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Minutes of the Financial Stability Oversight Council

March 6, 2019

PRESENT: 

Steven T. Mnuchin, Secretary of the Treasury and Chairperson of the Financial Stability 

Oversight Council (Council)

Jerome H. Powell, Chairman, Board of Governors of the Federal Reserve System (Federal 

Reserve) 

Jelena McWilliams, Chairman, Federal Deposit Insurance Corporation (FDIC) 

Jay Clayton, Chairman, Securities and Exchange Commission (SEC)

J. Christopher Giancarlo, Chairman, Commodity Futures Trading Commission (CFTC)

Kathleen Kraninger, Director, Consumer Financial Protection Bureau (CFPB)

Joseph Otting, Comptroller of the Currency, Office of the Comptroller of the Currency (OCC), 

and Acting Director, Federal Housing Finance Agency (FHFA)

J. Mark McWatters, Chairman, National Credit Union Administration (NCUA)

Thomas E. Workman, Independent Member with Insurance Expertise 

Steven Seitz, Director, Federal Insurance Office (FIO), Department of the Treasury (non-voting 

member)

Charles G. Cooper, Commissioner, Texas Department of Banking (non-voting member) (by 

telephone)

Eric Cioppa, Superintendent, Maine Bureau of Insurance (non-voting member)

Melanie Lubin, Securities Commissioner, Maryland Office of the Attorney General, Securities 

Division (non-voting member)

GUESTS: 

Department of the Treasury (Treasury)

Brent McIntosh, General Counsel

Craig Phillips, Counselor to the Secretary

Bimal Patel, Deputy Assistant Secretary for the Council

Eric Froman, Principal Deputy Assistant General Counsel (Banking and Finance) and Executive 

Director of the Council

Stephen Ledbetter, Director of Policy, Office of the Financial Stability Oversight Council

Board of Governors of the Federal Reserve System

Randal Quarles, Vice Chairman for Supervision (by telephone)

Andreas Lehnert, Director, Division of Financial Stability

Federal Deposit Insurance Corporation

Travis Hill, Senior Advisor to the Chairman

Securities and Exchange Commission

Jaime Klima, Chief Counsel
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Commodity Futures Trading Commission

Michael Gill, Chief of Staff

Consumer Financial Protection Bureau

Hallee Morgan, Attorney-Advisor

Federal Housing Finance Agency

Sandra Thompson, Deputy Director, Division of Housing Mission and Goals

Comptroller of the Currency

Morris Morgan, Senior Deputy Comptroller and Chief Operating Officer

National Credit Union Administration

Andrew Leventis, Chief Economist

Office of the Independent Member with Insurance Expertise

Charles Klingman, Senior Policy Advisor 

Federal Reserve Bank of New York 

John Williams, President and Chief Executive Officer (by telephone)

Office of Financial Research (OFR)

Kipp Kranbuhl, Acting Assistant Secretary for Financial Institutions, Treasury

Stacey Schreft, Deputy Director for Research and Analysis 

Federal Insurance Office

Keven Meehan, Senior Insurance Regulatory Policy Analyst

Texas Department of Banking

James Cooper, Senior Vice President for Policy, Conference of State Bank Supervisors

Maine Bureau of Insurance

Mark Sagat, Assistant Director, Financial Policy and Legislation, National Association of 

Insurance Commissioners

Maryland Office of the Attorney General, Securities Division

A. Valerie Mirko, General Counsel, North American Securities Administrators Association
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PRESENTERS:

Nonfinancial Corporate Credit

• Ted Berg, Senior Financial Analyst, OFR

• Dan Li, Section Chief, Financial Intermediaries Analysis, Division of Monetary Affairs, 

Federal Reserve

• Charles Press, Senior Financial Institution and Policy Analyst, Division of Monetary 

Affairs, Federal Reserve

• Peter Phelan, Deputy Assistant Secretary for Capital Markets, Treasury (available for 

questions)

• Richard Farber, Senior Advisor, Treasury (available for questions)

Interpretive Guidance on Nonbank Financial Company Designations

• Bimal Patel, Deputy Assistant Secretary for the Council, Treasury

• Eric Froman, Principal Deputy Assistant General Counsel (Banking and Finance) and 

Executive Director of the Council, Treasury (available for questions)

Executive Session

The Chairperson called the executive session of the meeting of the Council to order at 

approximately 2:03 P.M.

The Chairperson began by welcoming Kipp Kranbuhl, Acting Assistant Secretary for Financial 

Institutions at Treasury, who was managing the OFR. The Chairperson also noted that Steven 

Seitz had been named the Director of FIO and was therefore a member of the Council. The 

Chairperson then outlined the meeting agenda, which had previously been distributed to the 

members together with other materials. The agenda for the executive session of the meeting 

included (1) an update on nonfinancial corporate credit and (2) a discussion of proposed 

amendments to the Council’s interpretive guidance on nonbank financial company designations.

1. Nonfinancial Corporate Credit

The Chairperson then introduced the first agenda item, an update on nonfinancial corporate 

credit. The Chairperson introduced Ted Berg, Senior Financial Analyst at the OFR; Dan Li, 

Section Chief of Financial Intermediaries Analysis in the Division of Monetary Affairs at the 

Federal Reserve; and Charles Press, Senior Financial Institution and Policy Analyst in the 

Division of Monetary Affairs at the Federal Reserve. 

Mr. Berg explained that the presentation would address (1) four key vulnerabilities that have 

emerged due to the low-interest rate environment and the long credit cycle and (2) the increasing 

importance of nonbank lenders, particularly in leveraged loans, and exposures of banks to 

corporate credit markets. He stated that investor demand had resulted in a record amount of debt 

issuance, and a post-crisis low in leveraged loan and high-yield bond credit spreads, during 

2018. He noted that one vulnerability is the deterioration in the credit quality of investmentgrade debt, which he stated could lead to widespread credit-rating downgrades. He explained 
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that over half of investment-grade corporate debt outstanding consisted of bonds rated BBB, the 

lowest-rated investment-grade category—a record high. He noted that bonds rated BBB are 

most susceptible to downgrades to high-yield, and that the risk of downgrades could therefore be 

higher than in previous credit cycles. He estimated that during the next downturn, downgrades 

of investment-grade debt could range from roughly $300 billion to $1 trillion, with the latter 

being a low-probability, worst-case scenario. A large downgrade wave could be disruptive to 

financial markets if investors with strict investment-grade mandates were forced to sell 

downgraded debt. He then noted that another vulnerability arose from high debt growth and 

leverage. He noted that many nonfinancial sectors had experienced debt growth well in excess 

of earnings growth over the previous five years. He also noted that a large percentage of noninvestment grade companies were highly leveraged (with a ratio of gross debt to earnings before 

interest, taxes, and depreciation exceeding 6x). He then described a vulnerability relating to high 

debt-serving burdens, based on interest coverage ratios. He noted that debt-serving burdens were 

high in many sectors, particularly technology, healthcare, consumer staples, and energy. Finally, 

he described a vulnerability related to the rapid growth in leveraged loans. In particular, he 

noted that the proportion of covenant-lite loans, which feature limited investor protections 

compared with other leveraged loans, was at a record high.

Ms. Li then explained that nonbank lenders had increased in importance in leveraged loan 

markets, with the share of newly issued institutional leveraged loans held by collateralized loan 

obligations (CLOs) increasing from 48 to 61 percent since 2006, and the share held by loan 

mutual funds increasing from 10 to 19 percent during the same period. She explained that loan 

mutual funds were more likely to be forced sellers due to the daily redemption they offer 

investors. She noted that there had been flows out of loan mutual funds in December 2018, but 

that funds had navigated the stress by selling loans at a discount and absorbing losses with cash 

buffers and bank credit lines, and that there had been no reports of these funds halting 

redemptions.

Mr. Press further described CLOs’ investments in institutional leveraged loans. He noted that 

CLOs had weathered the financial crisis better than certain other types of funds, and that changes 

in CLOs’ structures since the crisis, such as shorter reinvestment periods, had reduced CLOs’ 

riskiness somewhat. He also noted that, unlike mutual funds, CLOs do not have redemption risk 

and therefore would not generally be forced to sell assets. He then described banks’ exposures to 

leveraged loans, including direct exposures arising through holdings of leveraged loans and 

CLOs and indirect exposures from banks’ loans to third parties that have leveraged loan 

exposures. He noted that some exposures can be difficult to assess. He concluded by stating that 

vulnerabilities related to corporate debt had grown and leverage was at an all-time high, creating 

the potential for higher default rates and lower recovery rates in the next downturn compared to 

previous cycles.

Council members asked questions and had a discussion, including regarding the types of entities 

holding leveraged loans, and the extent to which they have hedged their exposures; liquidity 

requirements and other existing regulations applicable to loan mutual funds; and the extent to 

which market participants hold short positions in financial products tied to leveraged loans. 

Council members also discussed the extent to which leveraged loans are originated by banks and 

nonbanks, and banks’ direct and indirect exposures to leveraged loans. In addition, Council 
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members discussed the importance of the Council’s and regulators’ continued engagement on 

these issues. 

2. Interpretive Guidance on Nonbank Financial Company Designations

The Chairperson then introduced the second agenda item, a discussion of proposed amendments 

to the Council’s interpretive guidance on nonbank financial company designations under section 

113 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). 

The Chairperson noted that during the public session of the meeting, the Council would vote on 

proposed interpretive guidance and a final rule requiring the Council to seek public comment

before adopting amendments to its interpretive guidance on nonbank financial company 

designations. The Chairperson asked Council members if they wished to make any comments on 

the interpretive guidance or rule. Council members then discussed the proposed interpretive 

guidance, including the potential uses of nonbank financial company designations; the 

engagement among Council member agencies during the process of drafting the proposed 

interpretive guidance; how to implement the proposed activities-based approach set forth in the 

proposed interpretive guidance; and the appropriate role of primary regulators in Council 

analyses.

3. Other Business

The Chairperson then noted that he had held discussions the previous week with officials in 

London and Paris regarding the end of the membership of the United Kingdom (U.K.) in the 

European Union (Brexit). He noted the continuing uncertainty regarding Brexit, and the 

potential for dislocations if the U.K. left the European Union without a withdrawal agreement. 

He also described various potential next steps for the U.K. government, and noted that Treasury 

will continue to monitor these developments.

The Chairperson adjourned the executive session of the meeting at approximately 2:46 P.M.

Public Session

The Chairperson called the open session of the meeting of the Council to order at approximately 

2:52 P.M.

The Chairperson then outlined the agenda for the open session, which included (1) proposed 

amendments to the Council’s interpretive guidance on nonbank financial company designations

and a final rule requiring the Council to seek public comment before adopting amendments to its 

interpretive guidance on nonbank financial company designations, and (2) a vote on the minutes 

of the Council’s meeting on December 19, 2018.

1. Interpretive Guidance on Nonbank Financial Company Designations

The Chairperson then introduced the first agenda item. He stated that the proposed interpretive 

guidance the Council was considering would make significant changes to how the Council 

identifies, assesses and responds to potential risks to U.S. financial stability. He stated that under 
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the proposal, the Council would adopt an activities-based approach that would rely on the 

expertise of existing regulators to address potential risks. The Chairperson stated that the 

proposal would also enhance the Council’s process for evaluating individual nonbank financial 

companies for designation by increasing transparency and analytic rigor. He stated that the 

Council would also vote on a final rule requiring the Council to issue any future amendments to 

its interpretive guidance on nonbank financial designations for public comment, before adopting 

changes.

The Chairperson then turned to Bimal Patel, Deputy Assistant Secretary for the Council at 

Treasury, for a presentation.

Mr. Patel stated that the proposed interpretive guidance that the Council was voting on would 

replace the Council’s existing interpretive guidance on nonbank financial company designations. 

He noted that the Council was also voting on a final rule that would require any future changes to 

the Council’s interpretive guidance on nonbank financial company designations to be issued for 

public notice and comment.

Mr. Patel stated that the proposed interpretive guidance describes the approach the Council 

intended to take in prioritizing its work using an activities-based approach. He stated that it also 

includes reforms to enhance the analytical rigor and transparency in the processes the Council 

intended to follow if it were to consider making a nonbank financial company designation, 

including cost-benefit analysis, the consideration of the likelihood of a company’s material 

financial distress, and pre- and post-designation off-ramps to designation. He noted that the

proposed interpretive guidance states that the Council would pursue entity-specific nonbank 

financial company designations only if a potential risk or threat to U.S. financial stability cannot 

be addressed through an activities-based approach.

Mr. Patel noted that the proposed interpretive guidance emphasizes the importance of market 

discipline as a mechanism for addressing potential risks to U.S. financial stability. He stated that 

the activities-based approach was designed to leverage the expertise of primary financial 

regulatory agencies and allow them to address identified potential risks. He stated that it was 

also designed to reduce competitive distortions from government intervention by addressing 

risks in a consistent manner.

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

the activities-based approach. First, the Council would monitor markets to identify and assess 

potential risks to U.S. financial stability. Second, the Council would work with relevant 

regulators to seek the implementation of actions intended to address the potential risks. Mr. 

Patel stated that only if a potential risk or threat cannot be addressed through an activities-based 

approach would the Council potentially evaluate a nonbank financial company for a potential 

designation. 

Mr. Patel stated that the proposed interpretive guidance would also make several changes to 

enhance the analytical rigor and transparency of the nonbank financial company designation 

process. He stated that, in order to make the designation process more efficient, the proposed 

interpretive guidance would condense the current three-stage designation process into two stages, 
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by eliminating the current stage 1. He stated that in order to enhance analytical rigor, the 

Council would perform a cost-benefit analysis under the proposed interpretive guidance prior to 

making a designation. Mr. Patel noted that only if the expected benefits to financial stability 

from the determination justify the expected costs would the Council make a designation. He 

stated that the Council would also assess the likelihood of a nonbank financial company’s 

material financial distress when evaluating the company for a potential designation.

Mr. Patel stated that to promote transparency, the proposed interpretive guidance would increase 

the Council’s engagement with companies and their existing regulators before and during the 

designation process. He stated that the increased engagement would provide a company with a 

potential pre-designation “off-ramp.” He noted that the proposed guidance also includes 

procedures intended to clarify the post-designation “off-ramp.”

The Chairperson then invited comments on the proposed guidance from members of the Council. 

Jerome Powell, Chairman of the Federal Reserve, stated that the proposed amendments to the 

interpretive guidance did a good job of explaining to the public how the Council planned to 

address systemic risks. He stated that he supported the activities-based approach for addressing 

systemic risk, and also supported releasing the proposal for public notice and comment. 

Chairman Powell stated that the approach in the proposed interpretive guidance represented a 

disciplined framework for approaching financial stability. He noted that the Council’s annual 

report effectively uses an activities-based approach because it focuses on potential emerging 

threats and vulnerabilities associated with activities in major financial markets. He stated that 

there are many cases when designating companies will not reduce market fragilities. He stated 

that the activities-based approach envisions constructive engagement with the primary regulators

that have the tools and expertise to address such market fragilities. He noted that the activitiesbased approach focuses on monitoring a wide variety of risks and assessing how the risks might 

be propagated through the financial system. He noted that the proposed guidance also preserves 

nonbank financial company designations, which should be used sparingly, but which remain an 

important tool for addressing financial stability risks. He concluded by stating that the proposed 

interpretive guidance would benefit from public input.

Jay Clayton, Chairman of the SEC, stated that he agreed with Chairman Powell’s remarks. He 

stated that he also agreed with the principles of transparency, engagement, active monitoring of 

risk, and collaboration across Council members embodied in the proposal. Chairman Clayton 

stated that he believed the approach described in the proposed interpretive guidance would have 

worked well in the past in identifying some of the risks that previously came to fruition, and that 

he would like to hear from the public about whether they believe the proposal back-tests well. 

Jelena McWilliams, Chairman of the FDIC, thanked the Council for its transparency and for 

soliciting public comment on the proposal. She praised the emphasis in the proposal on primary 

regulators’ duties and obligations under the relevant organic statutes and mandates. She stated 

that the interpretive guidance took a thoughtful approach in taking into account primary 

regulators’ available supervisory tools and considering whether those tools would be sufficient to 

manage systemic risk before proceeding to the next stage of the designation process.
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Kathleen Kraninger, Director of the CFPB, expressed her support for the prior comments by 

Council members. She stated that the cost-benefit analysis proposed in the interpretive guidance 

was a good-government principle and a hallmark of the activities that the CFPB is undertaking. 

J. Mark McWatters, Chairman of the NCUA, stated that the activities-based approach requires 

the Council to follow the money and look for areas of over-concentration in risky, dubiously 

underwritten assets, loans, investments, and other ill-conceived financial activities. He stated 

that there was a common denominator in the savings and loan crisis, the developing-country debt 

crisis, the dot-com crisis, and the 2008-2009 financial crisis: these events were triggered by overconcentration in poorly underwritten assets. Chairman McWatters said that the approach under 

the proposed interpretive guidance matches what has occurred in the marketplace, and that this 

approach segues well into addressing nonbank financial institutions. He stated that American 

International Group, Inc., had received a $180 billion bailout during the financial crisis because 

it was over-concentrated in dubious credit-default swaps and other derivatives activities. He 

concluded by stating that if the Council identifies such over-concentration and activities, it

should not hesitate to designate entities that are engaged in those activities, if the primary 

regulator is not doing its job and Congress is not looking for a structural change. 

Thomas Workman, the Council’s independent member with insurance expertise, stated that the 

proposed interpretive guidance was the first time he had seen any substantive structure behind 

the idea of an activities-based approach. He stated that the proposed interpretive guidance 

incorporated the elements that need to be considered when applying a system-wide approach, 

while keeping in mind the relationship with the primary regulator and being mindful of the 

Council’s statutory obligations. 

Joseph Otting, Comptroller of the Currency and Acting Director of the FHFA, stated that he 

supported the proposal to revise the Council’s interpretive guidance, which was consistent with 

the recommendation in Treasury’s November 2017 report on Council designations. He stated 

that the proposed interpretive guidance would shift the Council’s approach away from the 

designation of individual companies and toward an activities-based approach that relies on the 

expertise of the primary regulator to address an identified risk. He stated that the additional 

procedural steps built into the designation process were positive changes, citing the consideration 

of the likelihood that a company would experience material financial distress and the analysis of 

benefits and costs. He stated that the proposal ensured that the Council will continue to serve its 

primary function in a transparent, efficient, and effective manner. 

Christopher Giancarlo, Chairman of the CFTC, stated that the Council’s value proposition is to 

bring together the expertise of its different member agencies. He stated that the proposed 

interpretive guidance would bring the primary regulator and the other regulators together to look 

at activities, determine whether they are likely to present financial stability risk, and consider 

whether steps should be taken. He stated that he believed the proposed interpretive guidance

improved as the Council incorporated input from the member agencies.

Eric Cioppa, Superintendent of the Maine Bureau of Insurance, stated that state insurance 

regulators believe the most appropriate approach to addressing financial stability risk is for the 

Council to work in conjunction with existing regulators to identify risks and use regulators’ 
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authorities to address the risks in the first instance. He stated that the proposed interpretive

guidance reflects these concepts, and that he supported the proposal and supported the proposed 

changes to the designation process and the annual review process for designated companies. He 

noted that the revised process would offer a robust exit ramp for designated firms and would 

provide designated firms and their regulators more transparency into the reasons for any firmspecific designations.

Following the discussion, the Chairperson presented to the Council the following resolution 

approving the proposed interpretive guidance regarding nonbank financial company 

designations:

WHEREAS, the Council’s duties under section 112 of the Dodd-Frank Wall Street Reform and 

Consumer Protection Act (the “DFA”) include monitoring the financial services marketplace in 

order to identify potential threats to U.S. financial stability, recommending to the Council 

member agencies general supervisory priorities and principles reflecting the outcome of 

discussions among the member agencies, identifying gaps in regulation that could pose risks

to the financial stability of the United States, and making recommendations to primary financial 

regulatory agencies to apply new or heightened standards and safeguards for financial activities 

or practices that could create or increase risks of significant liquidity, credit, or other problems 

spreading among financial companies and markets; and 

WHEREAS, section 113 of the DFA authorizes the Council to determine that a nonbank financial 

company shall be supervised by the Board of Governors of the Federal Reserve System (the 

“Federal Reserve”) and shall be subject to prudential standards if the Council determines that 

material financial distress at the company, or the nature, scope, size, scale, concentration, 

interconnectedness, or mix of the activities of the company, could pose a threat to the financial 

stability of the United States; and 

WHEREAS, on April 3, 2012, the Council issued a final rule, with accompanying interpretive 

guidance (the “2012 Interpretive Guidance”), that describe the manner in which the Council 

intended to apply the statutory standards and considerations, and the processes and procedures 

that the Council intended to follow, in making determinations regarding nonbank financial 

companies under section 113 of the DFA; and 

WHEREAS, the staffs of the Council members and their agencies have prepared proposed 

interpretive guidance (the “Proposed Guidance”) that would replace the 2012 Interpretive 

Guidance and that describes the approach the Council proposes to take in (1) prioritizing its 

work to identify and address potential risks to U.S. financial stability using an activities-based 

approach, and (2) enhancing the analytical rigor and transparency in the processes the Council 

would follow if it were to consider making a determination under section 113 of the DFA; and

WHEREAS, the staffs of the Council members and their agencies recommend that the Council 

approve and publish the Proposed Guidance.

NOW, THEREFORE, BE IT RESOLVED, that the Council hereby approves the Proposed 

Guidance and authorizes the Chairperson, or his designee, to cause the Proposed Guidance to 
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be published in the Federal Register, in a form and manner acceptable to the Chairperson, or his 

designee, and to otherwise make it available to the public as the Chairperson deems appropriate. 

BE IT FURTHER RESOLVED, that the Council hereby delegates authority to the Chairperson, 

or his designee, to make technical, nonsubstantive, or conforming changes to the text of the 

Proposed Guidance to ensure that it can be published in the Federal Register; to extend the due 

date for public comments on the Proposed Guidance; and to take such other actions and issue 

such other documents incident and related to the foregoing as the Chairperson, or his designee, 

deems necessary or appropriate to fulfill the Council’s objectives in connection with its 

publication.

The Chairperson asked for a motion to approve the resolution, which was made and seconded. 

The Council approved the resolution by unanimous vote.

The Chairperson then presented the Council with the following resolution approving the final 

rule regarding opportunities for notice and comment on the Council’s interpretive guidance 

regarding nonbank financial company designations:

WHEREAS, on April 3, 2012, the Council issued a final rule (the “2012 Rule”) and 

accompanying interpretive guidance that describe the manner in which the Council intended to 

apply the statutory standards and considerations, and the processes and procedures that the 

Council intended to follow, in making determinations regarding nonbank financial companies 

under section 113 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the 

“DFA”); and 

WHEREAS, section 111(e)(2) of the DFA authorizes the Council to adopt such rules as may be 

necessary for the conduct of the business of the Council; and 

WHEREAS, the staffs of the Council members and their agencies have prepared an amendment 

(the “Final Rule”) to the 2012 Rule to provide that the Council shall not amend or rescind its 

interpretive guidance on nonbank financial company determinations under section 113 of the 

DFA without providing the public with notice and an opportunity to comment under the 

Administrative Procedure Act; and

WHEREAS, the staffs of the Council members and their agencies recommend that the Council 

approve and publish the Final Rule.

NOW, THEREFORE, BE IT RESOLVED, that the Council hereby approves the Final Rule and 

authorizes the Chairperson, or his designee, to cause the Final Rule to be published in the 

Federal Register, in a form and manner acceptable to the Chairperson, or his designee, and to 

otherwise make it available to the public as the Chairperson deems appropriate. 

BE IT FURTHER RESOLVED, that the Council hereby delegates authority to the Chairperson, 

or his designee, to make technical, nonsubstantive, or conforming changes to the text of the Final 

Rule to ensure that it can be published in the Federal Register, and to take such other actions 

and issue such other documents incident and related to the foregoing as the Chairperson, or his 
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designee, deems necessary or appropriate to fulfill the Council’s objectives in connection with its 

publication.

The Chairperson asked for a motion to approve the resolution, which was made and seconded. 

The Council approved the resolution by unanimous vote.

2. Resolution Approving the Minutes of the Meeting Held on December 19, 2018

BE IT RESOLVED, by the Financial Stability Oversight Council (the “Council”), that the 

minutes attached hereto of the meeting held on December 19, 2018 of the Council are hereby 

approved.

The Chairperson asked for a motion to approve the resolution, which was made and seconded. 

The Council approved the resolution by unanimous vote.

The Chairperson adjourned the meeting at approximately 3:08 P.M.