized pre-tax income for all U.S. 

commercial banks and savings institutions 

totaled $296 billion for the first six months of 

2018, driven by a rise in net interest income 

and noninterest income (Chart 4.11.27). Net 

interest income rose by 8.6 percent for the first 

six months of 2018 over the first six months of 

2017 due to expanding net interest margins and 

2.9 percent growth in interest-earning assets. 

Almost three-quarters of commercial banks and 

savings institutions reported higher earnings in 

the second quarter of 2018. A lower effective tax 

rate also contributed to the increase in industry 

net income. Credit quality continues to improve 

as the noncurrent ratio declined to 1.06 percent 

of total loans. Loan loss provisions increased 0.3 

percent from first half of 2017, primarily as risks 

within credit card portfolios increased modestly.

4.11.2 U.S. Branches and Agencies of 

Foreign Banks 

U.S. branches and agencies of FBOs generally 

function as wholesale operations of the 

parent bank and therefore their balance sheet 

structure and funding patterns differ from most 

U.S. domestic banking organizations. 

As of June 30, 2018, assets of U.S. branches 

and agencies of foreign banks totaled $2.5 

trillion, roughly 15 percent of total U.S. 

banking assets (Chart 4.11.28). Aggregated 

assets of U.S. branches and agencies of foreign 

banks increased 3.5 percent since June 30, 

2017. Reserve balances for U.S. branches and 

agencies of foreign banks total 29 percent of 

total assets as of June 30, 2018, and increased 

3.4 percent from the previous year. After the 

onset of the financial crisis, balances held at 

the Federal Reserve significantly increased, as 

foreign banks availed themselves of interest 

paid on Federal Reserve balances via their U.S. 

branch and agency operations. 

-1000

-750

-500

-250

0

250

500

750

1000

-1000

-750

-500

-250

0

250

500

750

1000

2010 2012 2014 2016 2018

Noninterest Income

Net Interest Income

Noninterest Expense

Provisions

4.11.27 Commercial Bank and Thrift Pre-Tax Income

Billions of US$ Billions of US$

Source: FDIC

Note: Includes all FDIC-insured commercial 

banks and thrifts. Values are annualized. 

As Of: 2018 Q2

Total Pre-Tax Income

Realized Gains/Losses 

on Investments

4.11.27 Commercial Bank and Thrift Pre-Tax Income 

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2004 2006 2008 2010 2012 2014 2016 2018

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

Trillions of US$ Trillions of US$

Source: Federal Reserve, 

Haver Analytics

As Of: 2018 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, 

asset-backed securities, and other trading assets.

4.11.28 U.S. Branches and Agencies of Foreign Banks: Assets 
68 2018 FSOC / / Annual Report

Securities purchased under agreement to resell 

at U.S. branches and agencies of foreign banks 

increased 37 percent from June 30, 2017 to June 

30, 2018. Securities purchased under agreement 

to resell represented 12 percent of U.S. 

branches and agencies of foreign banks total 

assets as of June 30, 2018, when compared to 8.7 

percent of total assets as of June 30, 2017. The 

recent growth is primarily related to a shift of 

securities purchased under agreement to resell 

to the U.S. branches and agencies of foreign 

banks from related IHCs and BHCs to improve 

regulatory capital ratios at those entities. 

U.S. branches and agencies of foreign banks 

loan balances totaled approximately 30 percent 

of total assets at June 30, 2018 overall. Loan 

growth has slowed in recent years, with loan 

balances increasing only 0.9 percent year-overyear. C&I lending, which has historically been 

a significant portion of overall lending by U.S. 

branches and agencies of foreign banks has 

slowed, with C&I loan levels largely unchanged 

between June 30, 2017 and June 30, 2018. 

Within C&I lending, operations of the larger 

and complex U.S. branches and agencies of 

foreign banks led to the decline in growth rates. 

C&I lending was also impacted by increasing 

competition from nonbank credit providers and 

shifts from C&I lending to CRE. 

Since most U.S. branches and agencies of 

foreign banks are generally not permitted to 

take retail deposits, corporate and certificates 

of deposits are the primary source of funding 

totaling 43 percent of total liabilities as of 

June 30, 2018 (Chart 4.11.29). In recent 

years, U.S. foreign branches and agencies 

have shifted from historically higher levels 

of bank-to-bank lending via federal funds 

purchased to securities sold under agreement 

to repurchase. U.S. branches and agencies of 

foreign banks also repositioned funding from 

money market to secured financing, utilizing 

short-term government and agency securities 

and other short-term funding sources after 

the implementation of MMF reforms in 2016. 

Federal funds purchased totaled 1.3 percent of 

total liabilities for U.S. branches and agencies of 

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2004 2006 2008 2010 2012 2014 2016 2018

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

Trillions of US$ Trillions of US$

Source: Federal Reserve, 

Haver Analytics

As Of: 2018 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.

4.11.29 U.S. Branches and Agencies of Foreign Banks: Liabilities 
Financial Developments 69

foreign banks as of June 30, 2018, and declined 

32 percent year-over year. Securities sold under 

agreement to repurchase for U.S. foreign 

branches was 19 percent of total liabilities as of 

June 30, 2018, and increased 0.6 percent yearover-year. U.S. branches and agencies of foreign 

banks also increased their securities purchased 

and sold activities in recent years as a result of 

organization changes, where foreign parents 

transferred activities from the broker-dealer 

to their U.S. branches and agencies to avoid 

certain regulatory requirements.

4.11.3 Credit Unions

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

quarter of 2018, there were 5,480 federally 

insured credit unions with aggregate assets of 

more than $1.4 trillion. Almost three-quarters 

of credit unions (3,904) had assets under $100 

million, with nearly 30 percent having less than 

$10 million in assets. There were 1,274 credit 

unions with assets between $100 million and $1 

billion, and 302 credit unions with assets over 

$1 billion. 

Consolidation continued during the first half 

of 2018, particularly at smaller institutions. 

The number of credit unions with less than 

$50 million in assets fell to 3,195 in the second 

quarter of 2018, bringing the cumulative 

decline over the past five years to 28 percent. 

At the same time, however, industry assets 

grew 6 percent on an annualized basis over 

the five years ending in the second quarter of 

2018. Membership in federally insured credit 

unions grew 20 percent over the past five years, 

exceeding 115 million members as of the 

second quarter of 2018. 

Financial performance at credit unions 

generally improved during the first half of 2018, 

at least partly reflecting the strength of the 

economy and solid growth in loan demand. Net 

income at consumer credit unions increased 

to nearly $13 billion on an annualized basis 

as of the second quarter of 2018, an increase 

of 25 percent from the second quarter of 2017 

(Chart 4.11.30). The amount of outstanding 
70 2018 FSOC / / Annual Report

loans at credit unions increased by 9.8 percent 

over the year ending in the second quarter of 

2018, a moderate decline from the 10.9 percent 

pace registered during the same period a year 

earlier. Credit union real estate loans, roughly 

half of all credit union lending, grew 9.6 percent 

during the year ending in the second quarter of 

2018. Auto loans, just over one-third of the credit 

union loan portfolio, grew 10.6 percent. 

The credit union system experienced ROA of 90 

basis points at an annual rate through the first 

half of 2018, up from 77 basis points in 2017. 

Interest and noninterest income rose, and the 

NIM among all credit unions edged up to 3.07 

percent of average assets from 2.93 percent one 

year earlier. The NIM among all credit unions 

has narrowed by roughly 20 basis points from 

the post-crisis high in 2010. 

While credit union system performance 

has been relatively strong overall, smaller 

credit unions have not performed as well as 

larger credit unions by a number of standard 

measures. These smaller institutions account for 

the bulk of institutions but a dwindling share of 

assets and members. For example, credit unions 

with less than $100 million in assets account 

for 71 percent of the number of institutions, 

but only 7 percent of assets, while credit unions 

with more than $1 billion in assets account 

for 65 percent of system-wide assets and 58 

percent of credit union members. ROA at the 

smaller institutions was 47 basis points on an 

annualized basis through the second quarter 

of 2018; ROA at credit unions with more than 

$1 billion in assets was 103 basis points. At the 

same time the loan delinquency rate for smaller 

credit unions was 94 basis points in the second 

quarter of 2018, compared with 63 basis points 

at the $1 billion plus institutions.

Credit unions continue to contend with interest 

rate risk, as the economy transitions to a higher 

interest rate environment with a flatter yield 

curve. While interest-sensitive deposits as a 

share of total liabilities have fallen back to precrisis levels, the share of money market accounts 

and individual retirement account (IRA) 

-75

-50

-25

0

25

50

75

-75

-50

-25

0

25

50

75

2006 2008 2010 2012 2014 2016 2018

Net Income

4.11.30 Credit Union Income

Billions of US$ Billions of US$

Source: NCUA

As Of: 2018 Q2

Noninterest Income

Net Interest Income

Note: Federally-insured credit unions. 

Values are annualized. 

Noninterest Expense

Provisions Realized Gains/Losses 

on Investments

4.11.30 Credit Union Income 
Financial Developments 71

deposits remains elevated (Chart 4.11.31). A 

measure of long-term assets—comprised of 

fixed-rate first mortgages and investments with 

a term longer than three years—rose to 28.0 

percent of total assets at the end of the second 

quarter of 2018, up from 27.6 percent a year 

earlier. The share is high relative to the precrisis period (Chart 4.11.32). 

After exhausting other sources of earnings 

growth, some credit unions appear to be 

continuing to reach for yield by lengthening the 

term of their investments to boost near-term 

earnings, though it may leave them vulnerable 

if short-term interest rates rise more quickly 

than expected. As the economy has improved 

and credit union lending has accelerated, the 

investment share of the credit union asset 

portfolio has declined and the share of assets 

accounted for by loans has increased. Over the 

past five years, the share of investments with 

maturity greater than three years declined from 

11.7 percent in the second quarter of 2013 to 7.3 

percent in the second quarter of 2018 (Chart 

4.11.33). Over the same period, the share of 

assets accounted for by loans rose 12 percentage 

points to 70 percent.

Finally, although credit unions’ close ties to 

specific geographies or business organizations 

offer certain advantages, localized economic 

distress can present these institutions with certain unique challenges. For example, the drop 

in the price of oil between 2014 and 2016 led 

to a sharp decline in investment and increased 

layoffs in energy companies, creating strains on 

the credit unions exposed to the sector. Similarly, credit unions exposed to the taxicab industry 

have experienced stress following increased 

competition from ridesharing companies and a 

decline in demand for traditional taxi services. 

As of the second quarter of 2018, there were 

seven credit unions with significant member 

0

10

20

30

40

50

0

10

20

30

40

50

2006 2008 2010 2012 2014 2016 2018

4.11.32 Credit Union Net Long-Term Assets

Percent of Total Assets Percent of Total Assets

Source: NCUA

As Of: 2018 Q2

Fixed Rate First Mortgages

Investments Longer Than 3 Years

4.11.32 Credit Union Net Long-Term Assets

0

5

10

15

20

25

30

35

0

5

10

15

20

25

30

35

2007 Q2 2013 Q2 2015 Q2 2018 Q2

4.11.33 Credit Union Investments by Maturity

Percent of Total Assets Percent of Total Assets

Source: NCUA

As Of: 2018 Q2

1-3 Years

3-5 Years

5-10 Years

<1 Year

>10 Years

Note: Federally-insured credit unions. Investments <1 

year exclude securities with maturities <3 months.

4.11.33 Credit Union Investments by Maturity

45

50

55

60

65

20

24

28

32

36

2005 2007 2009 2011 2013 2015 2017

4.11.31 Credit Union Deposits

Percent Percent

Source: NCUA

As Of: 2018 Q2

Money Market and 

IRA Deposit Share 

(left axis)

Interest-Sensitive 

Deposit Share 

(right axis)

Note: Federally-insured credit unions. Interest-sensitive 

deposit share includes money market and IRA deposit 

share, share certificates, and certain other deposits. 

4.11.31 Credit Union Deposits 
72 2018 FSOC / / Annual Report

ties to the taxi industry with $3.0 billion in 

taxi medallion loans either on their balance 

sheets or sold to other credit unions. Two credit 

unions with total assets more than $1.5 billion 

and specializing in taxi medallion loans were 

placed into conservatorship in the first half of 

2017; both of them were liquidated in the third 

quarter of 2018.

4.12 Nonbank Financial Companies

4.12.1 Securities Broker-Dealers

As of June 2018, there were approximately 3,800 

securities broker-dealers registered with the 

SEC, a decline of 6.1 percent from year-end 

2016. The number of broker-dealers registered 

with the SEC has declined steadily since 2009. 

Aggregate net income in the sector increased 

by approximately $10.8 billion in 2017 on 

increasing revenues (Charts 4.12.1, 4.12.2).

The U.S. broker-dealer sector remains relatively 

concentrated. Approximately 60 percent of 

industry assets were held by the 10 largest brokerdealers as of June 2018; the concentration of the 

largest broker-dealers by assets has remained 

fairly constant over the past several years. The 10 

largest broker-dealers account for approximately 

one-third of industry total revenues and onefourth of industry net income. 

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

increased to $4.4 trillion as of June 2018, but 

were well below the peak of $6.8 trillion in 2007 

(Chart 4.12.3).

Broker-dealers typically obtain leverage through 

the use of secured lending arrangements such 

as repos and securities lending transactions. 

Broker-dealer leverage, measured in various 

0

10

20

30

40

50

3000

3500

4000

4500

5000

2009 2010 2011 2012 2013 2014 2015 2016 2017

4.12.1 Number of Broker-Dealers and Industry Net Income 

Number of Firms As Of: 2017 Billions of US$

Source: FINRA

Net Income (right axis)

Number of Broker-Dealers (left axis)

0

100

200

300

400

0

100

200

300

400

2009 2010 2011 2012 2013 2014 2015 2016 2017

Sale of Investment 

Company Shares

Margin Interest

Other

Underwriting

Fees – Supervision, 

Advisory, Administration

Commissions

4.12.2 Broker-Dealer Revenues

Billions of US$ Billions of US$

Source: FINRA

As Of: 2017

0

1

2

3

4

5

6

7

2005 2007 2009 2011 2013 2015 2017

0

5

10

15

20

25

4.12.3 Broker-Dealer Assets and Leverage

Trillions of US$ Ratio

Source: FINRA

As Of: 2018 Q2

Note: Leverage is the ratio of total 

assets to total ownership equity. 2018 

data as of second quarter 2018.

Total Assets (left axis)

Leverage (right axis)

4.12.1 Number of Broker-Dealers and Industry Net Income

4.12.2 Broker-Dealer Revenues

4.12.3 Broker-Dealer Assets and Leverage
Financial Developments 73

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), increased slightly to 

11.3 in aggregate as of June 2018, up from 10.9 

as of year-end 2017, but it still remains well 

below the pre-crisis peak of 21.2 in 2006.

Most of the large U.S. broker-dealers are 

affiliated with U.S. BHCs or FBOs. Among this 

group of broker-dealers, aggregate assets for 

BHC-affiliated broker-dealers have increased 

steadily since 2015. Aggregate assets for brokerdealers affiliated with FBOs have continued to 

decrease significantly since 2010. BHC-affiliated 

broker-dealers had an aggregate leverage ratio 

of 13.0 as of June 2018, while FBO-affiliated 

broker-dealers had an aggregate leverage ratio 

of 9.7 (Chart 4.12.4).

Unlike the traditional banking sector model, 

which relies in large part on the use of 

customer deposits for funding, broker-dealers 

generally fund themselves through short-term 

secured financing arrangements. Since the 

crisis, broker-dealers have relied more heavily 

on short-term unsecured financing from their 

parent companies and affiliates. Broker-dealer 

financing activity through repo agreements 

represented 50 percent of total liabilities as 

of June 2018, up from 46 percent at yearend 2017, but down from 60 percent in 2009. 

A broker-dealer’s short-term liabilities are 

typically supported by a very liquid asset base 

such as Treasury securities, as well as agency 

debt and MBS. For the largest broker-dealers, 

0

5

10

15

20

25

0

1

2

3

4

5

2010 2011 2012 2013 2014 2015 2016 2017 2018

4.12.4 Large Broker-Dealer Assets and Leverage by Affiliation

Trillions of US$ Ratio

Source: FINRA

As Of: 2018 Q2

Note: Data covers BHC- and FBO-affiliated brokerdealers that are among the 25 largest brokerdealers by assets as of second quarter 2018.

BHC-Affiliated Assets (left axis)

FBO-Affiliated Assets (left axis)

BHC-Affiliated Leverage (right axis)

FBO-Affiliated Leverage (right axis)

4.12.4 Large Broker-Dealer Assets and Leverage by Affiliation
74 2018 FSOC / / Annual Report

the WAM of repo for very liquid products was 

approximately three weeks as of June 2018. Less 

liquid assets such as high-yield debt are typically 

financed through term-secured financing 

arrangements, capital, or subordinated debt 

from the parent company. For the largest brokerdealers, the WAM of repo for less liquid assets 

was more than three months as of June 2018. 

4.12.2 Insurance Companies

The net income of U.S. licensed life insurance 

companies grew by 6.9 percent in 2017. Net 

income has remained steady at around $40 

billion for each of the past five years, and was 

$19 billion in the first half of 2018 (Chart 4.12.5). 

In the property and casualty (P&C) sector, net 

income fell for the fourth consecutive year in 

2017, but appears stronger in the first half of 

2018. Despite an increase in earned premiums 

and investment income, the sector has incurred 

large underwriting losses that have been due in 

part to catastrophic events. 

Insurance companies have long cited the low 

interest rate environment as an impairment to 

their profitability. Although the federal funds 

rate target has increased by 175 basis points 

since December 2016 through October 2018, 

the yields on bonds, which comprise most 

of insurers’ general account invested assets, 

have not risen by the same amount. These 

developments are reflected in slightly higher 

yields on invested assets at P&C insurers and a 

leveling of yields at life insurers following years 

of declines (Chart 4.12.6).

In addition to changes in market interest 

rates, the yield on invested assets is also 

driven by the composition of those portfolios. 

Bonds remained the largest investment 

class in 2018, comprising 58 percent of P&C 

2

3

4

5

6

2010 2011 2012 2013 2014 2015 2016 2017 2018

2

3

4

5

6

4.12.6 Net Yield on Invested Assets

Percent Percent

Source: SNL Financial, Bank of 

America Merrill Lynch, Haver Analytics

Life

P&C

Yield on A-Rated 

Corporate Debt

As Of: 2018 Q2

Note: Life includes 

accident and health.

4.12.6 Net Yield on Invested Assets 

0

15

30

45

60

75

0

15

30

45

60

75

2010 2011 2012 2013 2014 2015 2016 2017 2018

YTD

4.12.5 Insurance Industry Net Income

Billions of US$ Billions of US$

Source: SNL Financial

As Of: 2018 Q2

Life

P&C

Note: Life includes accident and health.

4.12.5 Insurance Industry Net Income
Financial Developments 75

insurers’ assets and 69 percent of those for life 

insurers. Nonetheless, insurers did change their 

investment mix somewhat in 2017 and the first 

half of 2018. Life insurers increased investments 

in bonds and real estate mortgage loans, while 

decreasing their direct investment in real estate. 

P&C insurers increased investments in mortgage 

loans, common equities, cash, and bonds. 

The amount of capital supporting P&C 

insurers has continued to increase despite their 

declining net income (Chart 4.12.7). This has 

enabled their asset to capital ratio to remain 

steady over the past several years. Life insurers 

have also increased their capital, although 

at a more modest pace, and have similarly 

maintained steady asset to capital ratios.

4.12.3 Specialty Finance

Although outstanding consumer and business 

loans from commercial banks increased in 

2017 and 2018, loans from specialty finance 

companies were generally flat over this period. 

Specialty finance companies are non-depository 

institutions that provide loans to consumers and 

businesses. Specialty finance companies held 

approximately $730 billion of consumer loans 

and leases and $388 billion of business loans 

and leases as of August 2018 (Charts 4.12.8, 

4.12.9). Specialty finance companies’ ownership 

of real estate loans and leases declined in 2017 

and 2018 to $123 billion and is about 80 percent 

below its pre-crisis peak.

0

250

500

750

1000

2010 2011 2012 2013 2014 2015 2016 2017 2018

YTD

0

10

20

30

40

50

60

4.12.7 Insurance Industry Capital and Surplus

Billions of US$ Percent of Total Assets

Life Capital and Surplus / Assets (right axis)

P&C Capital and Surplus / Assets (right axis)

Life Capital and Surplus (left axis)

P&C Capital and Surplus (left axis)

As Of: 2018 Q2

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

percent of net admitted assets less net admitted separate 

Source: SNL Financial account assets. Life includes accident and health.

4.12.7 Insurance Industry Capital and Surplus 

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

Source: Federal Reserve, 

Haver Analytics

Trillions of US$ As Of: Sep-2018

4.12.8 Consumer Loans and Leases Outstanding

Note: Loans and leases owned and securitized. Series breaks 

in December 2010 and December 2014 due to change in data 

collection methodology. Gray bars signify NBER recessions.

Trillions of US$

Commercial Banks

Finance Companies

4.12.8 Consumer Loans and Leases Outstanding

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

Source: Federal Reserve, 

Haver Analytics

Trillions of US$ As Of: Sep-2018

4.12.9 Business Loans and Leases Outstanding

Trillions of US$

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.

4.12.9 Business Loans and Leases Outstanding 
76 2018 FSOC / / Annual Report

While specialty finance companies trail 

commercial banks in overall consumer lending 

volume, these firms do maintain an outsized 

market share in certain types of activity. 

Amid surging auto loan growth, for example, 

specialty finance companies originated roughly 

49 percent of total auto loans in the first half 

of 2018, slightly more than the 48 percent 

recorded during the first half of 2017. These 

firms, moreover, accounted for 72.6 percent 

and 73.3 percent of subprime auto loan 

originations, respectively, in those periods—

well above the subprime lending market share 

of banks and credit unions. As opposed to 

banks, which generally have more stable sources 

of funding such as deposits, specialty finance 

companies rely to a higher degree on wholesale 

funding and the securitization market. 

Total issuance of asset-backed securities 

(ABS) was 9.8 percent higher in the first three 

quarters of 2018 than during the same period 

in 2017. ABS issuance had grown 24 percent 

from 2016 to 2017 (Chart 4.12.10). Credit 

card ABS issuance declined sharply in the 

first three quarters of 2018, down 25 percent 

from the same period in 2017. Although new 

issue spreads are only modestly higher than 

historically low levels, rising rates have resulted 

in higher all-in funding costs for credit card 

ABS issuers and it appears that issuers have 

relied more on other funding sources, such as 

bank deposits. Meanwhile, student loan ABS 

issuance grew 44 percent in the first three 

quarters of 2018, having been flat in 2017. Auto 

ABS issuance continues to grow strongly: 2018 

issuance through the third quarter is 10 percent 

higher than the same period in 2017, consistent 

with growth last year. 

In 2018 through September, spreads widened 

for most ABS products, reversing some of the 

2017 spread tightening that encouraged strong 

issuance in that year (Chart 4.12.11). Tighter 

spreads benefit ABS issuers by lowering their 

cost of financing through securitization.

0

50

100

150

200

250

300

350

0

50

100

150

200

250

300

350

2006 2008 2010 2012 2014 2016 2018

YTD

4.12.10 ABS Issuance

Billions of US$ Billions of US$

Source: Thomson Reuters, SIFMA

As Of: Sep-2018

Credit Card

Auto

Student Loans

Other

Equipment

4.12.10 ABS Issuance 
Financial Developments 77

4.12.4 Agency REITs

Total assets of agency REITs increased from 

$251 billion to $287 billion over the second 

half of 2017, before falling to $269 billion as 

of the second quarter of 2018 (Chart 4.12.12). 

The increase in 2017 stopped a trend of 

steady declines from a peak of $418 billion 

in 2012. The market remains concentrated 

with approximately 64 percent of the share of 

total assets within two REITs. Leverage—as 

measured by the ratio of total assets to equity—

has increased from 6.7 to 7.1 between June 

2017 and June 2018. Leverage is below precrisis levels of 10 to 12. Leverage ratios among 

individual agency REITs continue to range 

widely, with a range of 2.3 to 10.3 in the second 

quarter of 2018. 

Agency REITs use short-term financing, 

mainly repos, to fund the purchase of agency 

MBS. Most agency REITs also use derivatives 

to hedge at least a portion of the inherent 

duration mismatch between their assets and 

liabilities. However, prepayment risk and basis 

risk limit the efficacy of hedging with interest 

rate derivatives. Consequently, agency REITs’ 

investment strategy exposes them to interest 

rate risk resulting from changes in the yield 

curve and convexity risks, or the risk of MBS 

prices falling at an increasing rate when rates 

rise. Yields on MBS rose towards the end of 2017 

into the first quarter of 2018, and were around 

the same level before rising in September and 

October of 2018. In October 2017, the Federal 

Reserve began to reduce the size of its balance 

sheet, which includes a runoff of agency MBS 

acquired during post-crisis asset purchases. By 

October 2018, the Federal Reserve’s holdings of 

agency MBS had decreased about $100 billion 

to $1.67 trillion. The spread between yields on 

MBS and financing costs has been decreasing as 

the yield curve has been flattening. 

0

20

40

60

80

100

0

20

40

60

80

100

2010 2011 2012 2013 2014 2015 2016 2017 2018

4.12.11 Select ABS Spreads

Basis Points Basis Points

Source: J.P. Morgan

Subprime Auto Fixed BBB 3-Year

Prime Auto Fixed AAA 3-Year

Credit Card Fixed AAA 3-Year

As Of: 27-Sep-2018

Note: Spreads to swaps.

4.12.11 Selected ABS Spreads 

As Of: 2018 Q2

0

100

200

300

400

500

0

3

6

9

12

15

18

2000 2003 2006 2009 2012 2015 2018

4.12.12 Agency REIT Assets and Leverage

Ratio Billions of US$

Source: Bloomberg, L.P.

Leverage

(left axis)

Total Assets (right axis)

Note: Leverage is the ratio of total 

assets to equity. Not all agency REITs 

existed in all time periods in the figure.

4.12.12 Agency REIT Assets and Leverage 
78 2018 FSOC / / Annual Report

Share prices of agency REITs largely decreased 

since mid-2017 despite broad gains in domestic 

equity markets. The aggregate price-to-book 

(P/B) ratio for agency REITs continues to be 

around 1.0 (Chart 4.12.13). Prior to 2017, the 

sector had an aggregate P/B ratio below 1.0 for 

16 consecutive quarters dating back to mid-2013.

4.13 Investment Funds

4.13.1 Money Market Mutual Funds

The AUM of U.S. MMFs increased 5.6 percent 

in 2017 and 1.2 percent from January to 

October 2018. MMF assets totaled $3.2 trillion 

in October 2018. Prime funds averaged 22 

percent of total MMF assets as of October 2018, 

a slight increase from the 21 percent average 

during 2017. Government MMFs averaged 73.2 

percent and 74.4 percent, respectively, during 

those periods (Chart 4.13.1). 

MMF industry consolidation continued in 2017 

but moderated in 2018. The number of MMFs 

declined from 413 in 2016 to 379 in 2017; the 

number increased to 381 in October 2018. 

The five largest MMF complexes managed 55 

percent of all MMF assets in October 2018, up 

from 52 percent at the end of 2017. The ten 

largest advisers managed 77 percent of all MMF 

assets in October 2018, up slightly from 76 

percent in 2017.

MMF yields increased in 2017 and 2018, along 

with U.S. short-term interest rates (discussed 

separately below). Yields offered by prime 

MMFs increased to 2.19 percent in October 

2018 from 1.31 percent at the end of 2017. Yields 

for government MMFs were 2.23 percent in 

October 2018 from 1.33 percent in 2017. Yields 

for tax-exempt MMFs were 1.66 percent in 

October 2018 and 1.59 percent in 2017. 

Prime MMFs’ daily liquidity—the share of 

assets convertible to cash within one business 

day—averaged 31 percent of assets through 

October 2018—somewhat lower than the 

average of 33 percent during 2017. This is 

significantly higher than the 10 percent 

20

30

40

50

60

70

20

30

40

50

60

70

2011 2012 2013 2014 2015 2016 2017 2018

4.13.2 Liquid Asset Shares of Prime MMFs

Percent of Total Assets Percent of Total Assets

Source: SEC 

As Of: Oct-2018

Daily Liquidity

Weekly Liquidity

Note: Weighted by fund size.

4.13.2 Liquid Asset Shares of Prime MMFs 

0

1

2

3

4

0

1

2

3

4

2011 2012 2013 2014 2015 2016 2017 2018

4.13.1 MMF Assets by Fund Type

Trillions of US$ Trillions of US$

Source: SEC

As Of: Oct-2018

Prime

Government and Treasury

Tax-Exempt

4.13.1 MMF Assets by Fund Type 

0.0

0.5

1.0

1.5

2.0

0.0

0.5

1.0

1.5

2.0

2000 2003 2006 2009 2012 2015 2018

4.12.13 Agency REIT Price-to-Book Ratio

Ratio Ratio

Source: Bloomberg, L.P. 

As Of: 2018 Q2

Note: Price-to-book ratio is weighted by 

market capitalization. Not all agency REITs 

existed in all time periods in the figure.

4.12.13 Agency REIT Price-to-Book Ratio 
Financial Developments 79

required by SEC rules. Weekly liquid assets (the 

share convertible to cash within five business 

days) averaged 50 percent in 2018 through 

October, little changed from 2017 and well 

above the 30 percent minimum required under 

SEC rules (Chart 4.13.2). 

The WAM of a fund is a measure of the 

sensitivity of the market value of its portfolio 

holdings to interest rate changes. MMF 

managers tend to keep maturities short during 

periods of rising rates, to minimize potential 

negative impact on market values of portfolio 

securities, and to allow the short- maturity 

securities to be rolled into higher-yielding ones 

more quickly. Prime MMFs’ average WAM was 

28.5 days through October 2018, down from 

an average of 29.1 days during 2017 and stood 

below the 60 days limit maximum permitted 

under SEC rules (Chart 4.13.3). 

The Federal Reserve’s overnight reverse 

repurchase agreement (ON RRP) facility is 

a supplementary policy tool that the Federal 

Reserve uses to help keep the federal funds 

rate in the target range set by the FOMC. 

Eligible MMFs have loaned cash to the FRBNY 

through the facility since regular testing began 

in September 2013. Over the past several 

years, ON RRP investments have been an 

important part of MMF portfolio holdings, 

especially during periods when traditional 

repo counterparties did not offer attractive 

opportunities. More recently, MMFs averaged 

$29 billion in lending through the ON RRP 

facility through October 2018, down from an 

average of $226 billion during all of 2017.

0

10

20

30

40

50

60

0

10

20

30

40

50

60

2013 2014 2015 2016 2017 2018

4.13.3 Weighted Average Maturity by Fund Type

Basis Points Basis Points

Source: SEC

Tax-Exempt

Government and Treasury

Prime

As Of: Oct-2018

4.13.3 Weighted Average Maturities by Fund Type 
80 2018 FSOC / / Annual Report

4.13.2 Mutual Funds

The AUM of the U.S. mutual fund industry 

increased 17 percent in 2017 and 4.1 percent 

in the first nine months of 2018; industry 

AUM totaled $16.6 trillion in September 2018. 

Mutual fund assets constituted approximately 

71 percent of total U.S. investment company 

AUM (Chart 4.13.4). The vast majority of 

recent mutual fund growth is due to capital 

appreciation, rather than investor inflows. 

-50

-25

0

25

50

-50

-25

0

25

50

2013 2014 2015 2016 2017 2018

Source: ICI, Haver Analytics

Billions of US$ As Of: Sep-2018

4.13.6 Monthly Equity Mutual Fund Flows

Billions of US$

4.13.6 Monthly Equity Mutual Fund Flows 

0

5

10

15

20

25

0

5

10

15

20

25

1996 1999 2002 2005 2008 2011 2014 2017

4.13.4 Net Assets of the Investment Company Industry

Trillions of US$ As Of: 2018 Q3 Trillions of US$

ETFs

Other

Equity Mutual Funds

Bond/Hybrid Mutual Funds

MMFs

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

funds. 2018 YTD figures include 2017 UIT data, which is reported 

Source: annually. ICI, Haver Analytics

-75

-50

-25

0

25

50

-75

-50

-25

0

25

50

2013 2014 2015 2016 2017 2018

Source: ICI, Haver Analytics

Billions of US$ As Of: Sep-2018

4.13.5 Monthly Bond Mutual Fund Flows

Billions of US$

Tax-Exempt

Taxable

4.13.4 Net Assets of the Investment Company Industry 

4.13.5 Monthly Bond Mutual Fund Flows 
Financial Developments 81

Mutual funds experienced net cash outflows 

during most months of 2018, driven largely by 

equity fund outflows (Charts 4.13.5, 4.13.6). 

High yield bond funds’ 2017 outflows continued 

into early 2018, reflecting the anticipated 

negative effect of tax law changes on issuers of 

lower rated debt. Flows to bank loan funds were 

varied in 2017, yet inflows to bank loan funds 

were consistently strong in 2018 and totaled 

$17 billion through September 30, on the 

backdrop of increasing interest rates (Charts 

4.13.7, 4.13.8). Alternative mutual funds—

which include funds that implement long-short, 

market-neutral, and inverse strategies, and 

which at one time were a fast-growing category 

of mutual funds—incurred small net inflows 

in 2017 and notable net outflows through 

September 2018 (Chart 4.13.9).

-30

-20

-10

0

10

20

30

-30

-20

-10

0

10

20

30

2006 2008 2010 2012 2014 2016 2018

4.13.7 High-Yield Mutual Funds: Quarterly Flows

Billions of US$ Billions of US$

Source: Morningstar, Inc.

As Of: 2018 Q3

4.13.7 High-Yield Mutual Funds: Quarterly Flows 

-20

-10

0

10

20

30

-20

-10

0

10

20

30

2006 2008 2010 2012 2014 2016 2018

4.13.8 Bank Loan Mutual Funds: Quarterly Flows

Billions of US$ Billions of US$

Source: Morningstar, Inc.

As Of: 2018 Q3

4.13.8 Bank Loan Mutual Funds: Quarterly Flows 

-20

-10

0

10

20

-20

-10

0

10

20

2006 2008 2010 2012 2014 2016 2018

4.13.9 Alternative Mutual Funds: Quarterly Flows

Billions of US$ Billions of US$

Source: Morningstar, Inc.

As Of: 2018 Q3

4.13.9 Alternative Mutual Funds: Quarterly Flows 
82 2018 FSOC / / Annual Report

Investors have continued to gravitate away from 

actively managed equity funds and towards 

lower-cost, index-based equity funds. As of 

September, 2018, passively managed mutual 

funds and ETFs represented 47 percent of 

U.S. equity fund AUM, up from 26 percent in 

2009. In the twelve months ending September 

2018, inflows to passively managed equity 

funds totaled $306 billion, while their actively 

managed counterparts saw outflows of $143 

billion (Chart 4.13.10). In fixed income mutual 

funds, both actively managed and index funds 

have continued to experience inflows.

4.13.3 Exchange-Traded Products

Exchange-traded products (ETPs) include 1940 

Act registered ETFs, non-1940 Act registered 

ETPs (such as those that primarily hold 

commodities or physical metals), and exchangetraded notes (ETNs). In 2017 and 2018, U.S. 

ETPs continued to expand at a faster rate 

than many other SEC registered investment 

vehicles. AUM increased 35 percent in 2017 

and an additional 8.7 percent over the first 

nine months of 2018, reaching $3.7 trillion by 

September (Chart 4.13.11). AUM growth has 

been primarily driven by inflows, which totaled 

$465 billion in 2017 and $214 billion in the first 

nine months of 2018. 

In the first three quarters of 2018, domestic 

equity and taxable bond ETPs respectively 

accounted for 42 percent and 31 percent of total 

inflows. In 2017, international equity, domestic 

equity and taxable bond ETPs respectively 

accounted for 32 percent, 31 percent, and 26 

percent of total ETP inflows. 

The industry remains concentrated, as the 

three largest managers account for 81 percent 

of ETP assets and the top ten managers account 

for 95 percent. The number of available ETPs 

increased 7.5 percent in 2017 and an additional 

5.1 percent over the first nine months of 2018, 

driven by products focused on alternative asset 

classes or strategies. 

-1.5

-1

-0.5

0

0.5

1

1.5

-1.5

-1

-0.5

0

0.5

1

1.5

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

4.13.10 Cumulative Equity Fund Flows

Trillions of US$ Trillions of US$

Source: Morningstar, Inc.

As Of: Sep-2018

Note: Includes ETFs and mutual funds.

International Passively Managed

International Actively Managed

U.S. Passively Managed

U.S. Actively Managed

4.13.10 Cumulative Equity Fund Flows 

-1.0

0.0

1.0

2.0

3.0

4.0

-1.0

0.0

1.0

2.0

3.0

4.0

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

4.13.11 U.S.-Listed ETP AUM

Trillions of US$ Trillions of US$

Source: Morningstar, Inc.

As Of: Sep-2018

Cumulative Flows to ETFs

Cumulative Market Appreciation

AUM

4.13.11 U.S.-Listed ETP AUM 
Financial Developments 83

ETFs, which constitute most ETP assets, 

accounted for approximately 16 percent of the 

U.S. investment company industry in September 

2018, up from 15 percent in 2017, and 13 

percent in 2016. Index-based ETFs across nearly 

all asset classes experienced strong rates of net 

asset growth over this time period. Additionally, 

so-called strategic- or smart-beta ETFs, which 

differ from traditional index-based funds by 

targeting certain risk and return characteristics 

such as volatility or income, grew rapidly in 2017 

and 2018. Approximately 21 percent of ETF 

assets are in strategic beta products. 

On February 5, 2018, volatility-linked inverse 

ETPs experienced turbulence following an 

unprecedented surge in the VIX (see Box D). 

Adjustments made to ETP portfolios on that day 

were an important share of the overall trades in 

some VIX futures contracts. As a result of this 

episode, two ETPs, managed by Credit Suisse 

and Nomura, were shut down. 

4.13.4 Pension Funds

As of the second quarter of 2018, the combined 

AUM of U.S. private and public pensions was 

$23 trillion, 4.0 percent higher than one year 

earlier. Including estimated IRAs, retirement 

fund assets totaled $32 trillion (Chart 4.13.12). 

Changes to pension allocations can amplify asset 

price volatility. However, the broader impact of 

such changes and potential risks emanating from 

pension funds are difficult to assess given data 

limitations, including lack of uniform reporting, 

timeliness, and granularity of pension assets, 

liabilities, and return assumptions. 

0

4

8

12

16

20

24

28

32

36

0

4

8

12

16

20

24

28

32

36

2007 2009 2011 2013 2015 2017

Source: Federal Reserve, Haver Analytics

Trillions of US$ As Of: 2018 Q1

4.13.12 Retirement Fund Assets by Plan Type

Trillions of US$

Private Defined Benefit Plans

Individual Accounts

Private Defined Contribution Plans

State and Local

Federal

4.13.12 Retirement Fund Assets by Plan Type 
84 2018 FSOC / / Annual Report

Corporate Plans 

Corporate defined benefit funded status—the 

estimated share of fund liabilities covered by 

current assets—rose in 2017 (Chart 4.13.13). 

One estimate of the funded status of the 100 

largest corporate defined benefit pension plans 

in the U.S. was 86 percent as of December 2017, 

an improvement from the previous year.

Multiemployer Plans 

The aggregated funded percentage of plans 

in the multiemployer sector is 81 percent 

according to an estimate from Milliman. While 

the Pension Benefit Guaranty Corporation 

(PBGC) projects the majority of multiemployer 

plans will remain solvent, a core group of 

plans appears unable to raise contributions 

sufficiently to avoid insolvency. According to the 

PBGC, over 1.3 million participants are covered 

in the 130 plans that have declared that they 

will likely face insolvency over the next 20 years. 

The PBGC projects it will have insufficient 

funds to cover the projected future demands 

from multiemployer plans requiring financial 

assistance. It is more likely than not the PBGC 

multiemployer program will run out of money 

by 2025. If so, the PBGC will be unable to 

provide financial assistance to pay the full 

level of guaranteed benefits in insolvent 

multiemployer plans. 

The Kline-Miller Pension Reform Act allows 

multiemployer plans projected to become 

insolvent in less than 20 years (15 years in some 

cases) to apply to Treasury for permission 

to reduce pension benefits. They may apply 

if reducing benefits would allow the plan to 

remain solvent over the long-term and continue 

to provide benefits at least 10 percent higher 

than the level of the PBGC guarantee, with 

further protections for the aged and disabled. 

As of October 31, 25 plans have filed 34 

applications with Treasury. Eight applications 

have been approved, five applications have 

been denied, and twelve applications have been 

withdrawn. The remaining applications are in 

the process of being evaluated. 

60

70

80

90

100

110

120

60

70

80

90

100

110

120

2002 2004 2006 2008 2010 2012 2014 2016

4.13.13 Public and Private Pension Funding Levels

Source: NASRA Public Fund Survey, Milliman

2018 Corporate Pension Funding Study

Percent Percent

Public Defined 

Benefit Plans

Private Defined 

Benefit Plans

As Of: 2017

4.13.13 Public and Private Pension Funding Levels 
Financial Developments 85

Public Plans 

In 2017, the aggregate funded status of U.S. 

public pension plans was 72 percent, in line 

with the prior year. Also of note, public pension 

funds generally use a different set of accounting 

rules than private pension funds. These rules 

enable them to assume investment returns based 

on their own long-run expectations, which are 

significantly higher than average post-crisis 

returns, and thus could overstate funded status. 

A number of large public plans have continued 

to revise their long-term investment expectations 

downwards. The underfunding of certain 

public plans continues to exert fiscal pressure 

on their sponsoring municipalities including 

U.S. territories Puerto Rico and the U.S Virgin 

Islands, as well as certain municipalities such as 

Dallas and Chicago.

4.13.5 Alternative Funds

Hedge Funds 

The gross asset value (GAV) of hedge funds 

offered in the U.S. totaled $7.3 trillion in 2017, 

a 14 percent increase from the prior year. The 

funds’ NAV totaled $3.9 trillion, an 11 percent 

increase. These figures cover the approximately 

9,000 hedge funds and 1,700 hedge fund 

advisers that file SEC Form PF. 

Various measures of leverage at the largest 

hedge funds, including measures of off-balance 

sheet exposures, show increasing leverage in 

the industry. GAV divided by NAV, one balance 

sheet leverage measure, showed aggregate 

hedge fund leverage of 1.87 for 2017, roughly 

the same as 2016. Gross notional exposure 

divided by NAV, a measure including notional 

derivatives, showed aggregate hedge fund 

leverage over 6 during 2017, somewhat higher 

than in 2016. Removing interest rate derivatives 

from gross notional exposure yields ratios of 

between 4 and 5 during 2017, also somewhat 

higher than in 2016. The largest hedge funds 

are notably more leveraged than the industry 

aggregate; the most highly leveraged funds 

also increased their ratios in 2017. Using gross 

notional exposures, the 98th percentile of large 

hedge fund adviser leverage ranged from 12 to 
86 2018 FSOC / / Annual Report

14 in the second half of 2017, compared to 11 

to 12 for the prior eighteen months. Excluding 

interest rate derivatives, the 98th percentile 

ranged 8 to 9 in 2017; it ranged from 7 to 8 in 

2016. Top leverage ratios are higher at the fund 

level than the adviser-level ratios stated here. 

The hedge fund industry remains 

concentrated. The top 6 percent of funds filing 

Form PF account for 67 percent of all filers’ 

GAV and 90 percent of all filers’ gross notional 

exposure. These figures were little changed 

from 2016 to 2017. 

According to Hedge Fund Research (HFR) 

data, the hedge fund industry experienced 

modest net inflows of $10 billion in 2017 and 

small outflows in the first half of 2018. This 

follows large net outflows of $70 billion in 2016. 

The reduction in outflows can be attributed 

in part to improved fund performance in 2017 

combined with a continued reduction in hedge 

fund fees. 

Hedge fund returns continued to 

underperform the S&P 500. The HFR Global 

Hedge Fund index increased 1.3 percent from 

January 2018 to August 2018, far below the 7.4 

percent increase for the S&P 500 stock index. 

Private Equity

The GAV of private equity funds offered in the 

United States totaled $2.7 trillion in 2017, a 17 

percent increase from the prior year. The funds’ 

NAV totaled $2.4 trillion, also a 17 percent 

increase. These figures cover approximately 

11,500 private equity funds, for which 

approximately 1,100 private equity advisers filed 

information on Form PF. Data from Preqin, 

which cover less of the industry but offer a 

longer time series for comparison, show a 

similar growth rate in 2017 (Chart 4.13.14). 

The private equity industry remains 

concentrated. Large private equity advisers 

filing Form PF—those with $2 billion or more 

in AUM—made up 26 percent of all private 

equity advisers filing Form PF in 2017, and 

managed 71 percent of gross assets. 

0.0

0.4

0.8

1.2

1.6

0.0

0.4

0.8

1.2

1.6

2005 2007 2009 2011 2013 2015 2017

4.13.14 North American Private Equity AUM

Trillions of US$ Trillions of US$

Source: Preqin

As Of: 2017

Dry Powder

Unrealized Value

4.13.14 North American Private Equity AUM 
Financial Developments 87

For funds managed by large private equity 

advisers, pension funds remain the largest 

beneficial owners, accounting for 33 percent of 

net assets; other private funds account for 20 

percent, foreign official sector investors account 

for 11 percent, and insurance companies 

account for 6 percent. 

Acquisition-related activity backed by private 

equity continued to increase in 2017 and has 

surpassed 2017 levels year-to-date in 2018 for 

both leveraged buyouts and non-leveraged 

buyouts (Chart 4.13.15).

The private equity industry continues to 

attract investor inflows, in part because the 

sector is viewed as an attractive alternative 

to hedge funds. According to Preqin survey 

data, 95 percent of investors felt private equity 

investment met or exceeded their expectations 

in 2017, with over half planning to increase 

their allocation to private equity over the 

long-run. In 2017, private equity funds raised a 

record $450 billion in capital, with 79 percent 

of funds meeting or exceeding their target 

fundraising. Private equity underperformed the 

S&P 500 during the last one, five, and 10 years.

4.14 New Financial Products and Services 

Financial innovation in products and business 

practices has continued over the past year. 

Recently, much attention has been devoted to 

financial innovation enabled by technology, 

or ‘fintech,’ which is changing the way some 

financial services are provided. This trend 

has been particularly apparent in areas such 

as digital assets, payments, and marketplace 

lending. Over the past year, a great deal 

of discussion has also been devoted to the 

entrance (and further potential evolution in 

the market) of well-established technology 

and e-commerce firms into financial services. 

Additionally, incumbent financial institutions 

are increasingly relying on third-party service 

providers for important technology and datarelated services. 

0

50

100

150

200

250

0

50

100

150

200

250

2011 2012 2013 2014 2015 2016 2017 2018

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

Billions of US$ Billions of US$

Source: S&P LCD

As Of: 31-Oct-2018

LBO

Non-LBO

YTD

4.13.15 M&A Loan Volume for Private Equity-Backed Issuers
88 2018 FSOC / / Annual Report

4.14.1 Digital Assets

Digital assets, such as Bitcoin, have rapidly 

increased in value in recent years (Chart 

4.14.1). Their dollar value has also been highly 

volatile. Some sources estimated that market 

capitalization of digital assets reached $800 

billion in early 2018, then declined precipitously 

to $125 billion by August. Many digital assets 

are 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 may have 

applications that extend well beyond the 

simple transfer of value. In recent years, an 

increasing number of financial institutions 

have initiated proof of concept projects to 

evaluate the potential for the technology’s 

application in areas such as interbank and 

intrabank settlement, derivatives processing, 

repo clearing, and trade finance.

4.14.1 Market Capitalization of Blockchain-Based Digital Assets

Source: Coinmarketcap.com; OFR

0

50

100

150

200

250

300

350

0

50

100

150

200

250

300

350

Apr:13 Apr:14 Apr:15 Apr:16 Apr:17 Apr:18

Billion of US$ As Of: 30-Sep-2018 Billions of US$

Litecoin

Ripple

Etherum

Bitcoin

4.14.1 Market Capitalization of Blockchain-Based Digital Assets
Financial Developments 89

The dollar value of digital assets grew extremely 

rapidly in recent years. The massive price increase and 

volatility of Bitcoin—from $5 in 2012 to nearly $20,000 

in early 2018, and less than $7,000 in October 2018—

drew particular attention to digital assets from market 

participants, regulatory authorities, and international 

organizations. 

In late 2017, the Council formed a working group on 

digital assets to facilitate coordination among U.S. 

financial regulators regarding these markets. The 

working group is examining issues related to digital 

assets and distributed ledger technology, including 

financial institutions’ exposures to digital assets, 

potential cybersecurity and operational risks related 

to these assets, illicit activity undertaken with digital 

assets, and international coordination on these topics.

Digital assets pose new challenges to market integrity 

and regulatory frameworks designed to protect 

investors and the public. An offering of digital assets 

or of assets that use a distributed ledger or blockchain 

can be subject to the requirements of federal securities 

and other laws. In the United States, initial coin 

offerings (ICOs) involving digital assets such as coins or 

tokens may be securities offerings—based on specific 

facts about the offerings—and may therefore fall 

under the federal securities laws enforced by the SEC. 

Furthermore, participants in an ICO may be subject to 

anti-money laundering (AML) rules. 

New technologies can present opportunities for 

fraudulent schemes, market manipulation, and other 

illicit activity—including old schemes under new 

names and using new terminology. The SEC and 

CFTC have cautioned investors to be mindful of 

traditional “red flags” when making any investment 

decision, including deals that sound too good to be 

true; promises of high returns with little or no risk; 

high-pressure sales tactics; celebrity promotions; 

working with unregistered or unlicensed sellers; and 

trading on unregistered platforms. 

Payments made using digital assets pose serious 

money laundering and other illicit financing risks that 

must be assessed and aggressively countered by U.S. 

and non-U.S. regulators. The growing use of digital 

assets—including the development of new assets 

designed to enhance anonymity—to facilitate illicit 

activity, including cybercrime, fraud, extortion, drug 

trafficking, money laundering, tax evasion, and other 

crimes, poses material risks. 

Most of the risks posed by digital assets are not 

limited by national borders, so effective supervision 

and regulation of digital assets will require sustained 

bilateral and multilateral international engagement. In 

March 2018, G20 Finance Ministers and Central Bank 

Governors endorsed language in a communiqué that 

referenced crypto-assets—a subset of digital assets—

for the first time. Treasury and the representatives 

of Council member agencies to various international 

standard-setting bodies are working to assess and 

adopt, where appropriate, measures to mitigate 

risks associated with digital assets in a way that 

is responsive to the priorities of U.S. regulatory, 

supervisory, and enforcement authorities.

Treasury and relevant U.S. regulators are considering 

rationalized regulatory responses that are appropriate 

for digital assets and the financial activities involving 

them, while aggressively targeting persons using such 

assets to conduct fraudulent or other illicit activities.

Digital assets do not presently appear to pose a 

threat to the stability of the financial system. As 

discussed above, the estimated market capitalization 

of digital assets is still relatively small at less than 

$200 billion; for context, that is less than 1 percent 

of the market capitalization of U.S. stocks. Digital 

assets currently have limited use in the real economy 

or financial transactions. Nonetheless, the value and 

uses of digital assets could grow rapidly, which would 

substantially increase their importance to the financial 

system. The Council will continue to monitor potential 

risks presented by the use of digital assets as these 

markets evolve.

Box B: The Council’s Digital Assets Working Group
90 2018 FSOC / / Annual Report

4.14.2 Peer-to-Peer Payments 

Many consumers have gradually changed the 

ways they make payments (Chart 4.14.2). In 

the past few years, several new ways of making 

payments have developed. Peer-to-peer transfers 

allow consumers to make payments to other 

consumers or firms online, usually through 

a mobile device app. The apps are generally 

linked to debit or credit card accounts or bank 

accounts, and the funding transfers therefore 

proceed through existing bank-maintained 

payment networks. Although some providers of 

such services are relatively new companies and 

experienced substantial growth in 2016 and 

2017, banks and other existing financial service 

providers have also entered the market. 

4.14.3 Marketplace Lending 

Marketplace lending is 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 to one that uses significant 

capital from institutional investors to finance 

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. Although marketplace lending 

is growing, it continues to represent a small 

portion of overall lending. 

0

20

40

60

80

100

0

20

40

60

80

100

1989 1993 1997 2001 2005 2009 2013 2017

4.14.2 U.S. Consumer Adoption of Payment Instruments

Percent of Consumers As Of: 2017 Percent of Consumers

Source: Federal Reserve 

Bank of Boston

Note: Survey of Consumer Finances data 

from 1989 to 2007. Survey of Consumer 

Payment Choice data from 2008 to 2017.

Cash

Check

Online Banking Bill Payments

Checking Account

Credit

Debit

4.14.2 U.S. Consumer Adoption of Payment Instruments 
Financial Developments 91

4.14.4 Large Technology Firms in Financial 

Services

Over the past few years, large technology and 

e-commerce firms have entered, or explored 

entering, financial services markets. Often, 

these firms offer financial products or services 

to customers as part of their established 

business activity, such as providing loans to 

small businesses or individuals operating on 

their technology or e-commerce platforms. 

Some of these technology and e-commerce 

companies have features that could allow them 

to grow quickly as providers of financial services, 

including large customer networks, broad name 

recognition, and existing data on current and 

potential clients. Additionally, as non-financial 

entities, these technology firms may not be 

subject to the full set of regulations and oversight 

that apply to the financial institutions that 

provide the same or similar services. 

4.14.5 Reliance of Financial Institutions on ThirdParty Service Providers

Reliance by financial institutions on third 

parties to provide important operational 

functions has increased over the past several 

years. With the adoption of fintech innovations 

and the proliferation of large data sets, some 

financial institutions have outsourced portions 

of certain operational functions and data 

gathering requirements. Financial institutions 

are increasingly relying on third-party firms 

that aggregate and distribute market-wide data. 

They are also using outside cloud computing 

services to supplement existing technology 

infrastructures for data storage, redundancy, 

and computational capacity. These services have 

information and cost benefits, but relying on 

outside firms for critical data and services also 

creates risks. 

Regulatory Developments and Council Activities 93

Since the Council’s 2017 annual report, actions 

by financial regulatory agencies have included 

supervisory and company-run stress tests; 

supervisory review and comment on large banking 

organizations’ resolution plans; implementation 

of additional reforms of the derivatives markets; 

amendments to disclosure requirements for 

mutual funds and ETFs; and measures intended 

to enhance consumer protection. Regulators have 

also taken steps to further tailor certain existing 

regulations, including capital requirements and the 

rules implementing the Volcker Rule. The Council 

continued to fulfill its mandate to monitor potential 

risks to U.S. financial stability and serve as a forum 

for discussion and coordination among the member 

agencies. Following is a discussion of the significant 

financial regulatory reforms implemented since the 

Council’s 2017 annual report.

5.1 Safety and Soundness

5.1.1 Enhanced Capital and Prudential Standards and 

Supervision

Pursuant to section 165 of the Dodd-Frank Act, as 

amended by EGRRCPA, the Federal Reserve applies 

enhanced prudential standards to certain BHCs 

and nonbank financial companies supervised by 

the Federal Reserve. These requirements generally 

apply to U.S. G-SIBs and any other BHCs with $250 

billion or more in total consolidated assets, though 

they also apply to BHCs with $100 billion or more 

in total consolidated assets until November 2019. In 

addition, the Federal Reserve has the authority to 

apply any such standard to BHCs with $100 billion or 

more, but less than $250 billion, in total consolidated 

assets if it determines that application of the standard 

is appropriate to prevent or mitigate risks to U.S. 

financial stability or to promote safety and soundness. 

On July 5, 2018, the Basel Committee on Banking 

Supervision (BCBS) issued a revised framework that 

replaces the BCBS’s 2013 framework used to identify 

G-SIBs and impose higher capital requirements on 

these entities. The revised framework implements 

a number of changes to the framework that the 

BCBS proposed in March 2017. Among other 

changes, the 2018 revised framework introduces 

a new indicator for secondary capital markets 

activity in the substitutability category, modifies 

the definition of cross-jurisdictional indicators, 

expands the regulatory scope of consolidation to 

include insurance subsidiaries, and introduces a 

requirement that banks disclose the indicators used 

in their “final” G-SIB calculations, which in certain 

instances may require restatement. The revised 

assessment methodology will take effect in 2021.

On July 31, 2018, the OCC announced that it would 

begin considering applications for a special purpose 

national bank charter from financial technology 

(fintech) companies, provided they meet the 

requirements and standards for obtaining a charter. 

The OCC will consider applications from fintech 

companies to charter a special purpose national 

bank that would engage in one or more of the “core 

banking activities” of paying checks or lending 

money but would not take deposits and would not 

be insured by the FDIC. The OCC stated that a 

qualified fintech company that receives a special 

purpose national bank charter will be subject to 

the same high standards of safety and soundness 

and fairness that all federally chartered banks must 

meet, and will be supervised like similarly situated 

national banks, including with respect to capital, 

liquidity, and risk management. 

State financial services regulators are working to 

implement approaches to achieve harmonization 

in the state system of licensing and regulating 

nondepository financial institutions. Through 

the CSBS, state regulators have launched a multipronged initiative, known as Vision 2020, to 

develop a unified multi-state regulatory system for 

nondepository financial institutions by 2020. The 

core components of Vision 2020 include redesigning 

Nationwide Multistate Licensing System (NMLS), 

developing a comprehensive State Examination 

System, establishing a fintech industry advisory 

5 Regulatory Developments and Council Activities
94 2018 FSOC / / Annual Report

panel, and driving toward more efficient statefederal coordination in the supervision of bank 

third-party service providers. 

On August 6, 2018, the Federal Reserve published 

a final rule, issued pursuant to section 165(e) of the 

Dodd-Frank Act, establishing single-counterparty 

credit limits (the SCCL) for BHCs and FBOs with 

$250 billion or more in total consolidated assets. The 

Federal Reserve issued proposed rules in 2011 for 

domestic BHCs and in 2012 for FBOs, and issued a 

re-proposal in 2016. Among other changes, the rule 

limits the “net credit exposures” of covered firms to 

a single counterparty to a specified percentage of 

the covered firm’s eligible capital base, and includes 

modifications from the 2016 re-proposal intended to 

streamline compliance with the SCCL. 

On August 31, 2018, the OCC, Federal Reserve, and 

FDIC issued an interim final rule with request for 

comment, which amends the agencies’ LCR rule 

to treat liquid and readily marketable, investment 

grade (IG) municipal obligations as HQLA. The 

agencies published the interim final rule pursuant 

to section 403(b) of EGRRCPA. Section 403(a) of 

that Act amends section 18 of the Federal Deposit 

Insurance Act and requires the agencies, for 

purposes of their LCR rule and any other regulation 

that incorporates a definition of the term “highquality liquid asset” or another substantially similar 

term, to treat a municipal obligation as HQLA if that 

obligation is “liquid and readily-marketable” and 

“investment grade,” as of the LCR calculation date. 

On October 30, 2018, the Federal Reserve, OCC, 

and FDIC issued a proposal to implement the 

standardized approach for counterparty credit risk 

(SA-CCR), which would be used to determine the 

exposure amount of a derivative contract under 

the capital rule. SA-CCR is a non-models based 

approach that reflects current market conventions 

regarding the exchange of initial and variation 

margin as well as stress volatilities observed during 

the financial crisis. Advanced approaches banking 

organizations would be required to use SA-CCR 

instead of the existing Current Exposure Method 

(CEM); however, other banking organizations could 

choose to use either CEM or SA-CCR.

On October 31, 2018, the Federal Reserve invited 

public comment on a framework that would more 

closely align the prudential standards for large 

U.S. banking organizations with their risk profiles. 

The framework would establish four categories of 

prudential standards for banking organizations 

with $100 billion or more in total consolidated 

assets. The category of standards for a firm would 

be determined based on several risk-based factors, 

including asset size, cross-jurisdictional activity, 

reliance on short-term wholesale funding, nonbank 

assets, and off-balance sheet exposure. The 

proposals build on the Federal Reserve’s existing 

tailoring of its rules. The regulatory capital and 

liquidity aspects of the proposals were jointly 

developed with the FDIC and OCC.

5.1.2 Dodd-Frank Act Stress Tests and 

Comprehensive Capital Analysis and Review

Section 165(i) of the Dodd-Frank Act, as amended 

by EGRRCPA, and section 401(e) of EGRRCPA, 

currently requires two types of stress tests. First, 

the Federal Reserve must conduct supervisory 

stress tests of BHCs with $100 billion or more in 

total consolidated assets on an annual or periodic 

basis, depending on the size of the firm, and 

annual supervisory stress tests of nonbank financial 

companies designated by the Council for supervision 

by the Federal Reserve.

Second, section 165(i) of the Dodd-Frank Act, as 

amended, also requires periodic company-run stress 

testing by certain financial companies regulated 

by a primary federal financial regulatory agency; 

BHCs with $250 billion or more in total consolidated 

assets or that are U.S. G-SIBs; and nonbank financial 

companies designated by the Council. The statute 

also provides the Federal Reserve with discretion to 

require a BHC with between $100 and $250 billion 

in total consolidated assets to conduct periodic 

company-run stress tests. 

In addition, through CCAR, the Federal Reserve 

evaluates the capital adequacy and the capital 

planning processes of large BHCs, including the 

quality of the BHCs’ risk-management frameworks 

and proposed capital actions such as dividend 

payments and stock repurchases. On April 10, 2018, 

the Federal Reserve proposed changes to its capital, 
Regulatory Developments and Council Activities 95

capital planning, and stress-testing frameworks. 

The proposal would create a single, integrated 

capital requirement by combining the quantitative 

assessment of the CCAR program with the buffer 

requirements in the Federal Reserve’s regulatory 

capital rule. Other proposed changes to CCAR, 

intended to better align it with a firm’s anticipated 

actions during stress, include eliminating the 

current assumption in CCAR that a firm will carry 

out all nine quarters of its planned capital actions 

(such as dividends, repurchases, and issuances) in 

the stress test, instead requiring firms to prefund 

only four quarters of planned common stock 

dividends; modifying a current assumption in 

CCAR that a firm’s balance sheet will grow under 

stress to an assumption that balance sheet size will 

remain constant under stress; and eliminating the 

30 percent dividend payout ratio as a threshold for 

heightened scrutiny. 

5.1.3 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 a 

financial company. Section 165(d) of the Dodd-Frank 

Act requires nonbank financial companies designated 

by the Council for supervision by the Federal Reserve 

and certain BHCs—including FBOs that have 

intermediate BHCs within U.S. territory—to report 

periodically to the Federal Reserve, the FDIC, and the 

Council plans for their rapid and orderly resolution 

under the U.S. Bankruptcy Code in the event of 

material financial distress or failure—also referred 

to as living wills. Under EGRRCPA, BHCs with less 

than $100 billion in total assets are exempted from 

enhanced prudential standards, including resolution 

plan requirements. Any BHC with total consolidated 

assets of at least $100 billion but less than $250 billion 

is subject to resolution plan requirements for 18 

months after enactment of EGRRCPA (unless earlier 

exempted by the Federal Reserve), and the Federal 

Reserve may apply resolution plan requirements to 

any such BHC thereafter.

The Federal Reserve and the 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. 

If the Board of Governors of the Federal Reserve 

and the FDIC Board of Directors make such a joint 

determination, the agencies must notify the company 

of the deficiencies in its plan, and the company 

must resubmit its plan with revisions that address 

the deficiencies, including any proposed changes in 

business operations and corporate structure. The 

company must also explain why it believes that the 

revised plan is credible and would result in an orderly 

resolution under the U.S. Bankruptcy Code.

If a firm fails to adequately remediate its identified 

deficiencies, the Federal Reserve and the FDIC, 

acting jointly, may impose more stringent capital, 

leverage, or liquidity requirements, or restrictions 

on growth, activities, or operations of the firm, 

or its subsidiaries. If, following a two-year period 

beginning on the date of the imposition of such 

requirements, a firm still has failed to adequately 

remediate any deficiencies, the Federal Reserve and 

the FDIC, in consultation with the Council, may 

jointly require the firm to divest certain assets or 

operations to facilitate an orderly resolution of the 

firm in bankruptcy.

In December 2017, the Federal Reserve and 

FDIC jointly announced that their review of the 

resolution plans of the eight U.S. G-SIBs found no 

“deficiencies,” which are weaknesses severe enough 

to trigger a resubmission process that could result 

in more stringent requirements. The agencies also 

jointly determined that the plans of four of the 

G-SIBs (Bank of America, Goldman Sachs, Morgan 

Stanley, and Wells Fargo) had “shortcomings,” 

which are less-severe weaknesses that require 

additional work in their next plan. The agencies 

also communicated updated expectations for the 

next resolution plans for 19 FBOs and two domestic 

BHCs in January and March 2018, respectively. In 

July 2018, the agencies jointly announced that they 

were seeking public comment on revised resolution 

plan guidance for the eight U.S. G-SIBs. The 

proposed guidance would apply beginning with the 

July 1, 2019, resolution plan submissions of the firms.

In July 2018, ISDA published the ISDA 2018 U.S. 

Resolution Stay Protocol, which was published 

in response to regulations issued by the Federal 

Reserve, the FDIC, and the OCC in 2017 requiring 

certain qualified financial contracts (QFCs) of 
96 2018 FSOC / / Annual Report

G-SIB entities to contain provisions providing for 

cross-border recognition of U.S. special resolution 

regimes and stay and transfer provisions relating to 

cross-defaults arising from the entry of an affiliate of 

the G-SIB entity into certain resolution proceedings.

5.1.4 Volcker Rule

In July 2018, the Federal Reserve, FDIC, OCC, 

SEC, and CFTC issued a Federal Register notice 

seeking comment on a number of amendments to 

the regulations implementing the Volcker Rule. The 

existing regulations were issued by the five agencies 

in December 2013 and generally prohibit banking 

entities from (1) engaging in proprietary trading 

in securities, derivatives, commodity futures, and 

options on these instruments for their own account 

and (2) owning, sponsoring, or having certain 

relationships with hedge funds, private equity funds, 

and other covered funds. 

The proposed changes are intended to streamline 

the rule by eliminating or modifying requirements 

that are not necessary to effectively implement 

the statute, without diminishing the safety and 

soundness of banking entities. In particular, the 

proposal is intended to further tailor the rule’s 

compliance requirements based on the size 

of a firm’s trading assets and liabilities; revise 

the definition of “trading account” in the rule; 

clarify the scope of permissible market making, 

underwriting, and hedging activity; limit the 

impact of the rule on the foreign activity of foreign 

banks; and improve the effectiveness of the trading 

activity reporting requirements. In addition, 

the notice of proposed rulemaking stated that 

EGRRCPA amended the Volcker Rule by narrowing 

the definition of banking entity and by revising 

the statutory provisions related to the naming of 

covered funds. These amendments were effective 

upon enactment. The agencies plan to address 

these statutory amendments through a separate 

rulemaking process, and will not enforce the 2013 

final rule in a manner inconsistent with EGRRCPA.

5.1.5 Insurance

Macro Prudential Initiative 

The National Association of Insurance 

Commissioners (NAIC) continued work on its 

Macro Prudential Initiative (MPI).The MPI seeks 

to improve the ability of state insurance regulators 

and the insurance industry to address macroprudential risks. It focuses on four areas: liquidity, 

recovery and resolution, capital stress testing, and 

exposure concentrations. This past year, regulators, 

through the NAIC, implemented changes to life 

insurer reporting that will allow regulators to more 

quickly and easily identify potential liquidity risks. 

The NAIC continues to make progress on a liquidity 

stress testing framework for large life insurers 

meeting various activities thresholds.

U.S.-EU Covered Agreement

On September 22, 2017, the U.S.-EU Covered 

Agreement was signed by the Secretary of the 

Treasury and the U.S. Trade Representative on 

behalf of the United States and by the Estonian and 

EU Ambassadors to the United States. on behalf of 

the EU. A covered agreement is a written bilateral 

or multilateral agreement regarding prudential 

measures with respect to the business of insurance 

or reinsurance. 

In conjunction with signing the agreement, 

the United States released a policy statement 

that provides additional clarity for the domestic 

insurance sector on certain terms of the agreement 

and addresses how the United States intends to 

implement the agreement. The policy statement 

states that the agreement “affirms the United States 

system of insurance regulation, including the 

role of state insurance regulators as the primary 

supervisors of the business of insurance” in the U.S., 

and recognizes the key implementation role that 

state insurance regulators will play in meeting U.S. 

obligations under the agreement. 

In response to the Covered Agreement, the NAIC 

anticipates adopting changes to the Credit for 

Reinsurance Model Law and Credit for Reinsurance 

Model Regulation. These changes would provide 

states with a model law and regulation intended to 

align state law with the Covered Agreement and 

the U.S. Policy Statement. They would also provide 

a mechanism intended to offer similar treatment 

to insurers in other jurisdictions that comply with 

similar conditions. 
Regulatory Developments and Council Activities 97

The United States and the EU held the first meeting 

of the Joint Committee of the U.S.-EU Covered 

Agreement on March 6, 2018, in Brussels.

NAIC Initiatives

The NAIC continues to develop its group capital 

calculation, which is an analytical tool designed to 

give regulators information relating to the capital 

across an insurance group. Field testing of the group 

capital calculation is expected to begin by early 

2019. Once the field testing is completed, the NAIC 

expects the results to be used by state regulators to 

further improve the construction of the calculation. 

State insurance regulators, through the NAIC, also 

continue to work on refining other NAIC standards 

on examination, accounting, actuarial matters, 

reporting, valuation, and risk-based capital. 

The NAIC made enhancements to its cybersecurity 

examination standards (which are based upon the 

National Institute of Standards and Technology 

Cybersecurity Framework) in the NAIC Financial 

Condition Examiner’s Handbook.

The NAIC continues to work on a modified 

framework for reserve and capital requirements for 

variable annuities, which could reduce life insurers’ 

reliance on captive reinsurers. The changes are 

expected to be finalized by the summer of 2019, with 

an effective date of January 1, 2020, and a three-year 

phase-in period with early adoption permitted.

The NAIC adopted amendments to its Financial 

Analysis Handbook to finalize the guidance to 

be used by analysts beginning in March 2018 for 

conducting more risk-focused prospective solvency 

assessments in their monitoring of insurers. The 

NAIC adopted a proposal that finalizes the addition 

of a new Operational Risk Charge as a “capital addon requirement” to risk-based capital. In addition, 

the NAIC adopted an Enterprise Risk Report (Form 

F) Implementation Guide to assist insurers and state 

regulators in maximizing the usefulness of the form 

with its inclusion of best practices for consideration 

in preparing and reviewing such filings.

Terrorism Risk Insurance

Under the Terrorism Risk Insurance Program 

Reauthorization Act of 2015 (TRIPRA), Treasury 

has been required since 2016 annually to collect 

terrorism risk insurance information from insurers. 

This information forms the basis for various reports 

that Treasury issues under TRIPRA concerning 

the Terrorism Risk Insurance Program (TRIP). 

Beginning with the 2018 data call, Treasury and 

state insurance regulators through the NAIC 

coordinated and developed a consolidated TRIP 

data call (with similar information reported to 

Treasury and to state regulators) to reduce the 

burden on participating insurers.

In June 2018, Treasury published a Report on 

the Effectiveness of the TRIP. The report was 

based in large part on the information submitted 

by insurers during the 2017 and 2018 TRIP data 

calls and information submitted by interested 

parties. In the report, Treasury concluded that 

TRIP has been effective in making terrorism risk 

insurance available and affordable in the insurance 

marketplace and that the market for terrorism risk 

insurance appears to be relatively stable, with few 

observable differences in the relevant benchmarks.

International Association of Insurance Supervisors

FIO, the Federal Reserve, and state insurance 

regulators, along with the NAIC, are the U.S. 

members of the International Association of 

Insurance Supervisors (IAIS), the international 

standard-setting body for supervision of the 

insurance sector. On December 8, 2017, the IAIS 

released an interim consultation paper on an 

activities-based approach to addressing systemic risk. 

The paper set forth a four-step conceptual approach 

for the IAIS’s work on developing policy measures 

related to an activities-based approach. The steps 

involve identifying the activities that insurers engage 

in that could potentially threaten global financial 

stability, evaluating existing IAIS policy measures 

that may help mitigate the potential systemic 

risk, identifying risks associated with an activity 

that are not sufficiently mitigated by an existing 

policy measure, and developing policy measures or 

enhancing existing policy measures to address any 

residual systemic risk. 
98 2018 FSOC / / Annual Report

The U.S. members of the IAIS have participated in 

IAIS committees and working groups involved in the 

development of global capital standards that would 

apply to internationally active insurance groups 

(IAIGs). This work includes annual iterations of field 

test exercises that involve the collection and analysis 

of data from volunteer IAIGs, including some of the 

largest U.S.-based insurance groups. In 2018, the 

IAIS continued to develop group capital standards in 

furtherance of its goal of a single Insurance Capital 

Standard (ICS). In July 2018, the IAIS released 

ICS Version 2.0 for public feedback ahead of the 

monitoring period, which begins in 2020. In 2018, 

the IAIS also assisted in the collection and analysis 

of data toward the development of the Aggregation 

Method, a methodology that leverages the group 

capital calculation work that is being conducted by 

U.S. state regulators and the Building Block approach 

being developed by the Federal Reserve. 

In June 2018, the IAIS released the draft 

Common Framework for the Supervision of IAIGs 

(ComFrame) for public consultation. The IAIS’s 

Insurance Core Principles relate to all insurers 

within a jurisdiction, and ComFrame includes 

guidance and standards specific to IAIGs.

In 2018, the IAIS continued its work to enhance its 

systemic risk assessment framework by developing 

an activities-based approach to assessing potential 

systemically risky activities and consideration of policy 

measures to address such activities. In November 

2018, the IAIS released the Holistic Framework for 

Systemic Risk in the Insurance Sector, a consultation 

paper that proposes to evolve the IAIS’ current 

approach to assessing and mitigating systemic risk. 

Among other things, the elements of the Holistic 

Framework include an enhanced set of policy 

measures, a global monitoring exercise, supervisory 

authority to intervene with corrective measures as 

appropriate, and a mechanism to promote consistent 

implementation across jurisdictions. 

In light of the progress on the Holistic Framework, 

the FSB announced in November 2018 that it had 

decided not to engage in an identification of global 

systemically important insurers (G-SIIs) in 2018. 

The FSB stated that once the Holistic Framework

is finalized in November 2019, it will reassess the 

annual identification of G-SIIs in 2020.

5.2 Financial Infrastructure, Markets, and 

Oversight 

5.2.1 Derivatives, SDRs, Regulated Trading Platforms 

and CCPs

In June 2018, the CFTC issued a final rule amending 

its regulations relating to access to swap data 

held by swap data repositories (SDRs). The final 

rule implements certain provisions of the Fixing 

America’s Surface Transportation Act of 2015 (the 

FAST Act), which amended Title VII of the DoddFrank Act, and makes associated changes to the 

CFTC’s regulations governing the grant of access to 

swap data by SDRs to certain foreign and domestic 

authorities. This rule provides procedures for such 

authorities to request access to SDR data consistent 

with their mandates.

On November 5, 2018, the CFTC proposed 

amendments to rules relating to SEFs and the trade 

execution requirement in the Commodity Exchange 

Act. The amendments are designed to improve the 

CFTC’s existing swaps regulatory framework and 

promote more SEF trading and pre-trade price 

transparency. Under the proposal, a swap subject to 

the CFTC’s mandatory clearing requirement would 

generally be required to be executed on a DCM or 

SEF upon being listed for trading by such a facility. 

The CFTC also proposed amendments to permit 

SEFs to offer more variable execution methods for 

the swaps listed for trading on their platforms. The 

proposal is intended to reduce regulatory burdens 

for SEFs and swap market participants.

Widely reported instances of CDS market participants 

entering into arrangements involving intentional, or 

“manufactured” credit events in the credit derivatives 

market raised concerns among traders and regulators 

regarding the potential impact on the integrity of the 

market. Staff of the CFTC issued a statement in April 

2018 that manufactured credit events may constitute 

market manipulation and may severely damage the 

integrity of the CDS markets, including markets for 

CDS index products, and the financial industry’s 
Regulatory Developments and Council Activities 99

use of CDS valuations to assess the health of CDS 

reference entities. 

Crisis Management Groups (CMGs) have been 

established to coordinate resolution planning for 

two U.S. CCPs that are considered systemically 

important in more than one jurisdiction, consistent 

with international standards. The FSB’s Key 

Attributes of Effective Resolution Regimes for 

Financial Institutions, and Appendix II-Annex 1 of 

that document on resolution of financial market 

infrastructures (FMIs) and FMI participants, 

provide that the home authority for FMIs that have 

been determined to be systemically important in 

more than one jurisdiction should establish a CMG 

to coordinate resolution planning. Processes for 

cooperation and sharing information, both during 

a crisis and for purposes of resolution planning, 

should be set forth in cooperation arrangements 

that are specific to the CMG for each FMI. Work 

remains in finalizing the cooperation arrangements.

As discussed in Section 4.10.5, the provision of 

client clearing services is concentrated in a relatively 

small number of bank-affiliated clearing firms. 

However, in August 2018 the FSB, BCBS, Committee 

on Payments and Market Infrastructures (CPMI), 

and International Organization of Securities 

Commissions (IOSCO) released a report (“Analysis 

of central clearing interdependencies”) that 

noted that the concentration of client clearing 

had decreased compared to a September 2016 

analysis. Notwithstanding such fluctuations, this 

concentration, combined with the consolidation of 

FCMs, may create difficulties in porting customer 

positions and margin between FCMs after a default 

event, particularly in times of market stress. In 

the event of a default, the ability to port customer 

positions and margin is contingent on the existence 

of FCMs that are willing and able to expand their 

customer clearing business in a time of stress. 

FCMs need to have sufficient capital to fund this 

new business, including meeting bank capital 

requirements as well as incremental contributions 

to the CCP guarantee funds based on incremental 

risks cleared. FCMs must also comply with knowyour-customer and AML regulations when accepting 

these new customer positions. If non-defaulting 

FCMs are unwilling or unable to accept these new 

customers, it would be necessary to liquidate the 

positions of the customers of the defaulting FCM, 

which could have negative consequences on market 

participants generally and on the customers of the 

defaulting FCM specifically, as the liquidations may 

result in the loss of risk-management protection 

provided by the cleared derivatives. 

In August 2018, the FSB, BCBS, CPMI, and the 

IOSCO also released a consultative document 

regarding the effects of financial regulatory reforms 

on incentives to centrally clear OTC derivatives; 

this document considers the potential impact of 

the leverage ratio on clearing incentives, including 

the possible interaction with client porting in the 

event of a default. Evidence collected in preparation 

for the consultative document indicates that some 

aspects of regulatory reform may not incentivize 

provision of client clearing services. The reasoning 

provided is that some regulations aimed at 

improving institutional resilience may, in some 

circumstances, be discouraging individual firms 

from providing client clearing services. The final 

report was released in November 2018. The BCBS 

released its own consultative document in October 

2018 on potential changes to the leverage ratio’s 

treatment of client cleared derivatives. 

5.2.2 Securities and Asset Management

In October 2016, the SEC adopted a rule to enhance 

liquidity risk management by mutual funds and 

ETFs, including strengthening the 15 percent limit 

on illiquid investments, and rule amendments to 

require enhanced disclosure regarding liquidity and 

redemption practices. Large entities were initially 

required to adopt and implement a liquidity riskmanagement program and to comply with monthly 

and annual reporting requirements on portfolio 

liquidity information by December 1, 2018; smaller 

entities had until June 1, 2019 to comply with these 

requirements. In February 2018, the SEC postponed 

the compliance date for open-end funds to classify 

their portfolio investments as part of Rule 22e4, which mandates programs for assessing and 

managing liquidity risks. The postponement gives 

large funds until June 1, 2019, and small funds 

until December 1, 2019, to assign their portfolio 

investments to four buckets ranging from “highly 

liquid” to “illiquid.” 
100 2018 FSOC / / Annual Report

In June 2018, the SEC amended certain of the 

liquidity-related disclosure requirements. The 

amendments replaced a requirement that funds 

publicly disclose the aggregate percentage of their 

assets that fall into specified liquidity classifications 

with a new requirement that funds briefly describe 

the operation and effectiveness of their liquidity 

risk-management programs in their shareholder 

reports. These amendments were designed to 

provide investors with accessible and useful 

information about the liquidity risk-management 

practices of the funds they hold.

In June 2018, the SEC proposed a rule that would 

replace the SEC’s current approach of issuing 

individual orders for exemptive relief for ETFs, 

in order to create a consistent, transparent, and 

efficient regulatory framework. The ETF market 

currently operates under more than 300 individually 

issued exemptive orders that have varied over time 

in wording and terms. 

The SEC is also working on a number of initiatives 

to improve disclosure for Main Street investors 

by modernizing the design, delivery, and content 

of mandated disclosures. First, the SEC issued 

a request for public comment to gain insight on 

ways to improve and modernize fund disclosures. 

Second, the SEC adopted a new rule that creates an 

optional “notice and access” method for delivering 

fund shareholder reports. Under new Rule 30e-3, a 

fund may deliver its shareholder reports by posting 

them on a website that is free of charge and sending 

investors multiple notices in paper through the mail 

letting them know that the report is available either 

on the website or in paper.

The SEC also proposed a rule to modernize 

disclosures for variable annuity and variable 

life insurance products. The proposal would 

use a layered disclosure approach designed to 

provide investors with key information related to 

a contract’s terms, benefits, and risks in a concise 

and more reader-friendly presentation, with access 

to more detailed information available online and 

electronically or in paper format on request.

In July 2018, the SEC adopted new Form ATS-N and 

amendments to Regulation ATS and Exchange Act 

Rule 3a1-1, with the goal of enhancing transparency 

and oversight of alternative trading systems (ATSs) 

that trade stocks listed on a national securities 

exchange. The amendments require certain ATSs 

to file public disclosure on Form ATS-N to enable 

market participants to assess potential conflicts of 

interest and inform market participants about the 

operation of the ATS, including order types, fees, 

and the ATS’s execution and priority procedures. 

The amendments also establish a process for the 

SEC to review Form ATS-N filings and declare such 

filings ineffective.

In November 2018, the SEC adopted amendments to 

facilitate enhanced transparency by broker-dealers 

to customers regarding the handling of their orders. 

Upon request of its customer, a broker-dealer must 

provide specific disclosures related to the routing 

and execution of the customer’s NMS stock orders 

submitted on a not-held basis for the prior six 

months, subject to de minimis exceptions. The 

Commission also made targeted enhancements to 

quarterly public disclosures on order routing. 

5.2.3 Operational Risks for Technological Systems 

and Cybersecurity

In April 2018, the Federal Financial Institutions 

Examination Council (composed of the Federal 

Reserve, BCFP, FDIC, NCUA, OCC, and the State 

Liaison Committee) issued a joint statement for 

financial institutions regarding the role of cyber 

insurance in risk management of information 

technology systems. The statement noted that, while 

cyber insurance is not required by the agencies, 

cyber insurance may be a component of a broader 

risk-management strategy that includes identifying, 

measuring, managing, and monitoring cyber risk 

exposure. The joint statement further notes that 

insurance is not a substitute for maintaining sound 

cybersecurity controls. 

5.2.4 Accounting Standards

In August 2018, the Financial Accounting Standards 

Board (FASB) issued Accounting Standards Update 

2018-12: Targeted Improvements to the Accounting 

for Long-Duration Contracts (FASB Topic ASC 

944, Financial Services—Insurance.). The new 

guidance will significantly change the measurement 

and disclosures for many long-duration contracts 
Regulatory Developments and Council Activities 101

issued by insurers and reinsurers. The changes were 

intended to provide users of financial statements 

with more information about insurance liabilities, 

including the amount, timing and uncertainty of 

an insurer’s cash flows related to long-duration 

contracts, and alleviate differences in practice. 

Insurers will have to review and update, if necessary, 

the assumptions they use to measure insurance 

liabilities at least annually, rather than retain the 

assumptions made at contract inception over the 

contract’s life, which can extend for several decades 

over multiple economic cycles. The guidance also 

changes how insurers recognize and measure 

deferred acquisition costs and requires embedded 

guarantees that meet the definition of market risk 

benefits to be measured at fair value. In addition, 

the guidance modifies the discounting of liabilities 

for future policy benefits, which will be based upon 

an upper-medium grade fixed income instrument 

yield and updated each reporting period. The 

implementation effort will require significant 

changes to systems, processes, and controls, and 

will likely require the accumulation of data that has 

not previously been captured and included in the 

actuarial models in the format and grouping needed 

for the measurement.

This change will be effective for public business 

entities for fiscal years beginning after December 

15, 2020; other entities have an additional year to 

comply. Earlier application is permitted. Due to the 

required modified retrospective adoption, insurers 

will need to begin to capture and retain this 

additional data as early as January 2019.

Financial institutions continue to prepare for 

the implementation of ASU 2016-13, Financial 

Instruments-Credit Losses (Topic 326); 

Measurement of Credit Losses on Financial 

Instruments, commonly referred to as the current 

expected credit losses methodology (CECL). Under 

CECL, collection expectations are updated at 

each reporting period such that the net amount 

recognized on the balance sheet represents the 

amount expected to be collected. The standard 

also requires consideration of a broader range of 

supportable information to determine credit loss 

estimates. The scope includes financial assets, such 

as loans, debt securities, reinsurance receivables, 

and commitments to extend credit. The guidance 

allows an institution to apply methods that 

reasonably reflect its expectations of the credit 

loss estimate. An institution is permitted to revert 

to historical loss information that is reflective of 

the contractual term (considering the effect of 

prepayments) for periods that are beyond the 

timeframe for which the entity is able to develop 

reasonable and supportable forecasts of loss. In 

other words, the allowance model considers events 

that have not occurred but can be expected in the 

future. An adjustment to allowance for credit losses 

will be required when an institution transitions from 

the current incurred loss methodology to CECL. 

The effective date for CECL is between 2020 and 

2022, depending on the type of entity. 

5.3 Mortgages, Consumer Protection, and 

Community Reinvestment Act

5.3.1 Mortgages and Housing Finance

In June 2018, the FHFA issued a proposed 

regulation on capital requirements for the 

Enterprises. The proposed rule would implement a 

new framework for risk-based capital requirements 

and a revised minimum leverage capital 

requirement for the two entities. The proposed 

rule builds on the FHFA’s work to develop a 

Conservatorship Capital Framework that is being 

used to align the entities’ capital guidelines. The 

FHFA suspended regulatory capital requirements 

after placing the Enterprises into conservatorships 

in September 2008, and the capital requirements 

in the rule would also be suspended while the two 

entities remain in conservatorship. 

In August 2018, FHFA issued guidance to FHLBs 

for maintaining sufficient amounts of liquidity to 

enable FHLBs to provide advances and fund letters 

of credit for members during a sustained capital 

markets disruption. FHFA contemporaneously 

issued a supervisory letter to FHLBs that identified 

the initial thresholds for the various measures of 

liquidity described in the guidance. FHFA noted 

that although the guidance sets expectations for how 

FHLBs may best measure and maintain sufficient 

liquidity, the FHLBs should also assess liquidity risk 
102 2018 FSOC / / Annual Report

and use liquidity metrics commensurate with their 

funds’ management strategies.

5.3.2 Consumer Protection and Community 

Reinvestment Act

In August 2018, the OCC issued an ANPR to seek 

public comment on ways to transform or modernize 

the regulations that implement the CRA. 

EGRRCPA includes provisions intended to 

provide protections for veterans, consumers and 

homeowners, as well as provisions related to credit 

reporting. EGRRCPA amends the Fair Credit 

Reporting Act to increase the length of time a 

consumer reporting agency must include an initial 

fraud alert in a consumer’s file. EGRRCPA generally 

requires a nationwide consumer reporting agency 

to provide a consumer with free credit freezes, and 

remove security freezes at a consumer’s request, 

and provides additional protections for security 

freezes for minors and incapacitated individuals. In 

addition, EGRRCPA adds limitations regarding the 

inclusion of a veteran’s medical debt in a consumer 

credit report, and establishes a dispute process and 

verification procedures for veterans with respect to 

the inclusion of such information. 

In July 2017 and April 2018, the BCFP published 

amendments to the TILA-RESPA Integrated 

Disclosures (TRID) rule issued by the BCFP in 2013 

and which was effective in October 2015. The TRID 

rule implemented a requirement in the Dodd-Frank 

Act directing the BCFP to consolidate multiple 

required closed-end mortgage loan disclosures into a 

Loan Estimate (provided after loan application) and 

a Closing Estimate (provided prior to closing). The 

disclosures are intended to provide borrowers with 

accurate and understandable information about their 

loan and closing costs. The 2017 amendment revised 

and clarified the TRID rule to address industry 

implementation questions, with a compliance date 

of October 1, 2018. The 2018 amendment, which was 

effective on June 1, 2018, modified when mortgage 

lenders may, with a valid justification, pass on 

increased closing costs to consumers and disclose 

them on a Closing Disclosure. 

EGRRCPA also amended the Home Mortgage 

Disclosure Act (HMDA) to provide certain insured 

banks and credit unions with a partial exemption 

from certain new and expanded HMDA data 

collection and reporting requirements. Specifically, 

banks and credit unions that originated fewer 

than 500 closed-end mortgages in each of the two 

preceding calendar years or fewer than 500 openend lines of credit in each of the two preceding 

calendar years are exempted from many of 

HMDA’s expanded data collection and reporting 

requirements for that type of transaction, provided 

they achieve certain CRA compliance ratings. In 

August 2018, the BCFP issued an interpretive and 

procedural rule specifying the data points that 

do not need to be collected and reported if an 

institution qualifies for a partial exemption. The 

partial exemptions cover most new data points 

required by the BCFP’s rulemaking in 2015, 

which largely implemented the Dodd-Frank Act 

amendments to HMDA.

In July 2018, the BCFP and the federal banking 

agencies released statements reminding institutions 

of their compliance statements issued in December 

2017. Based on these statements, for HMDA data 

collected in 2018 and reported in 2019, the BCFP 

and the federal banking agencies do not intend to 

require data resubmission unless data errors are 

material. Furthermore, they do not intend to assess 

penalties with respect to data errors. As explained in 

the statement, any supervisory examinations of 2018 

HMDA data will be diagnostic to help institutions 

identify compliance weaknesses and will credit goodfaith compliance efforts.

5.4 Data Scope, Quality, and Accessibility

5.4.1 Data Scope

Securities Financing Data Collection 

In July 2018, the OFR issued a proposed rule 

establishing a data collection covering centrally 

cleared transactions in the U.S. repo market. This 

proposed collection would require daily reporting 

by covered central counterparties. The data would 

be submitted directly to the FRBNY and would 

be used to enhance the ability of the Council and 

the OFR to identify and monitor risks to financial 

stability and to support the calculation of the SOFR 

and the Broad General Collateral Rate. In October 
Regulatory Developments and Council Activities 103

2018, the Council approved the sharing of the data 

to be collected under the rule with the FRBNY.

5.4.2 Data Quality

Legal Entity Identifier 

The LEI is a globally recognized, unique, 

20-character, alphanumeric code assigned to a legal 

entity that registers to receive it. Assigned LEIs are 

intended to enable the precise identification of 

counterparties, in order to increase transparency 

and enable risk oversight. As of November 27, 2018, 

more than 1.32 million LEIs had been issued by 32 

operational issuers that were approved to issue LEIs. 

Approximately 36 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 34 percent increase from 

year-end 2017. The increase has been largely driven 

by the use of the LEI in derivatives reporting and 

new mandatory LEI reporting in Europe under the 

revised Markets in Financial Instruments Directive 

(MiFID II) and Regulation (MiFIR), which became 

effective in January 2018. In markets where the use of 

the LEI is not mandated, issuance has been uneven. 

Approximately 19 percent of the entities that have 

obtained LEIs are behind schedule with regard to 

the annual renewal and verification of their LEI 

reference data. While this proportion has shrunk 

over time, Council member agencies and other global 

financial regulators continue to monitor renewal 

rates and to participate in other joint efforts to 

increase the quality of LEI reference data.

Reporting of Derivatives Data

During the past year, Council members including 

the CFTC, OFR, SEC, and Federal Reserve Board 

continued to lead and participate in derivatives data 

studies conducted by the FSB’s Working Group on 

UTI and UPI Governance (GUUG) and the CPMIIOSCO Working Group for the Harmonisation of 

Key OTC Derivatives Data Elements (Harmonisation 

Group). 

The GUUG’s objectives are to recommend the 

designation of one or more UPI Service Providers 

that will manage the issuance of UPIs and provide 

recommendations for the implementation and 

governance of a UPI system. In 2018, the GUUG 

published its second consultation paper on potential 

governance arrangements for the UPI and a provider 

self-assessment questionnaire. The GUUG is targeting 

the middle of 2019 for the completion of the provider 

designation process and governance design. 

A key development for the Harmonisation Group 

in 2018 was publication of technical guidance for 

critical data elements other than the UTI and 

UPI, and publication of a consultation paper on 

governance of those data elements. Other key 

developments for the GUUG included completion 

of the UTI governance framework and handover 

of the UTI to the International Organization for 

Standardization for standards development and 

implementation. 

5.5 Council Activities

5.5.1 Risk Monitoring and Regulatory Coordination

The Dodd-Frank Act charges the Council with 

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.

As discussed in Box B, in early 2018, the Council 

established a digital asset and distributed ledger 

technology working group. The working group 

brings together federal financial regulators whose 

jurisdictions are relevant to the oversight of digital 

assets and their underlying technologies. The 
104 2018 FSOC / / Annual Report

group seeks to enable the agencies to collaborate 

regarding these issues, including to promote 

consistent regulatory approaches and to identify and 

address potential risks. The working group has also 

conducted outreach to state regulators and lawenforcement authorities.

5.5.2 Determinations Regarding 

Nonbank Financial Companies

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 the nature, scope, size, scale, 

concentration, interconnectedness, or mix of its 

activities—could pose a threat to U.S. financial 

stability. The Dodd-Frank Act sets forth the standard 

for the Council’s determinations regarding nonbank 

financial companies and requires the Council to 

take into account 10 specific considerations and any 

other risk-related factors that the Council deems 

appropriate when evaluating those companies.

Under section 113 of the Dodd-Frank Act, the 

Council is required at least annually to reevaluate 

each previous determination and rescind any 

determination if the company no longer meets 

the statutory standards. The Council’s rule 

and interpretive guidance and its supplemental 

procedures with respect to nonbank financial 

company determinations provide the public with 

additional information regarding the process for the 

Council’s determinations and annual reevaluations.

In October 2018, the Council rescinded its previous 

determination that material financial distress at 

Prudential could pose a threat to U.S. financial 

stability and that Prudential shall be subject to 

supervision by the Federal Reserve and enhanced 

prudential standards. The Council’s decision to 

rescind the determination was based on extensive 

analysis that indicated that there is not a significant 

risk that the company could pose a threat to 

financial stability.

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. Since 2010, the Council has voted to advance a 

total of four companies to Stage 3 of the Council’s 

process for evaluating nonbank financial companies 

and voted not to advance five nonbank financial 

companies to Stage 3. Since the Council’s last 

annual report, the Council has not advanced any 

nonbank financial companies to Stage 3 or made 

a proposed or final determination regarding any 

nonbank financial company.

5.5.3 Applications Under Section 117 

of the Dodd-Frank Act

Section 117 of the Dodd-Frank Act applies to any 

entity (or its successor) that was a BHC with assets 

of at least $50 billion as of January 1, 2010, and 

participated in the Capital Purchase Program 

under the Troubled Asset Relief Program. Under 

section 117, if such an entity ceases to be a BHC, 

it is automatically treated as if the Council had 

designated it as a nonbank financial company 

for Federal Reserve supervision and enhanced 

prudential standards unless the Council grants 

an appeal of such treatment. In March 2018, the 

Council revised its hearing procedures to add 

hearings conducted under section 117 to the 

scope of the hearing procedures. In April 2018, 

the Council received the first application under 

section 117 from ZB, N.A., a subsidiary of Zions 

Bancorporation. In July and September 2018, the 

Council made a proposed and a final decision, 

respectively, to grant the company’s application.

5.5.4 Operations of the Council

The Dodd-Frank Act requires the Council to 

convene no less than quarterly. The Council 

held seven meetings in 2018, 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 two of its meetings 

in 2018. Approximately every two weeks, the 

Council’s Deputies Committee, which is composed 

of senior representatives of Council members, 
Regulatory Developments and Council Activities 105

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 ninth budget in 2018. 

The Council also amended its bylaws in 2018 to 

provide that if a recused voting Council member 

who is the head of a federal agency delegates his 

or her voting authority to an officer of that agency 

who was appointed by the President with the 

advice and consent of the Senate, or who is the 

first assistant to the office of the recused Council 

member for purposes of the Federal Vacancies 

Reform Act of 1998, the delegate may participate in 

any Council action to the extent permitted by the 

Dodd-Frank Act.

Potential Emerging Threats and Vulnerabilities 107

6 Potential Emerging Threats and Vulnerabilities

6.1 Cybersecurity: Vulnerabilities to Attacks 

on Financial Services

Financial institutions continue to invest in 

information technology. However, greater reliance 

on this technology, particularly across a broader 

array of interconnected platforms, increases the risk 

that a cybersecurity event could have severe negative 

consequences for financial institutions. 

Cyber vulnerabilities in the financial system include 

vulnerabilities to malware attacks, ransomware 

attacks, data breaches, and other events. Such 

incidents have the potential to impact tens of 

millions of Americans and result in financial losses 

of billions of dollars. 

A cybersecurity event could threaten the stability 

of the U.S. financial system through at least three 

channels: 

• The event could disrupt a key financial service or 

utility. Given the interdependencies of platforms, 

such a disruption could have a negative cascading 

effect on the financial sector. 

• The event could cause a loss of confidence 

among a broad set of customers or market 

participants, which could lead to broad asset sales 

or withdrawals that have destabilizing effects. 

• The event could compromise the integrity of 

data that is critical to the stable functioning of 

financial firms and the financial system. 

The potential for a destabilizing cybersecurity event 

is a key financial stability vulnerability. 

6.2 Ongoing Structural Vulnerabilities

The Council has identified a number of structural 

vulnerabilities in the U.S. financial system: 

concentrations of activities and exposures in 

CCPs; continued use of reference rates that are not 

sufficiently derived from observable transactions 

and that can be susceptible to manipulation; risktaking incentives of large, complex, interconnected 

financial institutions; reliance on less-stable, shortterm funding markets; vulnerabilities potentially 

created by financial innovation; and challenges 

to data quality, collection, and sharing. These 

vulnerabilities are described below.

6.2.1 Central Counterparties

The potential benefits of CCPs to financial stability 

include improved transparency, the promotion of 

enhanced risk management across the financial 

system, standardized margin methodologies 

applied to all clearing members, expanded 

multilateral netting, and strict procedures for the 

orderly management of counterparty credit losses. 

However, because CCPs clear a very large volume of 

transactions, and due to the extent to which they are 

interconnected with other large and interconnected 

financial institutions, it is critical that CCPs be 

robust and resilient. 

The goal of robust and resilient CCPs can be 

accomplished in part through the continued 

implementation of CCP risk management standards 

and recovery and orderly wind-down plans. Further 

analysis of the risk that clearing members may pose 

to CCPs and that CCPs may pose to the financial 

network as a whole is appropriate. Regulators also 

continue to analyze a range of possible risks arising 

from or related to the potential failure of one or 

more clearing members, each of which may be a 

member of multiple CCPs and may provide essential 

services (such as liquidity provision, settlement, or 

custody services) to multiple CCPs. This includes 

analysis of the potential for such failures to transmit 

stress among financial institutions or markets. Such 

analysis of the potential to transmit risk across 

financial institutions and markets will help regulators 

to better understand interconnections among CCPs, 

clearing members, and other financial institutions to 

help ensure the effectiveness of reforms that mandate 

greater use of central clearing. 
108 2018 FSOC / / Annual Report

Since the introduction of the Principles for Market 

Infrastructures (PFMI), a document setting forth 

24 key international standards related to CCPs and 

other FMIs, CCPs have made significant progress 

in the development and implementation of more 

robust risk management practices. In particular, 

CCPs have enhanced governance frameworks, 

introduced more robust stress testing and margin 

models, and increased financial resources 

available to cover the default of a clearing member. 

Additionally, some authorities regularly monitor 

risk exposures at CCPs pursuant to their regulatory 

regime. Both the CFTC and SEC maintain 

active risk surveillance programs of CCPs’ risk 

management and receive daily or weekly reports of 

positions, risk measures, margins, collateral, and 

default resources. 

Supervisory stress tests can also be an important 

contributor to risk management. Supervisory stress 

tests can, for example, help to shed light on the risks 

and vulnerabilities related to the potential failure 

of the largest clearing members at a CCP, including 

in many cases those with membership in multiple 

CCPs. Such a failure or failures could have an 

adverse impact across markets and institutions. The 

CFTC has taken productive first steps in this area, 

including conducting the first supervisory stress 

tests of derivatives CCPs in the United States and 

publishing reports on findings.

There have also been advances in the development of 

plans for CCP recovery and resolution. With respect 

to those CCPs designated as systemically important 

FMUs by the Council, the CFTC has reviewed 

and provided guidance on recovery plans of the 

CCPs it supervises, and the SEC recently approved 

recovery and orderly wind down plans for the CCPs 

it supervises. As discussed in Section 5.2.1, CMGs 

have been established for two U.S. CCPs that are 

considered systemically important in more than one 

jurisdiction, consistent with international standards. 

Finally, ongoing developments in the swaps market 

may reduce complexity in that market and the 

financial system as a whole. Specifically, swaps 

trade compression, access to swaps data, increased 

clearing volumes for various products, enhanced 

operational and liquidity policies and procedures, 

and publicly reported monthly cleared margin 

information (see Sections 4.10.4 and 5.2.1) should 

help reduce risk and increase transparency.

6.2.2 Reference Rates

While a number of steps to strengthen LIBOR have 

been implemented, fundamental issues remain that 

raise questions regarding LIBOR’s sustainability 

as an interest rate benchmark. USD LIBOR is used 

in a large volume and broad range of financial 

products and contracts (see Box C). The uncertainty 

surrounding LIBOR’s sustainability may threaten 

individual financial institutions and the U.S. 

financial system more broadly. Specifically, without 

advance preparation, a sudden cessation of such a 

heavily used reference rate could cause considerable 

disruptions to, and uncertainties around, the large 

flows of LIBOR-related payments. It could also 

impair the functioning of a variety of markets, 

including business and consumer lending. 

As discussed in Box C, to address the need for a 

robust, sustainable alternative reference rate, a 

group of U.S. agencies in 2014 convened the ARRC. 

The ARRC selected the SOFR as an alternative to 

LIBOR, which since April 2018 has been produced 

by the FRBNY in conjunction with the OFR. Soon 

thereafter, SOFR futures were launched, SOFR 

OIS and basis swaps were introduced, and the 

ARRC published guiding principles and public 

consultations on contract fallback language. This 

is important progress to reduce the risks associated 

with reliance on LIBOR. 

The transition away from LIBOR will be 

challenging, and important risks remain. If 

participants do not make adequate preparations 

in time for LIBOR’s cessation, it could lead to 

a disorderly exit from contracts. Differences in 

contractual fallback language or other preparations 

across participants and contract types could 

introduce pricing mismatches or other problems. 

The Council recommends that member agencies 

work closely with market participants to identify and 

mitigate risks from potential dislocations during the 

transition process.
Potential Emerging Threats and Vulnerabilities 109

Box C: The Transition to Alternative Reference Rates

LIBOR is the most widely used interest rate 

benchmark in the world. It is meant to reflect the cost 

at which large, globally active banks can borrow on an 

unsecured basis in wholesale markets, which include 

borrowing from other banks as well as using CP or 

uninsured certificates of deposit. It is a composite 

rate, produced by the ICE Benchmark Administration, 

based on rates submitted by a panel of banks. LIBOR 

is generally produced daily across five currencies 

and seven maturities. USD LIBOR has become the 

dominant USD reference rate. According to the 

second report of the ARRC, as of year-end 2016, 

LIBOR was used as a reference rate for more than 

$200 trillion in notional amount of financial contracts in 

the cash and derivatives markets. 

While LIBOR is still widely used, its reliability is in 

doubt, and it may not be available after 2021. LIBOR 

is increasingly based on the expert judgment of 

panel banks, rather than actual transactions, due 

to the declining amount of unsecured, wholesale 

borrowings by banks since the financial crisis. The 

scarcity of underlying transactions makes LIBOR 

potentially unsustainable, as many banks have grown 

uncomfortable with providing submissions based on 

such expert judgment and may eventually choose to 

stop submitting altogether. Since 2016, two banks 

have stopped submitting USD LIBOR. The chief of the 

UK Financial Conduct Authority (FCA), which regulates 

LIBOR, said in 2017 that the FCA would not persuade 

or compel panel banks to make LIBOR submissions 

after 2021. As a consequence, it is unclear if LIBOR 

will exist after that time. 

To address the need for an orderly transition to a 

robust alternative rate, the Federal Reserve and the 

FRBNY, in cooperation with Treasury, the CFTC, and 

the OFR, convened the ARRC. The ARRC brought 

together private market participants to identify a set of 

alternative reference rates that are more firmly based 

on transactions from a robust underlying market. The 

ARRC was reconstituted in 2018 to include a broader 

set of market participants and regulatory agencies. 

The ARRC now includes participants in the markets 

for floating-rate notes, business loans, securitizations, 

mortgages, and consumer loans. 

The ARRC selected SOFR as its recommended 

alternative to LIBOR. SOFR is a fully transactionsbased rate that will have the widest coverage of any 

Treasury repo rate available. It has been published 

on a daily basis by the FRBNY since April 3, 2018. 

Because of its range of coverage, the ARRC 

considers SOFR to be a good representation of the 

general funding conditions in the overnight Treasury 

repo market. As such, it reflects an economic cost 

of lending and borrowing relevant to a wide array 

of market participants in these markets, including 

broker-dealers, MMFs, asset managers, insurance 

companies, securities lenders, and pension funds. 

Following the commencement of the publication of 

SOFR in April 2018, SOFR futures were launched in 

May, at 1-month and 3-month tenors. In July, SOFR 

OIS and basis swaps began clearing. Meanwhile, 

the ARRC has also established principles for fallback 

language in certain contracts and released public 

consultations on such language, to facilitate an orderly 

transition from LIBOR. 

SOFR is fundamentally different from LIBOR, and 

a transition to SOFR has challenges. SOFR is an 

overnight, secured, nearly risk-free rate, while LIBOR 

is an unsecured rate published at several tenors. 

Because LIBOR is unsecured and therefore includes 

an element of bank credit risk, it is likely to be higher 

than SOFR and prone to widen when there is severe 

credit market stress. In contrast, because SOFR is 

secured and nearly risk-free, it is expected to be lower 

than LIBOR on average and behave differently in 

periods of stress. Contracts linked to LIBOR are vast 

in number and value, and they have diverse parties, 

procedures for amendments, and fallback language 

to transition to an alternate reference rate. Adding 

economically appropriate fallback language to LIBORlinked contracts is necessary, but it will be challenging 

to coordinate, and the contractual provisions may not 

be consistent across these diverse products. 
110 2018 FSOC / / Annual Report

6.2.3 Large, Complex, Interconnected 

Financial Institutions

In part due to implementation of the Dodd-Frank 

Act and other financial regulatory reforms, large 

BHCs are significantly better capitalized today and 

hold significantly more HQLA than they did before 

the financial crisis (see Section 4.11.1). In addition, 

the largest BHCs that operate in the United States 

are subject to both company-run and supervisory 

stress testing, and periodically submit resolution 

plans to the Federal Reserve and FDIC (see Sections 

5.1.2 and 5.1.3). Alongside these increases in 

resilience, market-based measures indicate low risk 

of distress or failure in the largest U.S. BHCs (see 

Section 4.11.1).

Nonetheless, the Council remains vigilant about 

the potential threats such institutions may pose to 

financial stability, given their importance to the U.S. 

financial system.

6.2.4 Short-Term Wholesale Funding

Repo Markets

Although progress has been made in recent years 

in reducing counterparty risk exposure in repo 

markets, the risk of fire sales of collateral by 

creditors of a defaulted broker-dealer remains. 

Concentration risk has increased in the tri-party repo 

market, as just one institution became effectively 

responsible for all clearing of that important market 

segment. This increases the financial stability 

risks that would be associated with distress at that 

institution. Even a temporary service disruption, such 

as an operational failure, could impair the market, as 

participants may not have a ready alternative platform 

to clear and settle these transactions. 

A better understanding is needed of the 

interdependencies among firms and market 

participants, particularly in the bilateral repo market, 

where more information would help regulators 

and supervisors better assess potential risks and 

vulnerabilities. To this end, in 2018 the OFR 

proposed a permanent collection of data on centrally 

cleared repo transactions (see Section 5.4.1). The 

proposed collection would allow monitoring of an 

important segment of the centrally cleared repo 

market, as well as enhancing the calculation of more 

robust reference rates to replace LIBOR.

MMFs and Other Cash Management Vehicles

MMFs and other cash management vehicles that offer 

a stable NAV can be subject to runs, which could 

disrupt short-term funding markets more broadly 

and have other adverse effects on related markets and 

firms. The MMF reforms implemented by the SEC 

in October 2016 represent an important development 

in addressing this risk. However, while the adoption 

of a floating NAV likely reduced the risk of runs and 

related disruptions in short-term lending markets, the 

extent of that reduction is not clear. 

Other types of cash management vehicles also invest 

in private assets and offer a stable NAV, but were not 

subject to the SEC reforms. This includes certain 

short-term investment funds, local government 

investment pools, and private liquidity funds. There 

has been no large migration of investments into 

these other vehicles since the SEC reforms, but 

it is possible that they will see greater inflows if 

short-term U.S. interest rates continue to increase, 

as expected by market participants. Even at their 

current size, runs on these vehicles in a stress 

scenario might amplify or transmit risks to the 

broader financial system. 

In the current market and regulatory environment, 

some institutions may attempt to distinguish 

themselves by using new strategies that could 

increase credit, interest rate, or liquidity risks. 

More generally, regulations may have unintended 

consequences, and market participants and 

regulators should be alert to the emergence of new, 

unanticipated risks.

6.2.5 Financial Innovation

Innovation is a regular feature of the financial 

services industry, and it has been particularly 

important in the post-crisis period. 

Financial innovations in the last 10 years have 

offered considerable benefits to consumers and 

providers of financial services, including reducing 

the cost of certain financial services, increasing the 

convenience of payments, and potentially increasing 

the availability of credit. Innovation can also create 
Potential Emerging Threats and Vulnerabilities 111

new risks that are not visible or well understood, and 

it can undermine financial regulation if it fosters 

financial activities in areas that are not subject to 

appropriate regulation. 

Significant developments in the use of digital assets 

and peer-to-peer payments have been enabled by 

advances in technology and digitization of the 

economy. As discussed in Section 4.14.1 and Box 

B, the market value and use of digital assets has 

grown rapidly in recent years, including through 

innovations such as ICOs. While digital assets do 

not presently appear to pose a risk to financial 

stability, they do pose other financial risks, including 

facilitating cybercrime, fraud, extortion, drug 

trafficking, money laundering, and tax evasion. 

This makes regulatory vigilance and coordination 

critically important. In late 2017, the Council 

formed a working group on digital assets to facilitate 

coordination among U.S. financial regulators 

regarding these markets. 

Marketplace lending and peer-to-peer payments 

are two recent technology-enabled innovations 

of growing importance, as discussed in Sections 

4.14.2 and 4.14.3. By offering an additional source 

of loans to households and small businesses—one 

that may incorporate new underwriting methods—

marketplace lenders have the potential to increase 

the overall availability of credit. However, the 

limited history of marketplace lending makes it 

difficult to determine whether their risk assessment 

and risk management practices are adequate to 

manage a broad credit downturn. Some of these 

lenders rely on funding models and institutional 

relationships that have not been tested in a period of 

significant stress. 

As discussed in Section 4.14.4, large technology 

companies providing financial services may 

increasingly seek to compete directly with 

incumbent financial service providers, and their 

market presence could grow significantly. As such 

firms may not be subject to many types of financial 

services regulation, this may leave a significant 

part of the financial system without appropriate 

standards and oversight. 

The rapid adoption of fintech innovations in 

recent years may increase operational risks in 

financial firms’ use of third-party service providers. 

Market concentration among third-party service 

providers can create financial stability risks, because 

operational failures or faults at one key provider 

could disrupt the activities of multiple important 

financial institutions or financial markets.

6.2.6 Data Gaps and Challenges to Data Quality, 

Collection, and Sharing 

The financial crisis exposed gaps and deficiencies in 

the quality of data required for effective regulatory 

oversight of the financial system. These data gaps 

included the structure and ownership of financial 

entities, the identification of OTC derivatives, and 

jurisdictional differences in regulatory reporting 

requirements. These types of inconsistencies also 

create challenges for data sharing and increase 

reporting burden. 

The need to close data gaps is critical. To help 

achieve this goal, Council member agencies have 

been actively engaged with the FSB and CPMIIOSCO to develop and implement the UTI, UPI, 

and other critical data elements for OTC derivatives. 

Staff of the OFR, CFTC, SEC, and Federal Reserve 

Board met regularly in 2018 with their international 

regulatory counterparts from the FSB to implement 

these identifiers for OTC derivatives, and are now 

developing a governance structure for oversight.

In their third status report released in September 

2018, the FSB and IMF noted that considerable 

progress has been made by the FSB and CPMIIOSCO on the G20’s Data Gaps Initiative to 

implement the agreed actions and reduce data 

gaps in the OTC derivatives market. This included 

delivering technical guidance on the UPI and on 

harmonization of critical OTC derivatives data 

elements other than UTI and UPI.
112 2018 FSOC / / Annual Report

6.3 Managing Vulnerabilities amid Prolonged 

Credit Expansion

After contracting sharply from 2008 to 2011, the level 

of total borrowing by the private nonfinancial sector 

has risen for seven years. The increase in borrowing 

has been particularly strong in the nonfinancial 

business sector, outpacing the rise in nominal GDP 

and pushing the ratio of nonfinancial corporate 

debt-to-GDP to a historical peak. As discussed in 

Section 4.3, key metrics also show that nonfinancial 

business leverage is at the upper end of historical 

ranges, increasing the risk of default. While strong 

interest coverage and liquidity positions have allowed 

businesses to service this debt with low delinquency 

rates, these factors may not prevent a wave of defaults 

in the event of a recession or a similarly large shock 

to business earnings. Any impact on financial 

stability will depend on the extent and severity 

of business defaults, whether there are spillovers 

to other markets, and the ability of investors and 

intermediaries to manage the fallout. 

A sharp downturn in the corporate credit cycle could 

also be accompanied by broad-based declines in asset 

prices. Elevated valuations in U.S. equity, corporate 

bond, and certain residential and commercial real 

estate markets (see Sections 4.3, 4.5, and 4.7) could 

make them susceptible to larger price declines 

in the next major correction. Such market losses 

alone do not cause financial instability; rather, 

they can contribute to financial instability when 

they are amplified or transmitted by factors such as 

leverage, liquidity transformation, complexity, or 

interconnections. To the extent that these factors are 

enduring features of the financial system, there is the 

potential for asset price corrections in these markets 

to impact financial stability.

6.4 Changes in Financial Market Structure 

and Implications for Financial Stability

Market making and liquidity provision are now 

undertaken by a wide variety of market participants, 

including broker-dealers—historical providers of 

such services—as well as asset managers, proprietary 

trading firms, and hedge funds. 

The increased use of electronic trading platforms 

has allowed for growth in both algorithmic and 

high-frequency trading practices, which have been 

adopted by many liquidity providers and liquidity 

takers. These developments have benefited market 

participants through lower transaction costs, 

increased market efficiency, and fewer manual 

errors. However, these developments may also create 

new risks and vulnerabilities in markets where 

electronic trading is prevalent. 

In recent years, there has been increased regulatory 

focus on the risks from both the faster speed 

of trades as well as the complexity of trading 

algorithms, as these can lead to operational risks 

that may be hard to predict or manage. There has 

also been heightened concern about so-called “flash 

events,” in which various markets have experienced 

sharp price moves, often with swift reversals. While 

some of these events have occurred in smaller 

markets or during illiquid trading hours, others 

have affected some of the largest markets in the 

world. Studies of events such as the Joint Staff 

Report on the U.S. Treasury Market on October 

15, 2014, have not identified any single cause, 

but instead point to a confluence of factors. The 

February 5, 2018, event, in which a decline in the 

S&P 500 was amplified by investment products 

linked to equity-market volatility, is discussed in 

Box D. When extreme, these events may also lead 

to disruptions in highly correlated markets. Such 

possible transmission across markets highlights 

the possibility that flash events could contribute to 

financial instability. 

In the Treasury securities market, the emergence 

of automated trading across multiple venues and 

new types of market participants—known as 

principal trading firms (PTFs)—raise questions 

as to whether clearance and settlement practices 

in the secondary market have evolved to address 

potential risks associated with this changing market 

structure. One area of potential risk is less-robust 

and less-transparent risk-mitigation practices for 

bilaterally cleared trades, which constitute the 

majority of transactions in the secondary markets 

for Treasury securities. Interdealer brokers, market 

participants that generally conduct trading in the 

dealer-to-dealer segment of the Treasury securities 
Potential Emerging Threats and Vulnerabilities 113

market, also raise potential risks, as their role and 

associated risks are not well understood by all 

market participants. 

These changes in market structure have been 

accompanied by a substantial shift towards 

automating the investment process. Asset managers, 

hedge funds, banks, and others are increasing their 

use of artificial intelligence, machine learning, and 

other advanced analytical tools to make investment 

decisions. These developments add complexity to the 

markets and can be a source of operational risk. For 

example, swift and automated trading algorithms 

spanning both traditional and non-traditional 

information sources could raise the risk of inaccurate 

information impacting price discovery. 

Given the changes in market structure described 

above, liquidity provision during times of stress 

may differ now from historical norms in ways that 

are hard to anticipate. Where market-making was 

once the purview of broker-dealers, in an increasing 

number of products this role can be taken on 

by smaller institutions that make significant use 

of automated technology. With trading speeds 

increasing and practices becoming more automated, 

liquidity provision can also change quickly. This can 

create challenges for market participants that are not 

prepared for the level and speed of liquidity changes, 

and may result in mismatches between liquidity 

supply and demand. In many markets, investment 

strategies have evolved in response to these structural 

changes. Buy-side firms and high-frequency traders 

have increased real-time monitoring of liquidity 

conditions and developed algorithms designed to 

minimize price impact. These innovations attempt 

to match trading needs with the environment that 

arises with market automation.
114 2018 FSOC / / Annual Report

On February 5, 2018, the CBOE Volatility Index—

known as the VIX index, a measure of optionimplied volatility for the S&P 500—rose by 20 points, 

representing the index’s largest ever one-day 

increase (Chart D.1). On this day, the S&P 500 

declined by around 4 percent and 10-year Treasury 

yields moved lower by as much as 15 basis points. 

Attention has been focused on the magnitude of the 

spike in equity volatility. While a variety of causes 

were cited, an important amplifying factor was the 

activity of ETPs linked to the VIX (VIX ETPs). These 

investment vehicles became increasingly popular in 

the months before February (Chart D.2). 

For most of January 2018, the equity market 

appreciated strongly—the S&P 500 gained 6.6 

percent from January 2 to January 26. In the final 

days of January, the market began to decline. In the 

week before the February 5 events, the S&P 500 sold 

off 3.9 percent and the VIX increased by 6 points. 

On the afternoon of February 5, equity volatility 

continued to rise, with a VIX spike occurring late in 

the trading session, apparently driven significantly by 

VIX ETP behavior. When the VIX futures index rises 

during a trading session, both inverse and leveraged 

long VIX ETP issuers must buy VIX futures in order to 

maintain their target exposure. This buying typically 

occurs as close as possible to the day’s close of 

futures markets. On the afternoon of February 5, VIX 

ETPs overwhelmed trading in VIX futures markets, 

accounting for an unusually large share of the open 

interest in the first two VIX futures contracts.

Some dealers that were intermediating the increased 

VIX futures transactions hedged their new positions 

by selling equity futures. This caused the VIX 

futures dynamics to spill over into the equity market, 

amplifying the sell-off. 

The effect of the VIX ETPs on February 5 was partly 

due to their rapid growth in 2017 and early 2018, 

as short-VIX products profited from the declines 

in volatility. Notably, by early 2018 the net position 

across VIX ETPs was short VIX; that is, the buyer 

would profit from a decrease in the VIX. Following the 

February 5 event, VIX ETPs fell sharply in size, and 

their net position became long VIX (Chart D.2).

The February 5 event illustrated how evolutions 

in investment products can create new sources 

of risk, including as a result of the feedback of 

stress between the markets for those investment 

products and the securities or derivatives markets. 

Although this event did not impair financial stability, it 

underscores the importance of regulators and market 

participants evaluating these events to enhance their 

understanding of the potential for such feedback 

dynamics to transmit or amplify stress. 

Box D: U.S. Equity Volatility Event on February 5, 2018

0

1

2

3

4

5

0

1

2

3

4

5

Jan:17 Mar:17 Jun:17 Sep:17 Dec:17 Mar:18 Jun:18 Sep:18

VelocityShares Daily Inverse VIX Short Term ETN (XIV)

VelocityShares Daily Inverse VIX Medium Term ETN (ZIV)

ProShares Short VIX Short-Term Futures (SVXY)

D.2 Total Assets of Inverse VIX ETPs

Billions US$ Billions US$

Source: Bloomberg, L.P.

As Of: 31-Oct-2018

D.2 Total Assets of Inverse VIX ETPs

2100

2250

2400

2550

2700

2850

3000

5

10

15

20

25

30

35

40

45

Jan:17 May:17 Sep:17 Jan:18 May:18 Sep:18

VIX Index (left axis)

S&P 500 Index (right axis)

D.1 VIX and S&P 500 Indices

Points Points

Source: Bloomberg, L.P.

As Of: 31-Oct-2018

D.1 VIX and S&P 500 Indices
Potential Emerging Threats and Vulnerabilities 115

6.5 Asset Management Products and 

Activities

The U.S. asset management industry is a critical 

component of the financial system and economy. 

Its importance has grown in the post-crisis period, 

accounting for an increasingly large share of U.S. 

investments and financial market activity. Asset 

management industry growth has been driven by 

asset price appreciation, strong demand from U.S. 

households, the aging of the U.S. population, and 

the rise of defined contribution retirement plans.

Over the last several years, the SEC has assessed 

potential threats and vulnerabilities in the asset 

management industry in the areas of liquidity 

and redemption risk and in the use of leverage. In 

October 2016, the SEC adopted rules to enhance 

liquidity risk management by mutual funds and 

ETFs; the SEC also adopted rules allowing mutual 

funds to adopt swing pricing to pass on transaction 

costs to entering and exiting investors. As discussed 

in Section 5.2.2, in June 2018 the SEC adopted a 

final rule that requires open-end funds to disclose 

information about their liquidity risk-management 

programs in their reports to shareholders. In 

addition, the SEC amended Form N-PORT to 

enhance the portfolio liquidity information that 

the funds report to the SEC. That new information 

required of funds will improve the ability to monitor 

liquidity risk in this important part of the asset 

management industry. The SEC is also considering 

re-proposing a new rule designed to enhance the 

regulation of the use of derivatives by registered 

investment companies.

6.6 Global Economic and Financial 

Developments

Since the Council’s last annual report, economic 

and financial risks have persisted or intensified in 

the UK, the euro area, China, and other emerging 

markets. Such foreign risks could impact U.S. 

financial stability through direct financial exposures 

or effects on economic and financial confidence. 

The risk of a no-deal UK exit from the EU in March 

2019 has increased (see Box E). A no-deal Brexit 

could create risks that may have immediate and 

significant spillover effects into the United States. 

Such risks include an interruption in financial 

contracts; undermined financial relationships and 

potential reversals of cross-border financial flows; 

interruptions to EU27 firms’ access to UK derivatives 

CCPs; disruptions in international trade and crossborder financial activities; and a deterioration in 

economic and financial confidence. 

While the euro area economy continues to recover 

from the global financial and European sovereign 

debt crises, the euro area financial system faces 

longer-term structural vulnerabilities. Public debt 

burdens remain high in a number of euro area 

economies, leaving fiscal agencies and financial 

institutions vulnerable to sudden shifts in investor 

sentiment. This risk was highlighted by the recent 

stress in Italian bond markets, which was triggered 

by concerns regarding the trajectory of Italy’s debt 

burden (see Section 4.2.1). While euro area bank 

profitability and asset quality have broadly improved, 

some euro area financial institutions face continued 

questions about their viability amid prolonged 

underperformance. Additionally, certain euro area 

banks have meaningful exposures to emerging 

markets such as Turkey, and are thus vulnerable to 

direct spillovers from EMEs. 

After a rapid increase in debt and leverage 

following the global financial crisis, Chinese 

authorities have taken steps to encourage financial 

deleveraging, leading to a slowdown in the rate 

of credit growth in recent years. However, in the 

second half of 2018 Chinese policymakers began 

loosening monetary instruments in light of weaker 

economic data. Meanwhile, concerns are increasing 

that trade tensions could impact Chinese growth 

and, in a severe case, the broader Chinese financial 

system. While China has sufficient fiscal space to 

moderate a slowdown in economic growth, a sharp 

slowdown or financial stress could have adverse 

consequences for closely connected EMEs and 

for Chinese financial institutions. Potential direct 

spillovers to the U.S. financial system appear to 

be manageable, but indirect effects on global 

economic and market confidence could materially 

impact U.S. economic growth. 
116 2018 FSOC / / Annual Report

Risks in EMEs are increasing, and recent tightening 

in dollar liquidity has left economies with large 

current account balances vulnerable to sudden 

shifts in investor sentiment (see Section 4.2.2). 

Spillovers from stress in Argentine and Turkish 

markets to the U.S. financial system have been 

limited, as U.S. financial institutions do not have 

significant direct exposures to these economies. 

Additionally, spillovers to other emerging markets 

have been moderate, but they could intensify if 

conditions in Argentina or Turkey deteriorate. 

The Council will continue to monitor and assess 

these developments and other potential emerging 

risks to financial stability.
Potential Emerging Threats and Vulnerabilities 117

The UK voted in a 2016 referendum to leave the EU. 

The UK’s formal withdrawal from the EU—commonly 

known as “Brexit”—is scheduled for March 29, 2019. 

An orderly Brexit would require that UK and EU 

authorities ratify a withdrawal agreement before then. 

Negotiators for the UK and EU have concluded a 

draft withdrawal agreement, but that agreement is still 

subject to final approval by the UK and EU parliaments. 

If both sides approve in a timely manner, the UK exit 

would be subject to a transition period, during which 

the UK would retain full access to the EU single market 

and customs union while it negotiates the terms of its 

future relationship with the EU. 

If a withdrawal agreement is not approved by March 

29, the result could be a no-deal Brexit, which 

could be disorderly. As discussed in Section 6.6, 

a no-deal Brexit could create a number of risks to 

financial stability, including: an interruption in financial 

contracts; undermined financial relationships and 

potential reversals of cross-border financial flows; 

interruptions to remaining EU firms’ access to 

UK derivatives CCPs; disruptions in international 

trade and cross-border financial activities; and a 

deterioration in economic and financial confidence. A 

no-deal Brexit could have immediate and significant 

spillover effects into the United States, both through 

direct channels, such as exposures of financial 

markets and institutions, and potential indirect effects. 

The following are some of the issues associated with 

Brexit that could pose risks to financial stability. 

Potential Effects on U.S. Financial Institutions

Many U.S. financial institutions have significant 

exposures to the EU, suggesting that disruptions to 

EU markets in a no-deal Brexit could affect those 

institutions. U.S. G-SIBs with material UK exposures 

are implementing business continuity plans and 

executing on long-term changes to their operations 

assuming they may lose the ability to provide financial 

services from the UK to remaining EU and European 

Economic Area (EEA) customers. In the most severe 

scenario, liability holders could pull back from UK 

financial institutions or foreign institutions with large 

exposures to the UK.

Potential Effects on Cross-Border Trade and Financial 

Services

In a no-deal Brexit scenario, the UK would likely lose 

its current access to the EU’s single market. Absent a 

transition period or other policy action, UK-domiciled 

financial services firms would no longer have 

passporting rights and would need to be separately 

authorized by applicable EU member states, raising 

contract continuity concerns for a substantial value 

and volume of financial contracts.

Potential Effects on Derivatives 

London is one of the key service centers for global 

derivatives markets. U.S. banks and financial 

institutions, which account for 40 to 60 percent of 

activity in global derivative markets, use London as 

a platform to service non-UK clients in the EU. A 

no-deal Brexit, in which UK firms immediately lose 

access to the EU market, could create significant 

risks to the cohesion and continuity of financial 

markets, particularly derivatives markets. 

Without a transition period or other official action 

to a similar effect, UK-based firms will be unable to 

continue to service certain cross-border contracts 

that were entered into before Brexit, particularly those 

that contemplate the ongoing provision of financial 

services or other activities previously governed 

by EU rules. This problem is particularly acute in 

the area of centrally cleared derivatives, where EU 

authorization (in the form of recognition by European 

Securities Markets Authority, ESMA) of UK-located 

CCPs is required. The UK has given assurances 

for a temporary permissions regime for CCPs in 

the event that a timely agreement is not ratified. In 

November 2018, the European Commission (EC) 

announced it will consider a temporary, conditional 

equivalence decision to allow UK CCPs to continue 

to service EU firms and apply for recognition by 

ESMA. Notwithstanding these potential temporary 

Box E: Risks Associated with United Kingdom Exit from the European Union
118 2018 FSOC / / Annual Report

permissions, the long-term ability of EU firms to 

execute the requisite long-term changes to their 

operations and to access UK CCPs remains uncertain. 

In the event that derivatives CCPs based in the UK 

lose authorization to provide clearing services to the 

EU, they may be forced to disassociate with non-UK 

EU (EU27) firms. Those EU27 firms could need to 

move their clearing activity away from the UK before 

a final Brexit date. In that regard, EU27 firms would 

need to find alternative products that in many cases 

are not available in EU27 countries, such as certain 

interest rate derivatives that are denominated in 

currencies available at UK CCPs, Brent crude oil, and 

various precious and industrial metals. The abrupt 

transfer of hundreds of thousands of swap positions 

across CCPs over a short period could be the source 

of significant risk. Such action could result in fire sales 

and significant write-downs by EU27 firms as they 

rush to dispose of open CCP positions. 

With respect to non-centrally cleared derivatives, 

there could be constraints on UK and EU firms’ ability 

to perform certain life-cycle events or amend existing 

contracts in the time remaining before Brexit. Existing 

swap contracts may need to be amended as a 

result of Brexit, potentially subjecting them to several 

new swap regulations. ESMA has prepared draft 

regulatory technical standards that would provide a 

12-month exemption from the EU clearing obligation 

and certain EU bilateral margin requirements, in order 

to facilitate the novation of non-centrally cleared 

derivatives contracts between UK and EU parties in 

the event of a no-deal Brexit.

Potential Effects on Insurance Contracts

Insurers and reinsurers in the UK are taking steps to 

maximize their ability to meet contractual obligations 

and undertake new business in the EU under any 

UK withdrawal scenario. These measures include 

establishing new entities in EU member states to 

conduct business within the EEA after Brexit. Officials 

from Treasury and the Office of the U.S. Trade 

Representative are discussing with UK counterparts

a bilateral “covered agreement” with the goal of 

maintaining market continuity for both sides regarding 

the obligations and benefits arising under the Bilateral 

Agreement Between the United States of America 

and the European Union On Prudential Measures 

Regarding Insurance and Reinsurance, signed by the 

United States and EU in September 2017.

Equivalence Considerations 

Once the UK is no longer subject to EU law—

either after a disorderly Brexit scenario or after the 

implementation period in an orderly Brexit scenario—

UK firms will need to receive EU authorization to 

supply their services to customers in the EEA. This 

will require that the EC deem the UK an equivalent 

jurisdiction for the provision of particular services and 

grant recognition to individual firms in some cases. 

These are unilateral determinations of the EC and can 

be withdrawn with limited notice. 

The equivalence and recognition framework does 

not apply to all financial services, however. Even if 

authorizations are approved in all cases for UK firms, 

the framework would not replicate the access that 

UK firms currently have to the EU single market or the 

access that EU customers currently have to the full 

range of UK financial services. The UK has proposed 

an enhanced equivalence regime that would allow for 

a higher degree of market access as compared to the 

standard equivalence regime. The political declaration 

for the future relationship between the UK and the EU, 

published on November 25, 2018, indicates that both 

sides have agreed to provide greater transparency with 

regard to the adoption and withdrawal of equivalence 

decisions. However, the political declaration does not 

suggest that the EU has agreed to the UK’s proposal 

on providing market access beyond the EU’s standard 

equivalence regime. 

Brexit has prompted the EU to reconsider the 

treatment of all third-country entities, not just UK 

firms. Proposed EU legislation on the treatment of 

third-country CCPs, for example, could increase 

the regulatory burden on U.S. entities and produce 

market fragmentation, if finalized. 

Box E: Risks Associated with United Kingdom Exit from the European Union 

(continued)
Abbreviations 119

ABS Asset-Backed Security

ACIS Agency Credit Insurance Structure

AIS Automated Indicator Sharing

AML Anti-Money Laundering

ANPR Advance Notice of Proposed Rulemaking

ARRC Alternative Reference Rates Committee

AUM Assets Under Management

BCBS Basel Committee on Bank Supervision

BCFP Bureau of Consumer Financial Protection

BHC Bank Holding Company

BIS Bank for International Settlements

BoE Bank of England

BoJ Bank of Japan

CAPE Cyclically-Adjusted Price-to-Earnings

C&I Commercial and Industrial

CAS Connecticut Avenue Securities

CBO Congressional Budget Office

CCAR Comprehensive Capital Analysis and Review

CCP Central Counterparty

CDS Credit Default Swap

CECL Current Expected Credit Losses

CET1 Common Equity Tier 1

CFTC Commodity Futures Trading Commission

CIRT Credit Insurance Risk Transfer

CLO Collateralized Loan Obligation

Abbreviations
120 2018 FSOC // Annual Report

CMBS Commercial Mortgage-Backed Security

CME .CME Group Inc

CMG Crisis Management Group

ComFrame Common Framework for the Supervision of Internationally Active Insurance Groups

Council Financial Stability Oversight Council

CP Commercial Paper

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

CSP Common Securitization Platform

CSS Common Securitization Solutions

DCM Designated Contract Market

DFAST Dodd-Frank Act Stress Tests

DHS Department of Homeland Security

Dodd-Frank Act Dodd-Frank Wall Street Reform and Consumer Protection Act

DVP Delivery-versus-Payment

EBITDA Earnings Before Interest, Taxes, Depreciation, and Amortization

EC European Commission

ECB European Central Bank

EEA European Economic Area

EGRRCPA Economic Growth, Regulatory Relief, and Consumer Protection Act

EME Emerging Market Economy

ENN Entity-Netted Notional

Enterprises Fannie Mae and Freddie Mac

ESM European Stability Mechanism

ESMA European Securities and Markets Authority
Abbreviations 121

ETF Exchange-Traded Fund

ETN Exchange-Traded Note

ETP Exchange-Traded Product

EU European Union

FASB Financial Accounting Standards Board

FAST Act Fixing America’s Surface Transportation Act of 2015

FBIIC Financial and Banking Information Infrastructure Committee

FBO Foreign Banking Organization

FCA Financial Conduct Authority

FCM Futures Commission Merchant

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

FIO Federal Insurance Office

FMI Financial Market Infrastructure

FMU Financial Market Utility

FOMC Federal Open Market Committee

FRA Forward Rate Agreements

FRBNY Federal Reserve Bank of New York

FSB Financial Stability Board

FS-ISAC Financial Services Information Sharing and Analysis Center

FSOC Financial Stability Oversight Council

FSSCC Financial Services Sector Coordinating Council
122 2018 FSOC // Annual Report

FX Foreign Exchange

G-SIB Global Systemically Important Bank

G7 Group of 7

G20 Group of 20

GAV Gross Asset Value

GCF General Collateral Finance

GDP Gross Domestic Product

GSE Government-Sponsored Enterprise

GUUG FSB’s Working Group on UTI and UPI Governance

Harmonisation

Group

CPMI-IOSCO Working Group for the Harmonisation of Key OTC

Derivatives Data Elements

HFR Hedge Fund Research

HMDA Home Mortgage Disclosure Act

HQLA High-Quality Liquid Asset

HTM Held-to-Maturity

HY High-Yield

IAIG Internationally Active Insurance Group

IAIS International Association of Insurance Supervisors

ICC ICE Clear Credit

ICE Intercontinental Exchange

ICEU ICE Clear Europe

ICO Initial Coin Offering

ICI Investment Company Institute

ICS Insurance Capital Standard

ICUS ICE Clear U.S

IG Investment Grade

IHC Intermediate Holding Company

IMF International Monetary Fund
Abbreviations 123

IOSCO International Organization of Securities Commissions

IRA Individual Retirement Account

ISDA International Swaps and Derivatives Association

LBO Leveraged Buyout

LCH Ltd. LCH Clearnet Ltd.

LCR Liquidity Coverage Ratio

LEI Legal Entity Identifier

LIBOR London Interbank Offered Rate

MBS Mortgage-Backed Security

MMF Money Market Mutual Fund

MOVE Merrill Lynch Option Volatility Estimate

MPI Macro Prudential Initiative

MSR Mortgage Servicing Right

NAIC National Association of Insurance Commissioners

NAV Net Asset Value

NCUA National Credit Union Administration

NIM Net Interest Margin

NIST National Institute of Standards and Technology

NMLS Nationwide Multistate Licensing System

OCC Office of the Comptroller of the Currency

OFR Office of Financial Research

OIS Overnight Indexed Swap

ON RRP Overnight Reverse Repurchase Agreement

OPEC Organization of Petroleum Exporting Countries

OTC Over-the-Counter

P/B Price-to-Book

P&C Property and Casualty

P/E Price-to-Earnings
124 2018 FSOC // Annual Report

PBGC Pension Benefit Guaranty Corporation

PBOC People’s Bank of China

PFMI Principles for Financial Market Infrastructures

PROMESA Puerto Rico Oversight, Management, and Economic Stability Act

Prudential Prudential Financial, Inc

PTF Principal Trading Firm

QFC Qualified Financial Contract

REIT Real Estate Investment Trust

Repo Repurchase Agreement

RMB Chinese Renminbi

RMBS Residential Mortgage-Backed Security

ROA Return on Assets

ROE Return on Equity

RRC Regulation and Resolution Committee

RWA Risk-Weighted Asset

S&P Standard & Poor’s

SCCL Single-Counterparty Credit Limits

SEC Securities and Exchange Commission

SEF Swap Execution Facility

SIFMA Securities Industry and Financial Markets Association

SLR Supplementary Leverage Ratio

SOFR

SRC

Secured Overnight Financing Rate

Systemic Risk Committee

STACR Structured Agency Credit Risk

TIPS Treasury Inflation-Protected Securities

TRACE Trade Reporting and Compliance Engine

Treasury Department of the Treasury
Abbreviations 125

TRID TILA-RESPA Integrated Mortgage Disclosures

TRIP Terrorism Risk Insurance Program

TRIPRA Terrorism Risk Insurance Program Reauthorization Act of 2015

UK United Kingdom

ULI Universal Loan Identifier

UMBS Uniform Mortgage-Backed Security

UPB Unpaid Principal Balance

UPI

USD

Unique Product Identifier

U.S. Dollar

UTI

VA

Unique Transaction Identifier

U.S. Department of Veterans Affairs

VIX Chicago Board Options Exchange Volatility Index

WAM Weighted-Average Maturity

WTI West Texas Intermediate

YTD Year-to-Date

Glossary 127

Additional Tier 1 Capital A regulatory capital measure which may include items such as 

noncumulative perpetual preferred stock and mandatory convertible 

preferred securities which 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 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 DVP 

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. 

Glossary
128 2018 FSOC // Annual Report

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.

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.

Common Equity Tier 1 Capital 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 riskweighted assets. The ratio applies to all banking organizations 

subject to the Revised Capital Rule.

Common Securitization Platform A common RMBS securitization infrastructure between Fannie Mae 

and Freddie Mac.

Comprehensive Capital Analysis and 

Review (CCAR)

An annual exercise by the Federal Reserve to ensure that institutions 

have robust, forward-looking capital planning processes which 

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. 

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. 
Glossary 129

Emerging Market Economy 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 IMF and Standard & Poor’s, which include, 

for example, Brazil, China, India, and Russia. 

EU27 Refers to the 27 member states of the European Union, excluding the 

United Kingdom. 

Exchange-Traded Product (ETP) An investment fund or note whose shares are 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.

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) A Dodd-Frank defined entity, which, subject to certain exclusions, is 

“any person that 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.
130 2018 FSOC // Annual Report

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. 

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 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.

Held-to-Maturity An accounting term for debt securities accounted for at amortized 

cost, under the proviso that the company can assert that it has the 

positive intent and ability to hold the securities to maturity.

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. High-quality liquid assets should be liquid in markets during 

times of stress and, ideally, be central bank-eligible.

Home Equity Line of Credit (HELOC) A line of credit extended to a homeowner which uses the home as 

collateral.

Household Debt Service Ratio An estimate of the ratio of debt payments to disposable personal 

income. Debt payments consist of the estimated required payments 

on outstanding mortgage and consumer debt. 

Household Formation A measure of housing demand, calculated as the month-to-month 

change in the number of occupied housing units.

Interest Rate Risk Management The management of the exposure of an individual’s or an institution’s 

financial condition to movements in interest rates. 
Glossary 131

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.

Large-Scale Asset Purchases Purchases by the Federal Reserve of securities issued by the U.S. 

government or securities issued or guaranteed by governmentsponsored agencies (including Fannie Mae, Freddie Mac, Ginnie 

Mae, and the Federal Home Loan Banks) in the implementation of 

monetary policy.

Legal Entity Identifier (LEI) A 20-character alpha-numeric code that connects to key reference 

information which enables clear and unique identification of 

companies 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 An acquisition of a company financed by a private equity contribution 

combined with borrowed funds, with debt comprising a significant 

portion of the purchase price.

Leveraged Loan A loan for which the obligor’s post-financing leverage as measured 

by debt-to-assets, debt-to-equity, cash flow-to-total debt, or other 

such standards unique to particular industries significantly exceeds 

industry norms. Leveraged borrowers typically have a diminished 

ability to adjust to unexpected events and changes in business 

conditions because of their higher ratio of total liabilities to capital. 

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. 

London Interbank Offered Rate 

(LIBOR) 

The interest rate at which banks can borrow unsecured funds from 

other banks in London wholesale money markets, as measured by 

daily surveys. The published rate is a trimmed average of the rates 

obtained in the survey.

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.

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. 
132 2018 FSOC // Annual Report

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.

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.

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.

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.

Over-the-Counter (OTC) A method of trading which does not involve an organized exchange. 

In OTC markets, participants trade directly on a bilateral basis, 

typically through voice or computer communication and often with 

certain standardized documentation with counterparty-dependent 

terms.

Part 30 Accounts Accounts which are for U.S. customers who trade futures and options 

on exchanges outside the U.S.

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.
Glossary 133

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 assets under management.

Real Estate Investment Trust (REIT) An operating company which manages income-producing 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 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.

Revised Capital Rule The capital rule which revised the risk-based and leverage capital 

requirements for U.S. banking organizations, as finalized by the 

Federal Reserve Board and the OCC in October 2013 (78 FR 62018), 

and for which the FDIC issued a substantially identical interim rule in 

September 2013 (78 FR 55340). In April 2014, the FDIC adopted the 

interim final rule as a final rule with no substantive changes (79 FR 

20754).

Risk-Based Capital An amount of capital, based on the risk-weighting of various asset 

categories, which a financial institution holds to help protect against 

losses.

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, 

off-balance 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—due to 

concerns about counterparties, collateral, solvency, or related 

issues—and respond by pulling back their funding.
134 2018 FSOC // Annual Report

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 security-based 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. 

Separately Managed Accounts Portfolios of assets or securities which are directly owned by 

investors and managed by professional investment firms.

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.

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. 

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 A person that holds itself out as a dealer in swaps, makes a market in 

swaps, regularly enters into swaps with counterparties, or engages 

in any activity causing it to be known as a dealer or market maker 

in swaps; does not include a person entering into swaps for such 

person’s own account.
Glossary 135

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.

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 which 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.

VIX (Chicago Board Options 

Exchange Market Volatility Index)

A standard measure of market expectations of short-term volatility 

based on S&P equity index option prices. 

Weighted-Average Maturity (WAM) A weighted average of the time to maturity on all loans in an assetbacked security.

Yield Curve A graphical representation of the relationship between bond yields 

and their respective maturities.

List of Char ts 137

4.1.1 Federal Debt Held by the Public........................................................ 15

4.1.2 U.S. Treasury Yields and Yield Curve ................................................ 15

4.1.3 10-Year Treasury Yields..................................................................... 16

4.1.4 Fixed Income Implied Volatility........................................................... 16

4.2.1 Advanced Economies Real GDP Growth .......................................... 17

4.2.2 Euro Area Real GDP Growth............................................................. 17

4.2.3 European 10-Year Yields................................................................... 17

4.2.4 Italian Sovereign Bond Spreads ........................................................ 18

4.2.5 Greece Fiscal Projections ................................................................. 18

4.2.6 Contributions to UK GDP Growth ..................................................... 18

4.2.7 UK Yield Curve ................................................................................. 19

4.2.8 Japanese Consumer Price Inflation................................................... 19

4.2.9 Japan 10-Year Government Bond Yield ............................................ 19

4.2.10 Gross Foreign Investor Capital Inflows to EMEs ................................ 20

4.2.11 Emerging Market Gross Global Bond Issuance................................. 20

4.2.12 Emerging Market Sovereign CDS Spreads........................................ 21

4.2.13 Emerging Market Current Account Deficits ...................................... 21

4.2.14 Emerging Market External Debt ....................................................... 21

4.2.15 Emerging Market Core CPI ............................................................... 22

4.2.16 Chinese Real GDP Growth ............................................................... 22

4.2.17 Chinese Manufacturing and Services Growth ................................... 22

4.2.18 Chinese Credit Growth ..................................................................... 23

4.2.19 Credit to the Chinese Nonfinancial Private Sector ............................. 23

4.2.20 Changes in State and Local Government Tax Revenues................... 23

4.2.21 Long-Term Mutual Fund Flows: Municipal Bonds .............................. 24

4.2.22 Municipal Bond Spreads................................................................... 24

4.2.23 Municipal Bond Issuance ................................................................. 24

4.3.1 Nonfinancial Corporate Debt as a Percent of GDP............................ 25

4.3.2 U.S. Nonfinancial Business Leverage ................................................ 25

4.3.3 U.S. Nonfinancial Business Interest Coverage Ratios ........................ 25

4.3.4 Nonfinancial Corporate Liquid Assets ............................................. 26

4.3.5 U.S. Cash Corporate Credit Spreads ............................................... 26

4.3.6 Gross Issuance of Corporate Bonds ................................................. 27

4.3.7 CLO Issuance ................................................................................... 27

4.3.8 Leveraged Loan Primary Market by Investor Type ............................. 27

4.4.1 Household Debt as a Percent of Disposable Personal Income.............28

List of Charts 
138 2018 FSOC // Annual Report

4.4.2 Components of Consumer Credit ..................................................... 28

4.4.3 Household Debt Service Ratio .......................................................... 29

4.4.4 Owners’ Equity as Share of Household Real Estate .......................... 29

4.5.1 House Prices by Census Region.......................................................30

4.5.2 Mortgage Originations and Rates...................................................... 31

4.5.3 Mortgage Origination Market ............................................................ 32

4.5.4 Mortgage Servicing Market............................................................... 32

4.5.5 Mortgage Delinquency and Foreclosure............................................ 32

4.5.6 Mortgages with Negative Equity........................................................33

4.5.7 Purchase Origination Volume by Credit Score ..................................33

4.5.8 Mortgage Originations by Product ...................................................34

4.5.9 RMBS Issuance ..............................................................................34

4.5.10 Commercial Property Price Indices .................................................. 37

4.5.11 Multifamily Capitalization Rates and Spreads ................................... 37

4.5.12 CMBS Issuance................................................................................38

4.6.1 Nominal U.S. Dollar Trade-Weighted Index........................................39

4.6.2 U.S. Dollar Exchange Rates ..............................................................39

4.6.3 Change in U.S. Dollar Exchange Rates .............................................40

4.7.1 Returns in Selected Equities Indices ................................................. 41

4.7.2 U.S. Stock Valuations ....................................................................... 42

4.7.3 S&P 500 Volatility ............................................................................. 42

4.8.1 Commodities .................................................................................... 42

4.9.1 Commercial Paper Outstanding........................................................43

4.9.2 Commercial Paper Interest Rates......................................................43

4.9.3 Primary Dealer Repo Agreements.....................................................44

4.9.4 Collateral of the Tri-Party Repo Market..............................................45

4.9.5 Value of Securities on Loan...............................................................45

4.9.6 U.S. Securities Lending Cash Reinvestment ................................... 46

4.9.7 U.S. Securities Lending Cash Reinvestment ................................... 46

4.10.1 Normalized Futures Prices ................................................................ 47

4.10.2 Market Volatility Indices..................................................................... 47

4.10.3 Normalized Futures Exchange Volume.............................................. 47

4.10.4 Normalized Futures Exchange Open Interest ....................................48

4.10.5 Normalized Futures Exchange Number of Products..........................48

4.10.6 OTC Equity Options: Global Notional Outstanding ...........................48

4.10.7 OTC Equity Option Share of All OTC Derivatives ............................... 49

4.10.8 OTC Equity Options: Global Market Value ........................................ 49

4.10.9 Derivatives Notional Amount Outstanding ........................................ 49

4.10.10 Derivatives Notional Volume ............................................................. 51

4.10.11 Interest Rate Derivatives: Global Notional Outstanding ..................... 51
Financial Stability Oversight Council 139

4.10.12 Interest Rate Derivative Compression Volume .................................. 51

4.10.13 Global Cleared OTC Interest Rate Derivatives .................................. 52

4.10.14 Global Credit Derivatives by Product ................................................ 52

4.10.15 Interest Rate Derivatives Inflation Swap Clearing .............................. 52

4.10.16 FX Non-Deliverable-Forward Clearing ..............................................53

4.10.17 Global OTC Central Clearing Market Share ......................................53

4.10.18 U.S. Central Clearing Market Share ..................................................53

4.10.19 Margin Funds Held at CFTC Registered FCMs .................................54

4.10.20 CFTC Registered FCMs Holding Client Funds ..................................55

4.10.21 FCM Concentration: Customer 4d(a)(2) Balances .............................55

4.10.22 FCM Concentration: Customer Swap Balances ...............................55

4.10.23 U.S. On-SEF Trading Volume ........................................................... 56

4.10.24 U.S. On-SEF Trading Share............................................................... 56

4.11.1 Total Assets by BHC Type................................................................. 57

4.11.2 Common Equity Tier 1 Ratios ........................................................... 57

4.11.3 Selected Sources of Funding at CCAR BHCs ................................... 57

4.11.4 Cumulative Changes in Deposit Rates ............................................. 58

4.11.5 LIBOR-OIS Spread ...........................................................................58

4.11.6 Return on Equity and Return on Assets ............................................58

4.11.7 Net Interest Margins.......................................................................... 59

4.11.8 Delinquency Rates ........................................................................... 59

4.11.9 Loan-Loss Reserves ......................................................................... 59

4.11.10 Credit Card Delinquency Rates .........................................................60

4.11.11 Auto Loan Delinquency Rates ...........................................................60

4.11.12 Loans to Nondepository Financial Institutions ..................................60

4.11.13 Liquidity Coverage Ratio ................................................................... 61

4.11.14 High-Quality Liquid Assets by BHC Type .......................................... 61

4.11.15 Selected Liquid Assets at All BHCs................................................... 61

4.11.16 Cumulative Change in Securities....................................................... 62

4.11.17 Held-to-Maturity Securities .............................................................. 62

4.11.18 Duration Gap .................................................................................... 62

4.11.19 Stock Prices .....................................................................................63

4.11.20 Price-to-Book ...................................................................................63

4.11.21 U.S. Banks 5-Year CDS Spreads ......................................................64

4.11.22 Foreign Banks 5-Year CDS Spreads .................................................64

4.11.23 Initial and Stressed Capital Ratios.....................................................65

4.11.24 Federal Reserve’s Actions in CCAR 2017..........................................65

4.11.25 Federal Reserve’s Actions in CCAR 2018..........................................66

4.11.26 FDIC-Insured Failed Institutions ........................................................66

4.11.27 Commercial Bank and Thrift Pre-Tax Income ................................... 67
140 2018 FSOC // Annual Report

4.11.28 U.S. Branches and Agencies of Foreign Banks: Assets .................... 67

4.11.29 U.S. Branches and Agencies of Foreign Banks: Liabilities ................68

4.11.30 Credit Union Income ........................................................................ 70

4.11.31 Credit Union Deposits ...................................................................... 71

4.11.32 Credit Union Net Long-Term Assets.................................................. 71

4.11.33 Credit Union Investments by Maturity................................................ 71

4.12.1 Number of Broker-Dealers and Industry Net Income......................... 72

4.12.2 Broker-Dealer Revenues ................................................................... 72

4.12.3 Broker-Dealer Assets and Leverage.................................................. 72

4.12.4 Large Broker-Dealer Assets and Leverage by Affiliation .................... 73

4.12.5 Insurance Industry Net Income ......................................................... 74

4.12.6 Net Yield on Invested Assets ............................................................ 74

4.12.7 Insurance Industry Capital and Surplus ............................................ 75

4.12.8 Consumer Loans and Leases Outstanding ....................................... 75

4.12.9 Business Loans and Leases Outstanding ........................................ 75

4.12.10 ABS Issuance .................................................................................. 76

4.12.11 Selected ABS Spreads .................................................................... 77

4.12.12 Agency REIT Assets and Leverage .................................................. 77

4.12.13 Agency REIT Price-to-Book Ratio .................................................... 78

4.13.1 MMF Assets by Fund Type ............................................................... 78

4.13.2 Liquid Asset Shares of Prime MMFs ................................................ 78

4.13.3 Weighted Average Maturities by Fund Type ..................................... 79

4.13.4 Net Assets of the Investment Company Industry ..............................80

4.13.5 Monthly Bond Mutual Fund Flows ....................................................80

4.13.6 Monthly Equity Mutual Fund Flows ...................................................80

4.13.7 High-Yield Mutual Funds: Quarterly Flows ........................................ 81

4.13.8 Bank Loan Mutual Funds: Quarterly Flows ....................................... 81

4.13.9 Alternative Mutual Funds: Quarterly Flows ........................................ 81

4.13.10 Cumulative Equity Fund Flows ......................................................... 82

4.13.11 U.S.-Listed ETP AUM ....................................................................... 82

4.13.12 Retirement Fund Assets by Plan Type ..............................................83

4.13.13 Public and Private Pension Funding Levels ......................................84

4.13.14 North American Private Equity AUM .................................................86

4.13.15 M&A Loan Volume for Private Equity-Backed Issuers........................ 87

4.14.1 Market Capitalization of Blockchain-Based Digital Assets ................88

4.14.2 U.S. Consumer Adoption of Payment Instruments ..........................90

D.1 VIX and S&P 500 Indices .................................................................114

D.2 Total Assets of Inverse VIX ETPs ......................................................114

FINANCIAL STABILITY 

OVERSIGHT COUNCIL

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Revised (06/20/2019)