Regulators belonging to the Financial Stability Oversight Council are looking at the new practices of asset managers, mortgage services companies, and insurers to search for potential threats related to certain high risk investment areas. The group just issued its yearly report to Congress, highlighting certain risks, both current and emerging ones. According to The Wall Street Journal, there is concern that the US government’s efforts to clamp down on banks could be sending risky activity outside the reach of legal recourse.
Since the 2008 financial crisis, banks are now subject to stricter rules. Two of the added requirements are that these financial institutions lower their exposure to high risk businesses and keep more loss-absorbing capital as protection in case of another economic meltdown. Now, however, regulators are watching to see whether financial firms that aren’t banks have been stepping in to fill in the roles that the latter vacated because of the stipulations.
For example, some nonbanks are now involved in mortgage servicing rights, which involves the collection and billing of mortgages. These firms aren’t under the same kind of regulatory oversight as banks, nor are they obligated to carry a specific cushion of capital.
In the report, the council expressed worry over certain securities lending markets-related activities. Asset-management firms are now providing protection services to investors engaging in short-selling and hedging. However, these firms also don’t have to carry a capital buffer. The regulators also expressed cause for possible concern because life-insurance companies have moved tens of billions of dollars of policy holder obligations to captive affiliates, which generally are not subject to even minimal disclosure.
The FSOC said it would keep an eye on these “emerging threats.” Areas that regulators have already identified as risk points include money-market mutual funds, repurchase agreements, short-term wholesale funding, growing interest rates, and cyber security. Also noted as possible causes for worry were whether fire sales might cause instability, how certain firms might be impacted by interest rates rising, the inadequate overhaul of the housing finance market, tight access to mortgage credits, and the markets’ dependence on Libor.
The council also acknowledging that there have been successes, including better balance sheets for big bank holding companies, greater confidence levels thanks to the Federal Reserve’s stress tests to gauge whether a financial institution could survive another economic crisis, the completion of the Volcker rule, and new rules for swaps markets and bank capital.
Regulators See Growing Financial Risks Outside Traditional Banks, The Wall Street Journal, May 7, 2014
Financial Regulators See Progress and Threats, NY Times, May 7, 2014
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