The Financial Stability Oversight Council (“FSOC”) has issued its first annual report. Established by the Dodd-Frank Act, the purposes of the FSOC are: (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; and (3) to respond to emerging threats to the stability of the U.S. financial system. The initial annual report focuses on the establishment of the FSOC and its initial activities to restore stability and strength of the U.S. financial markets, especially in the areas of capital levels, leverage, liquidity, resolution plans, volatility, swaps, the mortgage market and systemic risk. The Report also identifies the increased role of foreign banks in the U.S. marketplace as a risk point, since such institutions are not subject to the same regulation as are U.S.-based institutions. There is concern that foreign banks are subject to less strict capital and other financial standards than are U.S. banks, but that the pending Basel III reforms will help to address such issues.
The Report does not mention reinsurance, and contains only passing references to the insurance market, stating that “[t]he traditional U.S. insurance market largely functioned without disruption in payments to consumers throughout the financial crisis and the recovery.” The Report does note the role of financial guaranty and mortgage insurance in markets and products which experienced stress in recent times. The insurance industry is discussed at pages 61-62, 73 and 140-41 of the Report, which notes that insurance companies generally have strengthened their balance sheets and improved their investment portfolios.
On July 26, 2011, the Senate Committee on Banking, Housing & Urban Affairs held a nomination hearing which included Roy Woodall, the President’s insurance appointee to the FSOC, as well as nominees for the chair of the FDIC and the Comptroller of the Currency. The vast majority of the questions during the hearing were directed to the FDIC and OCC nominees, with no critical questioning of Mr. Woodall. As of the writing of this post, the Committee has not voted on those nominations.