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2020
ANNUAL REPORT

F I N A N C I A L S TA B I L I T Y OV E R S I G H T C O U N C I L

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.

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.

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:
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the Secretary of the Treasury, who serves as the Chairperson of the Council;
the Chair of the Board of Governors of the Federal Reserve System;
the Comptroller of the Currency;
the Director of the Consumer Financial Protection Bureau;
the Chairman of the Securities and Exchange Commission;
the Chairman of the Federal Deposit Insurance Corporation;
the Chairman of the Commodity Futures Trading Commission;
the Director of the Federal Housing Finance Agency;
the Chairman of the National Credit Union Administration; and
an independent member having insurance expertise who is appointed by the President
and confirmed by the Senate for a six-year term.

The nonvoting members, who serve in an advisory capacity, are:
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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.
F i n a n c i a l S t a b i l i t y O v e r s i g h t C o u n c i l

Statutory Requirements for the Annual Report

Section 112(a)(2)(N) of the Dodd-Frank Act requires that the annual report
address the following:
i. the activities of the Council;
ii. significant financial market and regulatory developments, including
insurance and accounting regulations and standards, along with an
assessment of those developments on the stability of the financial
system;
iii. potential emerging threats to the financial stability of the United
States;
iv. all determinations made under Section 113 or Title VIII, and the
basis for such determinations;
v. all recommendations made under Section 119 and the result of such
recommendations; and
vi. recommendations—
I. to enhance the integrity, efficiency, competitiveness, and stability
of United States financial markets;
II. to promote market discipline; and
III. to maintain investor confidence.

Approval of the Annual Report

This annual report was unanimously approved by the voting members of the
Council on December 3, 2020.

Abbreviations for Council Member Agencies and Member Agency Offices
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Department of the Treasury (Treasury)
Board of Governors of the Federal Reserve System (Federal Reserve)
Office of the Comptroller of the Currency (OCC)
Consumer Financial Protection Bureau (CFPB)
Securities and Exchange Commission (SEC)
Federal Deposit Insurance Corporation (FDIC)
Commodity Futures Trading Commission (CFTC)
Federal Housing Finance Agency (FHFA)
National Credit Union Administration (NCUA)
Office of Financial Research (OFR)
Federal Insurance Office (FIO)

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Contents
1 Member Statement....................................................... 1
2 Executive Summary...................................................... 3
3 Financial Developments...............................................11
3.1.

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

3.2. Nonfinancial Business Finance...........................................................15
Box A:.Nonfinancial Corporate Credit: Financial Market Fragilities and
the COVID-19 Pandemic.....................................................................19
3.3. Government Finance..........................................................................24
Box B:.U.S. Treasury Market Liquidity at the Onset of the COVID-19 Pandemic.27
Box C: F inances of State and Local Authorities and the COVID-19 Pandemic .33
3.4. Financial Markets .............................................................................35
Box D:.Recent Stress in Short-Term
Wholesale Funding Markets.............................................................. 43
Box E: Potential Risks in Commercial Real Estate.........................................74
3.5. Financial Institutions......................................................................... 77
3.6. Financial Market Structure, Operational Challenges,
and Financial Innovation................................................................... 118
3.7.

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

4 Council Activities and Regulatory Developments.....141
4.1.

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

4.2. Council Activities.............................................................................143
4.3. Safety and Soundness.....................................................................145
4.4.

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

4.5. Mortgages and Consumer Protection ..............................................160
4.6.

Data Scope, Quality, and Accessibility..............................................163

C o n te n t s

iii

5 Potential Emerging Threats, Vulnerabilities and
Council Recommendations....................................... 167
5.1.

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

5.2. Financial Markets............................................................................168
Box F:.Council Statement on Activities-Based Review of
Secondary Mortgage Market Activities.............................................171
5.3. Financial Institutions........................................................................173
5.4.

Financial Market Structure, Operational Challenges, and Financial
Innovation .......................................................................................175

5.5. Global Economic and Financial Developments..................................184
Box G:.“Low-For-Long” Interest Rates and Implications for
Financial Stability ...........................................................................186

6 Abbreviations............................................................ 189
7 Glossary..................................................................... 193
8 List of Charts............................................................. 203

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Member Statement

The Honorable Nancy Pelosi
Speaker of the House
United States House of Representatives

The Honorable Michael R. Pence
President of the Senate
United States Senate

The Honorable Kevin McCarthy
Republican Leader
United States House of Representatives

The Honorable Mitch McConnell
Majority Leader
United States Senate
The Honorable Charles E. Schumer
Democratic Leader
United States Senate

In accordance with Section 112(b)(2) of the Dodd-Frank Wall Street Reform and Consumer Protection
Act, for the reasons outlined in the annual report, I believe that additional actions, as described below,
should be taken to ensure financial stability and to mitigate systemic risk that would negatively affect
the economy: the issues and recommendations set forth in the Council’s annual report should be fully
addressed; the Council should continue to build its systems and processes for monitoring and responding
to emerging threats to the stability of the U.S. financial system, including those described in the Council’s
annual report; the Council and its member agencies should continue to implement the laws they
administer, including those established by, and amended by, the Dodd-Frank Act, through efficient and
effective measures; and the Council and its member agencies should exercise their respective authorities
for oversight of financial firms and markets so that the private sector employs sound financial risk
management practices to mitigate potential risks to the financial stability of the United States.

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

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

Brian P. Brooks
Acting Comptroller of the Currency
Office of the Comptroller of the Currency

Kathleen Kraninger
Director
Bureau of Consumer Financial Protection

Jay Clayton
Chairman
Securities and Exchange Commission

Jelena McWilliams
Chairman
Federal Deposit Insurance Corporation

Heath P. Tarbert
Chairman
Commodity Futures Trading Commission

Mark A. Calabria
Director
Federal Housing Finance Agency

Rodney E. Hood
Chairman
National Credit Union Administration

Thomas E. Workman
Independent Member Having Insurance Expertise
Financial Stability Oversight Council
M e m b e r S t a te m e n t

Executive Summary

The U.S. economy was in the midst of the longest
post-war economic expansion, with historically low
levels of unemployment, prior to the onset of the
COVID-19 pandemic earlier this year. The global
pandemic not only brought about a public health
crisis but also caused a contraction of economic
activity at an unprecedented pace. Initially, the
pandemic reduced consumer spending, slowed
manufacturing production, and led to widespread
business closures. The unemployment rate surged
from 3.5 percent in February to a record high of
nearly 15 percent in April. Since then, extraordinary
measures undertaken by policymakers have
succeeded in arresting the decline in economic
conditions, initiating a recovery and lowering the
unemployment rate to 7.9 percent as of September.
However, a protracted virus outbreak poses
downside risks that can slow the recovery and even
prolong the economic downturn.

Financial Stress from the COVID-19 Pandemic
and the Policy Response

The COVID-19 outbreak led to substantial financial
stress in the first quarter of 2020. While economic
activity was disrupted in March, investors fled riskier
assets for the safety and liquidity of cash and shortterm government securities. A broad-based selloff in
equities and commodities resulted in sharp declines
in both spot and futures prices. The sectors most
affected by the pandemic, such as airlines, energy,
transportation, hotels, and restaurants, recorded
the sharpest declines. The flight to safety and
liquidity also created disruptions in short-term and
global dollar funding markets. Meanwhile, trading
conditions for Treasuries and agency mortgagebacked securities (MBS), generally considered safe
and liquid assets, were also strained. Moreover,
credit conditions tightened in the commercial paper
(CP), corporate bond, and municipal debt markets.
With the stress in funding markets in March,
precautionary draws by nonfinancial businesses
on existing lines of credit with banks increased
sharply, as firms tried to cover shortfalls in revenues

and reductions in the availability of short-term
funding. Substantially increased liquidity and capital
requirements imposed after the 2008 financial
crisis helped banks meet the large, unanticipated
drawdowns. Large deposit inflows from investors
fleeing to the safety of deposit insurance and
borrowings at the Federal Reserve’s discount window
also helped in meeting this surge in liquidity demand.
Meanwhile, policymakers acted to minimize the
health and economic effects of the pandemic.
On March 27, the Coronavirus Aid, Relief, and
Economic Security (CARES) Act was signed into
law. The CARES Act authorized approximately
$2.6 trillion in funding to address COVID-19 and
to support the economy, households, businesses,
and other entities. In addition, the Federal Reserve
and Treasury undertook a series of extraordinary
measures beginning in March to contain the
financial fallout from the pandemic. The Federal
Reserve also lowered the target federal funds
rate to near zero and substantially increased
purchases of Treasuries and agency MBS to ease
trading pressures. In a bid to stabilize short-term
funding markets (STFMs), the Federal Reserve
launched a series of facilities to provide liquidity to
foreign central banks, primary dealers, depository
institutions, and money market funds. In light of
these exigent circumstances, the Federal Reserve
and Treasury also enacted a series of unprecedented
measures to support corporate bonds, bank loans,
longer-term municipal debt, and asset-backed
securities. These credit and lending facilities were
developed with the goal of relieving strains in
longer-term debt markets through the pandemic.
These policy actions have substantially improved
market conditions and investor sentiment in
financial markets. Federal Reserve purchases of
Treasuries and agency MBS reduced bid-ask spreads
and relieved the stress in trading conditions for
these securities. The announcement of liquidity
facilities not only succeeded in lowering spreads
on CP and short-term municipal securities but also
E xe c u t i v e S u m m a r y

reversed the heavy redemptions from prime and
tax-exempt money funds. The creation of new credit
facilities lowered spreads on corporate bonds and
revived new issuance in both the investment grade
and high-yield bond segments. Overall, these policy
measures have restored the orderly functioning of
financial markets and improved investor sentiment,
as reflected in the rebound in corporate financing
and equity prices.
The Council provided an important venue for
facilitating coordination and analysis of risks across
member agencies at the onset of the pandemic and
throughout the year. Council members regularly
identified key risks and shared information
regarding their policy responses. The Council also
increased the frequency of staff-level meetings
to allow important analyses of major market
developments to be shared in a timely manner
with all Council member agencies. In addition, the
Council’s previous identification of vulnerabilities
and analysis that it had performed leading up to the
financial stress helped ensure that policymakers’
responses were more coordinated, well informed,
and effective.

Implications for Financial Stability

A key goal of the Council and its member agencies
is to monitor vulnerabilities to U.S. financial
stability so that abrupt and unpredictable changes
in economic or financial conditions – “shocks” – do
not disrupt the ability of the financial system to meet
the demand for financial services. Vulnerabilities
include structural weaknesses in the financial system
and its regulatory framework. Vulnerabilities in the
financial system can amplify the impact of an initial
shock, potentially leading to substantial disruptions
in the provision of financial services, such as the
clearing of payments, the provision of liquidity, and
the availability of credit.
The COVID-19 pandemic was an extraordinary
shock to the global financial system. As discussed
above, it led to a significant disruption in the
provision of liquidity and the availability of credit,
reflecting increasing pessimism and uncertainty
about the economic outlook as major portions of the
economy began to shut down.

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Though policy actions to minimize the effects of the
pandemic have been effective at improving market
conditions, risks to U.S. financial stability remain
elevated compared to last year. In addition, the
global outlook for economic recovery is uncertain,
depending on the severity and the duration of the
ongoing pandemic.

Corporate Credit

The corporate debt-to-gross domestic product
(GDP) ratio was at historic highs when the
pandemic hit the United States. As economic activity
contracted in March, there were serious concerns
about the sustainability of corporate debt. Since
then, the corporate debt-to-GDP ratio has reached
new record highs, and, despite the turmoil in credit
markets, the policy-aided rebound in business
financing has been strong.
The potential risk to financial stability from
nonfinancial business borrowing depends on the
ability of businesses to service their obligations,
the ability of the financial sector to absorb losses
from defaults and downgrades, and the continued
willingness of market participants to provide
intermediation during times of stress.
Elevated valuations in U.S. equities and corporate
bonds make these markets vulnerable to a major
repricing of risk, increasing volatility, and weakening
balance sheets of financial and nonfinancial
businesses. Sharp reductions in the valuations of
different assets could negatively impact liquidity,
increase borrowing costs, and heighten rollover risk.
With cash flows impaired due to the COVID-19
pandemic, many businesses may be challenged to
service their debt. Since March, nearly $2 trillion in
nonfinancial corporate debt has been downgraded,
and default rates on leveraged loans and corporate
bonds have increased considerably. The growing
number of bankruptcy filings could stress resources
at courts and make it harder for firms to obtain
critical debtor-in-possession financing. It could also
prevent many firms from restructuring their debt
in a timely fashion, potentially forcing them into
liquidation.

Short-Term Wholesale Funding Markets

The short-term funding market provides essential
funding to businesses, local governments, and other
financial intermediaries and can have implications for
financial stability and the implementation of monetary
policy. Recent events, including the financial fallout
from the pandemic, have confirmed that potentially
significant structural vulnerabilities remain in STFMs.
Money market funds (MMFs) offer shareholders
redemptions on a daily basis while holding many
short-term assets that are less liquid, especially in
times of stress. Stresses on prime and tax-exempt
money funds in March revealed continued structural
vulnerabilities, which led to increased redemptions
and, in turn, likely contributed to the stress in
STFMs. Among institutional and retail prime MMFs,
outflows as a percentage of fund assets exceeded
that of the September 2008 crisis. Outflows abated
after the Federal Reserve announced support for the
CP market and MMFs.
Liquidity demand from leveraged participants,
such as hedge funds using Treasury collateral and
mortgage real estate investment trusts (mREITs)
using agency MBS collateral, may have also played a
significant role in the recent market volatility. Some
of these leveraged participants are vulnerable to
funding risks because of their reliance on funding
in repurchase agreement (repo) markets. When
such leveraged participants face margin calls (either
because of an external shock to the repo market
or investor concerns about their profitability), it
creates incentives for them to deleverage. Since the
assets on their balance sheets are the same assets
used as collateral in their repo funding, the need to
deleverage can increase selling pressures and lead to

more margin calls. The complexity of interactions
involving leveraged participants raises concerns as to
their role in amplifying funding stresses.
The Council recommends that regulators review
these structural vulnerabilities, including the
vulnerability of large-scale redemptions in prime
and tax-exempt MMFs, and the role leveraged
nonbank entities may have played in the repo
market. The Council also recommends that, if
warranted, regulators take appropriate measures to
mitigate these vulnerabilities.

Residential Real Estate Market: Nonbank
Mortgage Origination and Servicing

As the shock from the pandemic hit U.S.
households, federal and state governments enacted a
series of public assistance policies to aid households,
such as suspending foreclosures, discouraging
evictions, and offering flexibilities in home purchase
and mortgage acquisition processes. The disruption
in mortgage payments has focused attention on
nonbank mortgage origination and servicing.
While the business models of nonbank mortgage
companies vary, many are subject to certain
fragilities, such as a heavy reliance on short-term
funding, obligations to continue to make servicing
advances for certain delinquent borrowers, and
limited resources to absorb adverse economic
shocks. The surge in refinancing due to low rates
has provided servicers with an additional source
of liquidity to help sustain operations. An increase
in forbearance and default rates, however, has the
potential to impose significant strains on nonbank
servicers.
The Council encourages relevant state and
federal regulators to take additional steps to
coordinate, collect and share data and information,
identify and address potential risks, and strengthen
the oversight of nonbank companies involved in the
origination and servicing of residential mortgages.

Commercial Real Estate Market

The impact of COVID-19 has adversely affected
several components of the commercial real estate
(CRE) market, including the hotel, retail, and
office segments. A prolonged downturn leaves
E xe c u t i v e S u m m a r y

the CRE sector vulnerable to mortgage defaults
and declines in valuations, with spillovers to the
broader economy. While there is variation in
different institutions’ exposures to pandemic-driven
CRE stress, a sizeable proportion of CRE loans is
currently held on bank balance sheets, with small
and mid-sized banks more likely to be concentrated
in CRE. Distress in CRE properties makes these
creditor banks vulnerable to losses and write-downs,
with the potential to tighten credit and dampen the
economic recovery.
The Council recommends that regulators continue
to monitor volatility in CRE asset valuations, the
level of CRE concentration at banks and other
entities that hold CRE loans, and the performance
of CRE loans. The Council recommends that
regulators continue to encourage banks and other
entities, such as REITs and insurance companies,
to bolster, as needed, their loss-absorption capacity
by strengthening their capital and liquidity buffers,
commensurate with the levels of CRE concentration
on their balance sheets.

Large Bank Holding Companies

The banking system has been able to withstand the
financial fallout of the pandemic in part because
of the stronger capital and liquidity positions
built up over the last decade. Large bank holding
companies (BHCs) have also benefitted from the
extraordinary policy measures and other supervisory
and regulatory relief provided under these exigent
circumstances.
A severe and prolonged economic deterioration,
however, can affect the resilience of the banking
system. Financial distress at a large, complex,
interconnected BHC has the potential to affect
global financial markets and amplify the negative
impact on economic growth by further tightening
credit conditions.
The Council is closely monitoring the resilience
of large BHCs and remains vigilant about their
willingness and ability to provide credit should
economic conditions deteriorate further. Member
agencies use a wide range of tools to identify
and address risks to these institutions, including
supervisory and company-run stress tests,
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supervisory review and feedback on the resolution
plans of large banking organizations, on-site
examinations and off-site monitoring, and economic
analysis.
The Council recommends that financial regulators
ensure that the largest financial institutions
maintain sufficient capital and liquidity to ensure
their resiliency against economic and financial
shocks. In particular, the Council recommends that
regulators continue to monitor the capital adequacy
for these banks and, when appropriate, phase out
the temporary capital relief currently provided.
The Council also recommends that regulators
continue to monitor and assess the impact of rules
on financial institutions and financial markets—
including, for example, on market liquidity
and capital—and ensure that large BHCs are
appropriately monitored based on their size, risk,
concentration of activities, and offerings of new
products and services.

Investment Funds

Investment funds play a critical intermediary
role in the U.S. economy, promoting economic
growth through efficient capital formation. While
recognizing these benefits, the Council has also
identified potential vulnerabilities relating to
redemption risk in certain open-end funds. For
example, though both equity and fixed-income
oriented open-end funds offer daily redemptions
to investors, some fixed-income markets are less
liquid than equity markets, and thus funds holding
mostly fixed-income instruments may face greater
vulnerability to run risk than funds holding mostly
equities. The Council has focused in particular on
the question of whether the structure of open-end
funds results in greater selling pressure than if
investors held the fixed income instruments directly.
During the mid-March financial turmoil, credit
spreads increased to levels not seen since the 2008
financial crisis, and corporate bond issuance
came to a near halt. Meanwhile, bond funds
experienced historically high levels of outflows
that some research has suggested contributed to
stress in corporate and municipal bond markets.
Interventions by the Federal Reserve and Treasury

ultimately restored orderly functioning in the
primary and secondary markets. Nonetheless,
these events demonstrate the need for additional
analysis to assess broader market structure dynamics
that may have contributed to the stress, including
whether investors redeeming shares from bond
funds may have affected the extent of selling
pressure in the bond market differently than if those
investors had held and sold bonds directly.
In addition to the potential vulnerability associated
with redemption risk in mutual funds, the
Council has also previously highlighted the use of
leverage by investment funds. Leverage introduces
counterparty risk, and in a period of stress, if
leveraged investment funds are forced to sell assets
on a significant scale, it could exacerbate asset price
movements.
The Council recommends that the SEC and other
relevant agencies consider whether additional steps
should be taken to address these vulnerabilities.
The Council also supports initiatives by the SEC and
other agencies to address risks in investment funds
through various measures, including data collection
efforts and additional reporting requirements.

Financial Market Structure

The extreme volatility in financial markets early in
the pandemic further emphasized the importance
of ensuring that appropriate market structures
are in place so that financial markets can function
effectively during stress events.
Interlinkages among Dollar Funding Markets:
In the decade since the last financial crisis,
new regulations on bank capital and liquidity,
structural reforms in MMFs, and a new operating
environment for bank-affiliated broker-dealers have
fundamentally altered how market participants
interact and the various interlinkages among
the federal funds market, the repo market, and
the Eurodollar market. There are benefits from
interdependencies among markets, including
enhanced price discovery and more options for
hedging risks. At the same time, interdependencies
create transmission risks from volatile or inaccurate
pricing that have the potential to amplify market
shocks across different markets.

Pressures on Dealer Intermediation: The financial
fallout from the pandemic was disruptive in the
markets for critical securities such as Treasury
securities, MBS, and corporate bonds. Traditionally,
market-making and arbitrage mechanisms involving
securities dealers have helped in the orderly
functioning of the secondary markets for Treasury
securities and MBS. However, with the increase in
issuance volumes (especially for Treasury securities)
and the implementation of Basel III regulations on
capital and leverage, major bank-affiliated brokerdealers have reduced the amounts of their balance
sheets allocated to trading and repo transactions.
Together, these developments may have contributed
to episodes of illiquidity in Treasury security and
MBS markets in March 2020.
Nontraditional Market Participants: Nontraditional market participants, including principal
trading firms, play an increasingly important role
in securities and other markets. These firms may
improve liquidity and investor outcomes under
normal circumstances, but they may also introduce
risk. The trading strategies that non-traditional
market participants employ and the incentives and
constraints that they operate under may not be as
well understood, leading to uncertainty concerning
how these firms might behave during periods of
market stress.
The Council recommends that member agencies
conduct an interagency operational review of
market structure issues that may contribute to
market volatility in key markets, including shortterm funding, Treasuries, MBS, and corporate bond
markets, and study the interlinkages between them.
The Council recommends that financial regulators
continue to monitor and evaluate ongoing changes
that might have adverse effects on markets,
including on market integrity and liquidity.

Central Counterparties

Although central counterparties (CCPs) provide
significant benefits to market functioning and
financial stability, the inability of a CCP to meet
its obligations arising from one or more clearing
member defaults could potentially introduce strains
on the surviving members of the CCP and, more
broadly, the financial system. At the same time,
E xe c u t i v e S u m m a r y

CCPs’ internal risk management frameworks are
designed to reduce these risks by imposing liquidity
and resource requirements on clearing members
that can increase with market volatility. In addition,
both the CFTC and SEC maintain active risk
surveillance programs of CCPs’ and intermediaries’
risk management and receive daily or weekly reports
on positions, risk measures, margins, collateral, and
default resources. Supervisory stress tests involving
multiple CCPs can also be an important tool in the
assessment of risks.
In response to the market volatility in March 2020,
aggregate margin levels increased significantly,
but the markets served by the CCPs continued to
function in an orderly fashion. While the cleared
derivatives markets functioned as designed, there is
continued concern about the impact of contingent
liquidity demands on clearing members and their
clients related to margin requirements.
The Council recommends that the CFTC, Federal
Reserve, and SEC continue to coordinate in the
supervision of all CCPs designated by the Council
as systemically important financial market utilities
(FMUs). Relevant agencies should continue
to evaluate whether existing risk management
expectations for CCPs are sufficiently robust to
mitigate potential threats to financial stability.
The Council also encourages agencies to continue
to monitor and assess interconnections among
CCPs, their clearing members, and other financial
institutions. While margin requirements have
increased significantly in the aftermath of the
financial fallout from the COVID-19 pandemic,
agencies should continue to analyze and monitor the
impact of regulatory risk management frameworks
in cleared, uncleared, and related securities
markets and their impact on systemically important
intermediaries and their clients. Finally, the Council
encourages regulators to continue to advance
recovery and resolution planning for systemically
important FMUs and to coordinate in designing
and executing supervisory stress tests of multiple
systemically important CCPs.

Alternative Reference Rates

In March 2020, the UK Financial Conduct Authority
(FCA) stated publicly that, despite the COVID-19
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pandemic, the assumption that firms cannot rely on
LIBOR (formerly known as the London Interbank
Offered Rate) being published after the end of 2021
had not changed. The failure of market participants
to adequately analyze their exposure to LIBOR and
transition ahead of LIBOR’s anticipated cessation
or degradation could expose market participants to
significant legal, operational, and economic risks
that could adversely impact U.S. financial markets.
The Alternative Reference Rates Committee
(ARRC), a group of private-market participants
convened by the Federal Reserve and the Federal
Reserve Bank of New York (FRBNY) in 2014,
has released the Recommended Best Practices for
completing the transition from LIBOR. Market
participants that have determined that the Secured
Overnight Financing Rate (SOFR) is an appropriate
rate for their LIBOR transition should not wait for
the possible introduction of the forward-looking
SOFR term rates to execute the transition.
The Council commends the efforts of the ARRC
and recommends that the ARRC continue its work
to facilitate an orderly transition to alternative
reference rates. The Council recommends that
market participants formulate and execute
transition plans so that they are fully prepared for
the anticipated discontinuation or degradation
of LIBOR. Federal and state regulators should
determine whether further guidance or regulatory
relief is required to encourage market participants
to address legacy LIBOR portfolios. Council
member agencies should also use their supervisory
authority to understand the status of regulated
entities’ transition from LIBOR, including their
legacy LIBOR exposure and plans to address that
exposure.

Cybersecurity

Financial institutions continue to invest in and
expand their reliance on information technology
and cloud-based computing to reduce costs and to
increase efficiency and resiliency. The COVID-19
pandemic may accelerate this trend as financial
institutions have implemented business continuity
plans through increased use of teleworking systems
and dual-work locations. At the same time, financial
institutions have increased their reliance on third-

party service providers for teleworking systems.
Greater reliance on technology, particularly across a
broader array of interconnected platforms, increases
the risk that a cybersecurity incident may have
severe consequences for financial institutions. For
example, recent FRBNY analysis details how the
impairment of payment systems at any of the five
most active U.S. banks would result in significant
spillovers to other banks. Meanwhile, the rapid shift
towards working from home has also increased
cybersecurity risks in the financial sector. Market
participants have observed malicious actors’ use of
COVID-19 themed phishing attacks to increase their
success at compromising less secure home networks.
The Council recommends that federal and state
agencies continue to monitor cybersecurity risks
and conduct cybersecurity examinations of financial
institutions and financial infrastructures to ensure,
among other things, robust and comprehensive
cybersecurity monitoring, especially in light of new
risks posed by the pandemic. At the same time, the
unique and complex threats posed by cyber risks
require the public and private sectors to cooperate
to identify, understand, and protect against these
risks. The Council supports the continued use and
enhancement of public-private partnerships to
identify cybersecurity risks and to mitigate them.
The Council also supports agency efforts to increase
the efficiency and effectiveness of cybersecurity
examinations across the regulatory authorities.

Data Gaps and Challenges

The 2008 financial crisis revealed gaps in the data
needed for effective oversight of the financial
system and in internal firm risk management and
reporting capabilities. Since the crisis, important
steps have been taken, including developing and
implementing new identifiers for financial data.
Significant gaps remain, however, as some market
participants continue to use legacy processes that
rely on data that are not aligned to definitions from
relevant consensus-based standards. Gaps and legacy
processes inhibit data sharing.
The Council recommends that regulators and
market participants continue to work together to
improve the coverage, quality, and accessibility
of financial data, as well as improve data sharing

among relevant agencies. These partnership efforts
include implementing new identifiers, developing
and linking data inventories, and implementing
industry standards, protocols, and security for
secure data sharing. The Council also recommends
that member agencies support adoption and use of
standards in mortgage data, including consistent
terms, definitions, and data quality controls, which
will make transfers of loans or servicing rights less
disruptive to borrowers and investors. The Council
recommends that member agencies continue to
work to harmonize domestic and global derivatives
data for aggregation and reporting, and ensure
that appropriate authorities have access to trade
repository data needed to fulfill their mandates.

Financial Innovation

Financial innovation can offer substantial benefits to
consumers and businesses by meeting unfulfilled or
emerging needs or by reducing costs, but it may also
create new risks and vulnerabilities. For example,
there has been an increase in the number and type
of digital assets with many increasing in value. Much
like traditional assets, digital assets can also be
subject to operational and counterparty risks that
could prove disruptive to users and the digital asset
ecosystem as a whole.
In addition, financial firms’ rapid adoption of
fintech innovations in recent years may increase
operational risks associated with financial
institutions’ use of third-party service providers; if
critical services are outsourced, operational failures
or faults at a key service provider could disrupt
the activities of multiple financial institutions or
financial markets.
The Council encourages agencies to continue to
monitor and analyze the effects of new financial
products and services on consumers, regulated
entities, and financial markets, and evaluate their
potential effects on financial stability. The Council
encourages continued coordination among
federal and state financial regulators to
support responsible financial innovation and
competitiveness, promote consistent regulatory
approaches, as well as to identify and address
potential risks that arise from such innovation.

E xe c u t i v e S u m m a r y

3
3.1

Financial Developments

Household Finance

Prior to the onset of the COVID-19 pandemic,
households were generally in sound financial
condition. In contrast to the lead up to the 2008
financial crisis, debt levels, both in real terms
and as a percentage of disposable income, were
relatively low, and household credit growth was
concentrated in prime borrowers. Additionally,
household debt service ratios and delinquency
rates were low. Disruptions to economic
activity caused by the pandemic introduced
considerable stress to households, however.
The unemployment rate surged from 3.5
percent in February to a record high of nearly
15 percent in April. Since then, extraordinary
measures undertaken by policymakers
have succeeded in arresting the decline in
economic conditions, initiating a recovery
and lowering the unemployment rate to 7.9
percent as of September. While considerable
uncertainty remains concerning the path of the
economic recovery, delinquencies may increase
significantly as federal aid packages and
forbearance programs phase out.

3.1.1 Household Debt as a Percent of Disposable Personal Income
3.1.1 Household Debt as a Percent of Disposable Personal Income
Percent
160

120

As Of: 2020 Q2

Percent
160

Other Household Credit
Consumer Credit
Mortgages

120

0
1995

1998

2001

Source: BEA, Federal
Reserve, Haver Analytics

2004

2007

2010

2013

2016

2019

Note: Other Household Credit includes
debts of both households and nonprofits.

Following a sharp decline between 2008
and 2011, household debt has since grown
moderately, totaling $14 trillion in the second
quarter of 2020. While nominal household debt
is at record levels, it remains approximately $1
trillion below 2009 levels when adjusted for
inflation. In addition, the ratio of household
debt to disposable personal income has trended
downward in recent years, as disposable income
growth has outpaced household debt growth. As
of the fourth quarter of 2019, household debt
as a percentage of personal income stood at 97
percent, well below the peak of 134 percent in
the fourth quarter of 2007 (Chart 3.1.1). By
the second quarter of 2020, household debt as
a percentage of disposable income declined by
eight percentage points as consumer spending
Fina nc ia l De vel opment s

3.1.2 Household Debt Service Ratio

3.1.2 Household Debt Service Ratio
Percent

As Of: 2020 Q2

Percent

8
1990

1994

1998

2002

2006

2010

2014

2018

Note: Ratio of debt-service payments to
disposable personal income. Seasonally
adjusted. Gray bars signify NBER recessions.

Source: Federal Reserve,
Haver Analytics

3.1.3 Owners’ Equity as Share of Household Real Estate
3.1.3 Owners’ Equity as Share of Household Real Estate
Percent
80

As Of: 2020 Q2

Percent
80

40
1990

1990-Present
Average

1994

1998

2002

Source: Federal Reserve,
Haver Analytics

2006

2010

2014

2018

Note: Gray bars signify NBER recessions.

fell dramatically and federal aid helped
support incomes. The personal saving rate—a
measure of personal savings as a percentage
of disposable personal income—spiked to 34
percent in April 2020, exceeding the previous
record of 17 percent established in 1975. While
the personal saving rate has since declined to
14 percent as of September 2020, it remains well
above the 30-year average of 6.7 percent.
Rising incomes and years of low interest rates
helped keep the household debt service ratio—
the ratio of debt service payments to disposable
personal income—near 30-year lows through
the first quarter of 2020 and little changed
since 2018, before falling to record lows in the
second quarter of 2020 (Chart 3.1.2). The
share of owners’ equity in household real estate
continued to increase from its lows in 2012 and
has returned to the range that prevailed in the
early 2000s (Chart 3.1.3).
On net, household net worth has increased notably in the last decade, driven by stock market
and real estate gains; this has been particularly
true for high-net-worth and -income households. Between the fourth quarter of 2009 and
the fourth quarter of 2019, households above
the 80th percentile saw their net worth increase
by an annualized rate of 7.4 percent, while
households below the 80th percentile saw their
net worth increase by an annualized rate of 4.1
percent. Households below the 20th percentile
experienced a decrease in their household net
worth at an annualized rate of -1.2 percent.
While household net worth declined by 5.5 percent in the first quarter of 2020, it has since rebounded to pre-pandemic levels, as stock prices
recovered from pandemic-related economic and
financial market uncertainty.
In the last decade, consumer credit—which
primarily consists of credit card debt, student
loans, and auto loans—has grown at a faster
pace than mortgage debt, and now accounts
for about one-quarter of household debt. This
growth can be attributed to increases in student
loan and auto loan debt over credit card and
other household debt. However, in the midst of
the pandemic, total consumer credit declined

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as credit card balances fell by an unprecedented
$110 billion between the fourth quarter of 2019
and the second quarter of 2020. By contrast,
auto and student loan balances were little
changed during this period (Chart 3.1.4).

3.1.4 Components of Consumer Credit

Billions of US$
1750

As Of: 2020 Q2

1500

Credit standards have tightened since the start
of the pandemic, impeding credit markets
access for some. According to the April and
July 2020 Senior Loan Officer Opinion Survey
(SLOOS), banks have, on balance, tightened
standards and terms on all types of consumer
loans since the onset of the pandemic, and the
July survey indicated that the levels of standards
were reportedly at the tighter end of the 20052020 range. In addition, according to a Federal
Reserve survey of finance companies performed
in early May, consumer auto lending standards
at finance companies tightened somewhat
relative to before the pandemic outbreak. At the
same time, banks also reported that demand for
credit weakened substantially in the April and
July 2020 SLOOS.

1500

Student Loans

1250

Borrowers with prime credit scores have driven
increases in loan balances over the last ten
years. As of June 2020, subprime borrowers
accounted for 12 percent of loan balances, well
below the fourth quarter of 2009 peak when
subprime borrowers accounted for 21 percent
of loan balances. Total loan balances for prime
borrowers continued to increase throughout
the pandemic, as the steady growth in
mortgages more than offset the notable second
quarter decline in credit card debt for this
group. Alternatively, total loans for subprime
borrowers ticked down in the second quarter
of 2020, with mortgages, auto loans, and credit
card debt all decreasing.

Billions of US$
1750

1000

1250
Credit Card Debt

Auto Loans

750

1000
750

500

Other Household Debt

250

500

250

0
2003

2006

2009

2012

2015

Source: FRBNY Consumer Credit
Panel/Equifax, Haver Analytics

2018

Note: Gray bars signify
NBER recessions.

3.1.5 Change in Inquiries Relative to First Week of March 2020

3.1.5 Change in Inquiries Relative to First Week of March 2020
Percent
40
20

Percent
40

As Of: 26-Jun-2020
New Mortgages
Unspecified and Other
Revolving Credit
Auto Loans

-20

-40

-60
Mar:2020

Apr:2020

May:2020

Jun:2020

-60

Source: CFPB

Credit inquiries for new mortgages fell
dramatically starting in the second week of
March relative to both the first week and the
trend in previous years. Inquiries for new auto
loans and credit cards also fell considerably.
While auto and new mortgage inquiries have
largely recovered, credit card inquiries remain
substantially below pre-pandemic levels
(Chart 3.1.5).
Fina nc ia l De v el opment s

3.1.6 Percentage of Mortgages in Forbearance
3.1.6 Percentage of Mortgages in Forbearance
Percent
10
8

As Of: 27-Sep-2020

Percent
10

Nonbanks
Banks
Total

0
Mar:2020

May:2020

Jul:2020

Sep:2020

Source: Mortgage Bankers Association

3.1.7 Share Of Open Accounts that Transitioned to Delinquent

3.1.7 Share of Open Accounts that Transitioned to Delinquent
As Of: Jun-2020

Percent

1.5
1.2

1.5
First-Lien Mortgages
Credit Cards

Student Loans
Auto Loans

1.2

0.9

0.6

0.3

0.0
Feb:19

May:19

Aug:19

Source: CFPB

Nov:19

Feb:20

May:20

0.0

The economic impact of COVID-19 caused
strains on household finances that several
government actions, including stimulus
payments, extended unemployment benefits,
and mortgage payment forbearance, aimed
to alleviate. The share of mortgage loans in
forbearance increased sharply at the start of
the second quarter before flattening and even
declining in recent months (Chart 3.1.6).
As of June 2020, credit record data did not
show evidence of increasing delinquencies on
major forms of household credit during the
early months of the pandemic, in contrast to
the U.S. experience in the Great Recession. In
fact, delinquencies on household debt declined
between February and June. Policy interventions
at the federal, state, and local levels, which
counteracted income and employment
shocks, likely contributed to this decline in
delinquencies. Beyond direct income supports
such as higher unemployment insurance
benefits, these policies include programs aimed
specifically at providing payment assistance
to consumers with certain types of credit. At
the same time, the stable delinquency rates
can be attributed to temporary provisions
within the CARES Act mandating that loans
enrolled in forbearance be reported at the
level of delinquency as of the time of the
accommodation (Chart 3.1.7).
The COVID-19 pandemic has led to a sharp
increase in consumers seeking forbearance
or loss mitigation assistance from lenders.
The approximately 17,000 furnishers of
information to the nationwide consumer
reporting agencies vary meaningfully in their
level of sophistication and ability to accurately
report consumer data through this period of
financial stress. In addition, as discussed in
Section 3.4.5, credit scores have not generally
been negatively affected by COVID-19 as a
result of certain forbearance provisions in
the CARES Act. Accurate information on
consumer creditworthiness is important for the
functioning of consumer credit markets and
the broader economy. Inaccurate information
in consumer credit files may impair the

2 0 2 0 F S O C / / Annual Report

functioning of consumer lending and other
markets reliant on consumer credit report
information. It may be costly for furnishers
to improve the accuracy of their reporting,
however, especially given the stress caused by
the pandemic.
In the coming months, federal aid and
forbearance assistance programs are set to
expire, with forbearance assistance on federal
student loans held by the Department of
Education expiring in December 2020 and
forbearance assistance for federally backed
mortgages expiring in the first quarter of 2021.
These programs, along with analogous state
government programs and voluntary programs
set up by private lenders, have helped keep
delinquencies low in the immediate aftermath
of the COVID-19 pandemic. The elevated rates
of forbearance on mortgages and other forms
of household credit, however, indicate that
delinquencies may increase significantly as
programs expire.

3.2

Nonfinancial Business Finance

3.2.1.1 Nonfinancial Corporate Credit as Percent of GDP

3.2.1.1 Nonfinancial Corporate Credit as Percent of GDP
Percent
60

As Of: 2020 Q2

Percent
60

20
1980

1985

1990

1995

Source: Federal Reserve,
Haver Analytics

2000

2005

2010

2015

2020

Note: Gray bars signify NBER recessions.

3.2.1.2 U.S. Nonfinancial Business Leverage
3.2.1.2 U.S. Nonfinancial Business Leverage
Ratio
0.35

0.30
0.25

As Of: 2020 Q2

Ratio
6

Gross Debt / Assets
(left axis)

0.20

3.2.1 Corporate Debt
Nonfinancial firms entered 2020 with
increasingly high levels of debt, pushing the
corporate debt-to-GDP ratio to record high
levels (Chart 3.2.1.1). Debt levels were also high
when compared to corporate earnings (Chart
3.2.1.2). As the economic effects of COVID-19
unfolded, corporate credit quality deteriorated
as debt levels increased further and earnings
declined.

0.15
0.10
1990

Gross Debt / EBITDA
(right axis)
1996

Source: Compustat, Haver
Analytics

2002

2008

2014

2020

2
1

Note: Four-quarter moving average of the median ratio.
Includes rated and unrated nonfinancial businesses.
Gray bars signify NBER recessions.

Financial market conditions deteriorated
sharply after the onset of the COVID-19
outbreak. Many firms accessed their lines of
credit to preserve cash and liquidity given the
heightened uncertainty of future revenues.
These actions sharply increased bank credit
exposures to nonfinancial firms in the first half
of 2020. Several government relief programs
have helped many businesses obtain credit
and maintain operations, though considerable
credit risk remains given the uncertain
economic outlook. Bank lending increased
Fina nc ia l De v el opment s

in the second quarter of 2020 because of
the increase in small business lending under
the Small Business Administration’s (SBA’s)
Paycheck Protection Program (PPP), which
offset the decline in lending under lines of
credit. Outside of the PPP, however, the supply
of bank credit appears to have decreased as
indicated by the Federal Reserve’s SLOOS. The
percent of respondents reporting a tightening
of standards reached the highest level since
2008 (Chart 3.2.1.3).

As Of: 2020 Q2
Percent
100
Large and Middle-market Firms
75
Small Firms

-25

-50
1992

1996

2000

2004

2008

2012

2016

2020

Tightening

Percent
100

Easing

Tightening

3.2.1.3 Bank Business Lending Standards
3.2.1.3 Bank Business Lending Standards

-50

Note: Represents net percentage of banks reporting
tightening standards for C&I loans. Large and middlemarket firms are those with annual sales of $50 million
or more. Gray bars signify NBER recessions.

Source: Federal Reserve Senior
Loan Officer Opinion Survey

Percent
10

As Of: 30-Sep-2020

Percent
10

BBB US Corporate Index
Single-A US Corporate Index

AA US Corporate Index

0
2005

2007

2009

2011

Source: Ice Data Indices,
ICE BofA US, FRED

2013

2015

2017

2019

Note: The ICE BofA Option-Adjusted Spreads (OASs) are the
calculated spreads between a computed OAS index of all
bonds in a given rating category and a spot Treasury curve.

3.2.1.5 Gross Issuance of Corporate Bonds
3.2.1.5 Gross Issuance of Corporate Bonds
As Of: Sep-2020
Trillions of US$
2.5
High-Yield
Investment Grade
2.0

2.0

1.5

1.0

0.5

0.0

2006

2008

2010

Source: Refinitiv,
SIFMA

Trillions of US$
2.5

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2012

2014

2016

2018

2020
YTD

0.0

Note: Includes all non-convertible corporate debt,
MTNs, and Yankee bonds, but excludes all issues
with maturities of 1 year or less and CDs.

Hundreds

3.2.1.4 Investment Grade Corporate Bond Spreads
3.2.1.4 Investment Grade Corporate Bond Spreads

At the height of the March 2020 COVID-19
market stress, corporate bond issuance came
to a near-halt as secondary market liquidity
dried up and investment grade corporate credit
spreads surged to levels not seen since the
2008 financial crisis (Chart 3.2.1.4). However,
market conditions improved following the
announcement of the Federal Reserve’s Primary
Market and Secondary Market Corporate Credit
Facilities. These facilities led to a significant
tightening in credit spreads and bid-ask spreads
for investment grade corporates. Financing
conditions were further supported by the
Federal Open Market Committee’s (FOMC’s)
decision to reduce the target federal funds rate
to near zero percent, allowing investment grade
firms to issue new debt at historically low yields.
Consistent with more accommodative financing
conditions, issuances of investment grade
corporate bonds hit a record $298 billion in
April, and in the first nine months of 2020,
gross issuance of investment grade corporate
bonds totaled $1.6 trillion compared to
$1.1 trillion for all of 2019 (Chart 3.2.1.5).
Corporations raising cash buffers, paying down
drawn revolving credit lines, and refinancing
existing debt at more favorable interest rates
were primarily responsible for the record level
of issuances. While share repurchases and
dividend distributions still account for a sizeable
portion of corporations’ use of proceeds,
during the first half of 2020, nonfinancial
corporations increased their holdings of
domestic bank deposits (checking and time
deposit accounts) and currency by $580 billion,

After a few years of robust growth, issuance of
leveraged loans came to a halt in March, and
spreads widened significantly, peaking at over
1,000 basis points in late March. Since then,
spreads have compressed by over 500 basis
points to 493 basis points as of September 30,
2020 (Chart 3.2.1.7). In contrast to the record
level of issuance in the investment grade and
high-yield corporate bond markets, issuance
in the leveraged loan market remains subdued
relative to pre-pandemic levels (Chart 3.2.1.8).
Demand from collateralized loan obligations

Percent
25

As Of: 30-Sep-2020
Percent
25
Single-B US Corporate Index
BB US Corporate Index
20

0
2005

2007

2009

Source: Ice Data Indices,
ICE BofA US, FRED

2011

2013

2015

2017

2019

Note: The ICE BofA Option-Adjusted Spreads (OASs) are the
calculated spreads between a computed OAS index of all
bonds in a given rating category and a spot Treasury curve.

3.2.1.7 Leveraged Loan Spreads
3.2.1.7 Leveraged Loan Spreads
Percent
12.5

As Of: 30-Sep-2020

Percent
12.5

10.0

7.5

5.0

2.5
2011

2013

2015

2017

Hundreds

Spreads on high-yield corporate bonds, which
were at very low levels prior to the COVID-19
pandemic, increased significantly during the
March 2020 market stress (Chart 3.2.1.6). The
stress observed in the high-yield corporate
bond market effectively shut down the primary
market and according to Standard & Poor’s
Leveraged Commentary & Data (S&P LCD),
only five bonds were priced in March, raising a
total of $4.2 billion. This represents a decline
of 86 percent from February 2020, when
approximately $30 billion was raised, and a
decline of 81 percent from March 2019, when
$22 billion was raised. High-yield spreads have
since compressed considerably but remain
above pre-pandemic levels. Nevertheless,
the decline in risk-free rates has meant that
effective yields on high-yield corporate bonds
are now at or near pre-pandemic levels. As of
September 30, 2020, the effective yield on the
ICE BofA US High Yield Index was 5.8 percent
compared to 5.7 percent on September 30,
2019. With the return of more normal market
conditions, high-yield borrowers returned to
the market and in the first nine months of
2020, gross issuance of high-yield corporate
bonds totaled $325 billion compared to $279
billion for all of 2019. Although most highyield bonds are not eligible for the Federal
Reserve’s programs or facilities, much of the
improvement in pricing is attributed to the
implementation of these programs and to the
low interest rate environment.

3.2.1.6 High-Yield Corporate Bond Spreads
3.2.1.6 High-Yield Corporate Bond Spreads

Hundreds

a 40 percent increase relative to the fourth
quarter of 2019.

2.5

2019

Note: Spread-to-maturity for syndicated loans
included in the S&P LCD Leveraged Loan Index.

Source: S&P LCD

3.2.1.8 Institutional Leveraged Loan Issuance
3.2.1.8 Institutional Leveraged Loan Issuance
As Of: 30-Sep-2020
Billions of US$
100
2020 Monthly Issuance (left axis)
2016-2019 Monthly Average
Issuance (left axis)
80

Billions of US$
500
400

2016-2019 Average Cumulative
Issuance (right axis)
2020 Cumulative Issuance
(right axis)

300

200

100

Jan

Mar

May

Jul

Sep

Nov

Source: S&P LCD

Fina nc ia l De v el opment s

3.2.1.9 Nonfinancial Corporations Liquid Assets
3.2.1.9 Nonfinancial Corporations Liquid Assets
Percent of Total Assets
9

As Of: 2020 Q2

Percent of Total Assets
9

2
1980

1985

1990

1995

Source: Federal Reserve,
Haver Analytics

2000

2005

2010

2015

2020

Note: Liquid assets includes foreign deposits, checkable deposits and
currency, time and savings deposits, money market fund shares,
security repurchase agreements, debt securities, and mutual fund
shares. Gray bars signify NBER recessions.

3.2.1.10 Maturity Profile of U.S. Nonfinancial Corporate Debt

3.2.1.10 Maturity Profile of U.S. Nonfinancial Corporate Debt
Billions of US$
1200

Billions of US$
As Of: July-2020
1200
Speculative Grade
Investment Grade
1000
800

800

600

400

200

2020

2021

Source: S&P Global
Ratings Research

1000

2022

2023

2024

2025

Note: Includes bonds, loans, and revolving credit
facilities that are rated by S&P Global Ratings.

2 0 2 0 F S O C / / Annual Report

(CLOs), which purchased approximately 60
percent of the syndicated loan issuances in
2019, waned in 2020. As of September 30, 2020,
CLO volumes totaled $60 billion year-to-date,
a 33 percent decline compared to the first nine
months of 2019.
Some factors mitigate the burden of the debt
accumulated by corporations. Low interest rates
support interest coverage ratios for nonfinancial
firms. In addition, firms have accumulated
record levels of liquid assets which they can use
as a buffer against the drop in revenues (Chart
3.2.1.9). The immediate refinancing risk is
limited, and the high-yield debt accounts for
27 percent of U.S. nonfinancial debt maturing
through 2021 compared to 56 percent of U.S.
nonfinancial debt maturing in 2024 (Chart
3.2.1.10). However, nonfinancial corporations
with lower revenues and additional debt
outstanding may face increased constraints
in deleveraging as higher debt servicing
requirements may constrain future expansion.
Despite these mitigating factors, the COVID-19
pandemic has led to a contraction in economic
activity and corporate profits. This contraction has resulted in a sharp deterioration in
the credit quality of nonfinancial businesses.
During the first nine months of 2020, approximately $2 trillion of U.S. nonfinancial corporate debt was downgraded by Standard & Poor’s
(S&P), with the majority of these downgrades
occurring in March, April, and May. The COVID-19 pandemic has also negatively impacted
credit performance. Default rates on leveraged
loans and corporate bonds have increased notably from the pre-crisis lows, though they are still
below those observed during the 2008 financial
crisis. Amid uncertainty about the pandemic
and future economic growth, downside risks for
business credit quality and solvency remain.

Box A: N
onfinancial Corporate Credit: Financial Market Fragilities and
the COVID-19 Pandemic

Prior to the COVID-19 pandemic, U.S. corporate debt
ratios were elevated, leaving firms more vulnerable
to an earnings shock. During the early phase of
the crisis, debt ratios increased even further as
corporations drew down revolving credit facilities to
cover emergency liquidity and operating needs, while
earnings declined.
In response to the crisis, the Federal Reserve and
Treasury launched a series of corporate lending
facilities to enable markets to function more effectively.
Following these extraordinary actions, corporate
bond issuance surged to record levels, credit spreads
narrowed, and bid-ask spreads tightened (see
Section 3.2.1). Looking forward, there is significant
uncertainty in the corporate sector outlook. In an
adverse scenario, corporate defaults and bankruptcies
could increase significantly. Additionally, significant
debt overhang and an acceleration in credit rating
downgrades could lead to increased debt servicing
costs, limiting efficient allocation of capital and
dragging on the economic recovery.
Rising defaults and bankruptcies among
high-yield borrowers
In 2020 an increasing number of high-yield firms
defaulted on debt obligations and filed for bankruptcy.
This adverse trend is expected to continue as
corporate fundamentals weaken further for
companies in industries that have been particularly
challenged by COVID-19, such as the retail, airline,
travel, and hospitality industries.
The trailing four quarter U.S. high-yield corporate
default rate rose to 8.5 percent in the third quarter
of 2020, from 3.4 percent a year ago (Chart A.1). In
October 2020, Moody’s forecasted that the trailing
twelve month default rate will peak at 10 percent
in March 2021 under its baseline scenario, lower
than the 15 percent peak in November 2009. U.S.
corporate bond and syndicated loan defaults surged
in the second quarter of 2020, when defaults totaled
$97 billion, the highest since 2009. These numbers
do not include defaults of small and medium-sized

enterprises (SMEs), which employ close to 50 percent
of U.S. workers, have limited access to capital
markets, and are more vulnerable to economic
shocks.
A.1 U.S. Corporate Defaults

A.1 U.S. Corporate Defaults
Billions of US$
As Of: 2020 Q3
200
Default Rate (right axis)
Total Defaulted Debt (left axis)
160

Percent
20
16

120

2007

2009

2011

Source: Moody's
Investors Service, OFR

2013

2015

2017

2019

Note: Issuer weighted four quarter trailing default
rate for speculative grade U.S. corporates.

Business bankruptcy filings are also increasing, with
Chapter 11 business filings exceeding 5,500 year-todate through September, compared to 4,100 over the
same period in 2019 (Chart A.2). While the path of
the economic recovery remains uncertain, the pace
of filings may accelerate going forward as some
federal assistance programs begin to roll-off.
A.2 Chapter 11 Bankruptcy Filings

A.2 Chapter 11 Bankruptcy Filings
Count (‘000s)
16
Oct – Dec
14
Jan – Sep
Full Year
12

Count (‘000s)
16

As Of: Sep-2020

14
12

2000

2003

Source: ABI, AACER

2006

2009

2012

2015

2018

Note: Annual bankruptcy filings from 2000 – 2010.
Monthly bankruptcy filings from 2011 – 2020.

Bo x A: No n f i n a nc ia l Corp ora te Cre d it: Fina nc ia l Ma rke t Fra gilitie s a nd the COVI D- 19 P andemi c

Box A: Nonfinancial Corporate Credit: Financial Market Fragilities and
the COVID-19 Pandemic
The U.S. bankruptcy system provides important
benefits, including enabling borrowers to continue
operating during the bankruptcy process while debts
are restructured. However, a sudden wave of
bankruptcy filings could overwhelm the bankruptcy
system, resulting in congested courts and limited
access to debtor-in-possession (DIP) financing. In the
event of a protracted restructuring process, firms
without access to DIP financing may have insufficient
cash flows to cover day-to-day operations. A sudden
spike in liquidations could impede the economic
recovery through various channels, including
increased job cuts, reduced capital spending, and a
tightening in lending standards for business loans due
to increased creditor losses.
In response to these challenges, the Federal Reserve
and Treasury established the Main Street Lending
Program, a series of business lending facilities, to
support small and medium-sized businesses. As
of September 30, 2020, the total amount of loans
outstanding under this facility was $2.2 billion.
Credit rating downgrades further stress
corporate bond and CLO markets
Credit ratings downgrades accelerated in the spring
as corporate credit fundamentals deteriorated. By
May 2020, the rolling 3-month ratio of nonfinancial
corporate downgrades to upgrades hit 7.9, the
highest level on record (Chart A.3). Ratings actions
stabilized in the summer of 2020, and the ratio of
downgrades to upgrades fell to slightly above one for
the three months ending September 2020.
A large percentage of these recent downgrades
pertain to “fallen angels,” issuers downgraded from
investment grade to high-yield. According to the ICE
BofA U.S. Corporate Index, fallen angels totaled $250
billion year-to-date as of September, significantly
exceeding annual levels over all prior years (Chart A.4).
The Federal Reserve and Treasury established the
Primary and Secondary Market Corporate Credit
Facilities to provide a funding backstop for eligible
corporate debt and to support market liquidity for

2 0 2 0 F S O C / / Annual Report

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

A.3 U.S. Nonfinancial Corporate Downgrade-Upgrade Ratio
Ratio
10

As Of: Sep-2020

Ratio
10

0
1990

1994

1998

2002

Source: Moody’s,
Haver Analytics, OFR

2006

2010

2014

2018

Note: Ratio is trailing 3-month downgrades divided
by upgrades. Gray bars signify NBER recessions.

A.4 Fallen Angel Debt

A.4 Fallen Angel Debt
Billions of US$
250

As Of: Sep-2020

Billions of US$
250

200

150

100

0
2001
2005
Source: BofA Global
Research, ICE Data
Services, OFR

2009

2013

2017

Note: Rolling three months beginning in March 2020. Includes
financial issuers. Fallen angels above refer to issuers
previously included in the BofA U.S. Corporate Index.

3.2.2 Equities

corporate debt. These facilities were subsequently
expanded to include certain fallen angel debt,
which has helped restore investor confidence and
mitigate disruptions resulting from credit rating
downgrades.
Another concern regarding downgrades involves
corporate borrowers that rely on the syndicated
leveraged loan market. Loan-only issuers
represented 63 percent of 2019 syndicated loan
issuance, according to S&P LCD. In recent years,
CLOs have been the major purchaser of leveraged
loans, accounting for approximately 60 percent of
primary issuance according to S&P LCD. Demand
from CLOs waned in the spring, however, as
performance metrics for existing CLOs such as
over-collateralization ratios, weighted average
rating factors, and triple-C buckets, have been
adversely affected by the recent wave of loan
downgrades. As of June 2020, over 20 percent
of CLOs were failing junior over-collateralization
tests, according to Moody’s. Even so, the trailing
twelve month default rate for syndicated loan
issuers totaled 4.6 percent as of September
2020, well below the 8.2 percent default rate
seen in November 2009. While issuers that can
access funding via the corporate bond market
may be less adversely impacted, issuers that rely
exclusively on the syndicated loan market may
face a tightening in financing conditions.

The U.S. equity market entered 2020 on the heels of
one of its best annual gains in the last two decades.
Despite investor concern over global trade policy and the
sustainability of the longest U.S. economic expansion on
record, the S&P 500 climbed 29 percent in 2019. Led by
a sharp rise in tech stocks, the U.S. index outpaced most
of its global peers, with benchmarks in Japan, Europe,
and China rising 18 percent, 25 percent, and 22 percent
in 2019, respectively. Emerging market stocks also
gained 15 percent on average. By the end of 2019, market
analysts widely expected U.S. and global equity markets
to climb higher, albeit at a slower pace, with anticipated
support from accommodative Federal Reserve policy
and progress towards the U.S.-China Phase One trade
agreement.
Indeed, U.S. stocks continued to hit new highs at
the start of 2020, with markets reacting positively to
the official signing of a U.S.-China Phase One trade
agreement on January 15. However, investors grew
increasingly attentive to press reports describing a novel
coronavirus outbreak originating in Wuhan, China.
With investors citing new risks to global demand and
supply chains, global stock markets endured substantial
volatility, beginning in Asia. As COVID-19 intensified
and spread to Europe—and the economic impact of
sustained lockdown measures became apparent—risk
sentiment took a sharply negative turn.
Selling pressure in global equity markets intensified
in March as energy producers suffered from a global
collapse in demand and Saudi Arabia and Russia failed
to reach an agreement on oil output cuts, sending
commodity prices sharply lower. Between February 19
and March 23, the S&P 500 fell by 34 percent, with
industries most directly affected by the virus, such as air
carriers, cruise lines, and energy producers, leading the
decline in U.S. stocks.
During the March 2020 sell-off, the Chicago Board
Options Exchange Volatility Index (VIX)—a measure
of implied stock market volatility conveyed by options
prices—spiked to a level exceeding that which was seen
during the 2008 financial crisis, reaching 83 in midMarch after entering the year at 14 (Chart 3.2.2.1).
Realized stock market volatility also exceeded 2008
levels, with the S&P 500 falling by nearly 12 percent on
March 16, its largest one-day drop since 1987.
Fina nc ia l De vel opment s

3.2.2.1 S&P 500 Volatility
3.2.2.1 S&P 500 Volatility
Index
100

As Of: 30-Sep-2020

Index
100

VIX

20-Year
Average

20
0
2008

2010

2012

2014

2016

2018

2020

Source: Bloomberg, L.P.

3.2.2.2 S&P 500 Forward Price-to-Earnings Ratio
3.2.2.2 S&P 500 Forward Price-to-Earnings
P/E
30

As Of: 30-Sep-2020

P/E
30

10
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Source: Bloomberg, L.P.

3.2.2.3 S&P 500 1-Year Price Returns by Sector
3.2.2.3 S&P 500 1-Year Price Returns by Sector
Percent
50

As Of: 30-Sep-2020

-25

-50

Source: Bloomberg, L.P.

Percent
50

2 0 2 0 F S O C / / Annual Report

The velocity of the selloff triggered market-wide
circuit breakers for the first time since 1997.
These circuit breakers, revised in the aftermath
of the 2010 flash crash, were designed to halt
trading if price declines reached a level that
could exhaust market volatility. Under Level 1
and Level 2 circuit breakers—which are set at
7 percent and 13 percent of the closing price
for the previous day—trading pauses for 15
minutes. Under the Level 3 circuit breaker—
which is set at 20 percent—trading will halt for
the remainder of the day. Between March 9
and March 18, the Level 1 circuit breaker was
triggered four times, three of which occurred
in the opening minutes of trading. In each
instance, the resumption of trading after the
halt was relatively orderly, and the Level 2 and
Level 3 circuit breakers were not breached.
During the March 2020 equity market sell-off,
the S&P 500’s 12-month forward price-toearnings ratio—a popular valuation metric—
fell to a low of 14x, even as analysts penciled
in sharp downward revisions to expected
corporate profits (Chart 3.2.2.2). By the end
of March, risk sentiment began to improve
amid unprecedented policy easing. In terms
of monetary policy, the Federal Reserve
announced open-ended purchases of Treasury
and MBS and the purchase of corporate
bonds, among other extraordinary measures,
after cutting the target federal funds rate to
near zero. Regarding fiscal policy, Congress
passed fiscal packages totaling approximately
$2.6 trillion to support the economy and
boost investor sentiment. Improved market
functioning and a rebound in economic activity
in the third quarter of 2020 helped propel the
broad-based recovery in global stocks. As of
September 30, the S&P 500 was up 4.1 percent
on the year and its forward price-to-earnings
ratio had risen above 25x. At the sector level,
the recovery was driven primarily by large-cap
tech stocks, which analysts viewed as among the
main beneficiaries of changing consumer and
business behaviors (Chart 3.2.2.3).
Outside of the U.S., the aggressiveness
of countries’ economic and health policy

responses to COVID-19 helped drive
differentiated price action (Chart 3.2.2.4).
For example, Asian stock markets generally
outperformed their global peers, which
analysts have attributed to the relatively swift
containment of COVID-19. As of September 30,
Chinese, South Korean, and Taiwanese indices
were 5.5 percent, 5.9 percent, and 4.3 percent
higher, respectively, year-to-date. Meanwhile,
the benchmark euro area stock index (Euro
Stoxx 50) was 15 percent lower on the year as of
September 30, and bourses in Latin America—
where the COVID-19 outbreak has generally
proved more widespread and economic
activity remains relatively subdued—have
underperformed.

3.2.2.4 Performance of Global Stock Indices
3.2.2.4 Performance of Global Stock Indices
Percent
As Of: 30-Sep-2020
60
Euro Stoxx 50
Shanghai Composite SE
Nikkei 225
S&P 500
45 MSCI Emerging Markets Index

Percent
60
45

-15

-30
Jan:2019

-15

Jul:2019

Source: Bloomberg, L.P.

Jan:2020

Jul:2020

-30

Note: Indexed to 01-Jan-2019.

3.2.3 Nonfinancial Non-Corporate Debt
Small businesses were hit particularly hard
by COVID-19. In the industries most affected
by COVID-19 (such as restaurants, food and
beverage, and retail), roughly half of small
businesses that operated in January were not
open by mid-April due to shut-down orders,
according to Homebase. While the share of
firms in these industries that remain closed has
declined substantially since then, more than 20
percent of them are still not open. The share of
hourly workers working over that same period
is even lower, suggesting that even among open
businesses, operations remain reduced relative
to their pre-COVID-19 levels.
As the uncertainty surrounding COVID-19
began and small business funding needs
increased, lenders began tightening standards,
increasing spreads on loans to small businesses.
As a result, the SBA’s PPP was essential for the
survival of many small businesses. PPP has been
the COVID-19-related relief program most
utilized by small businesses, and approximately
two-thirds of PPP loans were originated by small
and mid-sized banks. According to the SBA’s
data, the PPP program supported an estimated
51 million American jobs, covering over 80
percent of small business payrolls. The funding
was only designed to cover two and a half
months of payroll, however. Needs are likely
to increase further as many businesses remain
Fina nc ia l De v el opment s

3.3.1.1 Federal Debt Held by the Public
3.3.1.1 Federal Debt Held by the Public
Percent of GDP
225

Percent of GDP
225

200

175

CBO September 2020 Baseline Projection

150

175
150

125

100

0
0
1940 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050
Note: Data for fiscal years.
Years after 2019 are projected.

Source: CBO, Haver Analytics

3.3.1.2 Publicly Held Treasury Securities Outstanding
3.3.1.2 Publicly Held Treasury Securities Outstanding
Trillions of US$
As Of: Sep-2020
25
Bills
Other Marketable Securities
20

Trillions of US$
25
20

0
2015

2016

2017

Source: Federal Reserve,
Haver Analytics

2018

2019

2020

Note: Other marketable securities
includes notes, bonds, TIPs, and FRNs.

closed or operate at reduced capacity. Recent
surveys of small businesses indicate that at least
a quarter of small businesses believe they will
need additional financial assistance in the next
six months in order for their business to survive,
with about a third of firms holding less than
one month of cash on hand.
Small business loan performance has
deteriorated through the pandemic. As of
September 2020, PayNet’s measure of short
and long-term delinquencies was 18 percent
higher than in February and stood at levels
last seen in 2011. Similarly, PayNet’s measure
of small business defaults was 43 percent
higher in September than in February. Most
lenders have indicated that they have modified
and extended terms for many of their small
business borrowers; thus, these numbers could
understate the difficulties that small businesses
are having in staying current.

3.3

Government Finance

3.3.1

Treasury Market

In early 2020, the United States was facing its
deepest recession since the Great Depression.
In light of this, Congress enacted four rounds
of fiscal assistance, totaling $2.6 trillion. These
fiscal packages provided much-needed support
to households, businesses, municipalities, and
other entities through the initial lockdowns
and recovery. However, the additional spending
is expected to push the 2020 primary deficit
to 16 percent of GDP, a 70-year high. This
will lead to a sharp increase in the amount
of debt outstanding. In September 2020, the
Congressional Budget Office projected that
public debt will rise to approximately 110
percent of GDP in 2030 and 195 percent of GDP
in 2050 (Chart 3.3.1.1).
The amount of U.S. Treasury securities
outstanding grew from $17 trillion in February
to $20 trillion in September, following the
additional fiscal spending (Chart 3.3.1.2). New
issuance has been primarily in the form of
Treasury bills, which now account for 25 percent
of outstanding debt compared to 15 percent

2 0 2 0 F S O C / / Annual Report

at year-end 2019. In addition, the weighted
average maturity of marketable debt has fallen
from 70 months at year-end 2019 to 63 months
as of September 30, 2020. The Treasury General
Account (TGA) at the Federal Reserve swelled
to $1,679 billion as of September 30, compared
to $370 billion at year-end 2019 (Chart 3.3.1.3).
The record-high TGA balance was driven by
several factors, including the unprecedented
size and ongoing uncertainty regarding the
timing of COVID-19-related outlays.
Between August 2019 and August 2020, foreign
holdings of U.S. sovereign debt increased by 2.3
percent to $7.1 trillion. Over this period, Japan
overtook China as the largest foreign holder of
U.S. sovereign debt, with $1.3 trillion in holdings
as of August 2020. While China has reduced its
holdings of U.S. Treasury securities in recent
years, they remained fairly stable year-over-year,
totaling $1.1 trillion as of August 2020.
Treasury yields declined considerably in 2020
as investors rapidly reassessed the economic
outlook in light of the COVID-19 pandemic
(Chart 3.3.1.4). Between December 31, 2019
and September 30, 2020, the yield on the 2-year
Treasury decreased by 145 basis points and the
yield on the 10-year Treasury decreased by 123
basis points. Yields fell most dramatically in the
early days of the COVID-19 market stress, with
the yield on the 10-year Treasury falling by 98
basis points between February 20 and March
9. While the yield on the 10-year Treasury
stabilized in the following months, it closed at
a record low of 0.52 percent on August 4, 2020.
The spread between the 2-year and 10-year
Treasury yields, which briefly inverted in August
2019, remained positive in 2020, which can
largely be attributed to the FOMC’s March 2020
decision to cut the target range for the federal
funds rate to the zero lower bound.
Over the past two years, the yield on 10-year
Treasury Inflation-Protected Securities (TIPS)
has fallen considerably, from a high of 1.17
percent in November 2018 to -0.94 percent
as of September 30, 2020 (Chart 3.3.1.5).
The 10-year breakeven inflation rate, which

3.3.1.3 Treasury General Account Balance
3.3.1.3 Treasury General Account Balance
Billions of US$
2000

As Of: 30-Sep-2020

Billions of US$
2000

1750

1500

1250

1000

750

500

250

0
2015

2016

2017

2018

2019

2020

Source: Federal Reserve, Haver Analytics

3.3.1.4 U.S. Treasury Yields
3.3.1.4 U.S. Treasury Yields
Percent
5

As Of: 30-Sep-2020

Percent
5

4
10-Year

2-Year

0
2010

2012

2014

2016

2018

2020

Source: U.S. Department of the Treasury

3.3.1.5 10-Year TIPS Yield and 10-Year Break Even
3.3.1.5 Ten-Year TIPS Yield and Breakeven
Percent
4
3

As Of: 30-Sep-2020

Percent
4
10-Year
Breakeven

-1

Treasury InflationProtected Securities

-1

-2
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Source: U.S. Department
of the Treasury

-2

Note: Breakeven represents the difference
between the nominal and TIPS yield.
Fina nc ia l De v el opment s

3.3.1.6 FRBNY Open Market Operations: Treasury Purchases

3.3.1.6 FRBNY Open Market Operations: Treasury Purchases
Billions of US$
400

As Of: 03-Oct-2020

Billions of US$
400

300

200

100

0
2008

2010

2012

Source: FRBNY

2014

2016

2018

2020

Note: Weekly amount of Treasury securities
purchased by the Federal Reserve Bank of New York
in accordance with the FOMC directive.

is calculated as the difference between the
nominal 10-year Treasury yield and the 10-year
TIPS yield, is widely used to assess financial
market participants’ inflation expectations. This
measure of inflation expectations, however, is
imperfect given that the breakeven inflation rate
is also influenced by liquidity and inflation risk
premia. Prior to the COVID-19 market stress,
breakeven inflation rates had been trending
downwards, with the 10-year breakeven inflation
rate falling from 2.1 percent in September 2018
to 1.6 percent in mid-February 2020. During the
COVID-19 market stress, the breakeven inflation
rate fell sharply, hitting a low of 0.50 percent on
March 19, 2020. The breakeven inflation rate
has since rebounded, rising to 1.63 percent as
of September 30, 2020, which can be primarily
attributed to the continued decline of the 10year TIPS yield along with improved market
functioning.
In March 2020, liquidity in the U.S. Treasury
market deteriorated rapidly, severely impairing
market functioning in what is typically the
deepest and most liquid fixed income market
in the world (see Box B). In response to
this extreme stress, the FOMC directed the
Open Market Trading Desk (the Desk) at
FRBNY to increase the System Open Market
Account holdings of Treasury securities to
support the smooth functioning of markets
for Treasury securities. The pace of purchases
was unprecedented, with the Desk purchasing
nearly $800 billion of Treasury securities in
the second half of March (Chart 3.3.1.6).
The Desk has since scaled back its purchases,
and since mid-June, the Desk has purchased
approximately $80 billion of Treasury securities
per month, generally in line with the pace of
previous large-scale asset purchase programs.
The credit ratings for U.S. sovereign debt
published by the three largest credit rating
agencies were unchanged from the previous year
at AA+, Aaa, and AAA. While Fitch reaffirmed
its AAA rating of U.S. sovereign debt, it revised
its outlook from stable to negative, citing the
deterioration in U.S. public finances and the
absence of a credible fiscal consolidation plan.

2 0 2 0 F S O C / / Annual Report

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

As the deepest and most liquid market in the world,
the U.S. Treasury market plays a critical role in global
financial markets. In addition to financing the U.S. federal
government, Treasury securities are used as risk-free
benchmarks for other financial instruments, to manage
interest rate risk, and by the Federal Reserve when
implementing monetary policy. Given the important role
of U.S. Treasury markets, smooth market functioning
is critical to broader financial market stability and the
provisioning of credit to corporations, households, and
other borrowers.
Beginning in late February, increased concerns about
the macroeconomic consequences of the COVID-19
pandemic drove Treasury yields sharply lower, with the
10-year end-of-day yield plunging from 1.59 percent on
February 14 to 0.54 percent on March 9. In the first few
days of the market reaction, the rapid decline in Treasury
yields appeared relatively orderly. However, by mid-March
liquidity conditions had deteriorated rapidly as market
depth collapsed, volatility surged, and bid-ask spreads
widened (Charts B.1, B.2).
The deterioration in liquidity conditions was particularly
acute for longer-dated and off-the-run Treasury securities,
which led yields on off-the-run securities to deviate
significantly from a fitted curve. In less than two weeks,
liquidity conditions in Treasury markets had deteriorated
to levels not seen since the 2008 financial crisis. In
addition, the extreme volatility triggered circuit breakers
for Treasury futures, extreme deviations between Treasury
Exchange-Traded Fund (ETF) prices and their underlying
net asset values, and deleveraging by some hedge funds.
In sum, compressed and massive selling across a broad
spectrum of Treasury investors strained intermediaries’
ability to smoothly handle record trading volumes,
resulting in a sharp deterioration in market functioning and
liquidity.
On March 15, the FOMC announced it would increase
its holdings of Treasury securities by at least $500 billion
over the coming months to support smooth functioning
in Treasury markets. In light of the continued strains
in Treasury markets, the FOMC announced on March
23 that it would purchase Treasury securities in the
amounts needed to support smooth market functioning.

B.1 Intraday Volatility for 10-Year Treasury Yields

Basis Points

As Of: 30-Sep-2020

Basis Points

99th Percentile
30

95th Percentile

Intraday Volatility

0
Jan:2019

Jun:2019

Source: Bloomberg, L.P.

Nov:2019

Apr:2020

Sep:2020

Note: Intraday volatility calculated as daily high yield
minus daily low yield on 10-year Treasury notes.
Percentiles based on January 2005 – September 2020.

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

Basis Points

As Of: 30-Sep-2020

Basis Points

7
6
5

Off-the-run (2nd)

Off-the-run (1st)

On-the-run

0
Oct:2019

Jan:2020

Source: Bloomberg, L.P.

Apr:2020

Jul:2020

Note: Represents the bid YTM minus the ask
YTM for on- and off-the-run U.S. Treasury bonds.

Subsequently, the Federal Reserve provided temporary
supervisory relief to help incentivize dealer intermediation
and to alleviate frictions in Treasury markets (see
Section 4.1.1). Finally, the FOMC amended permanent
central bank swap lines, reintroduced temporary central
bank swap lines, and established the Foreign and
International Monetary Authority (FIMA) repo facility
to help relieve selling pressure from foreign accounts
seeking to raise dollar liquidity (see Section 3.7.1).
These steps were taken to restore Treasury market
functioning and avoid exacerbating disruptions in credit
markets, which could, in turn, impact access to credit

Box B: U.S. Tre a sury Ma rke t Liq uid ity a t the Onse t of the COVI D- 19 P andemi c

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

for corporations, households, and other borrowers.
The speed and scale of Federal Reserve intervention
stabilized Treasury market functioning by the end of
spring, and continued purchases have sustained this
improvement with liquidity conditions returning to
more normal levels.
Treasury Market Intermediaries
Bank affiliated broker-dealers are a key source of
liquidity provision in U.S. Treasury markets. These
dealers have traditionally acted as short- to mediumterm liquidity providers, often buying or selling from
customers in large amounts, holding a portion of
these positions across days, and maintaining a
large balance sheet to support such positions. In
addition to traditional dealers, principal trading firms
(PTFs) and other high-frequency traders (HFTs) play
a significant role in providing intraday liquidity to
U.S. Treasury markets, with PTFs accounting for
roughly 60 percent of trading volume on electronic
interdealer broker platforms, which are the primary
sources of price discovery for the critical on-the-run
segment of the Treasury market.
Both traditional dealers and PTFs were under stress
during March 2020. Traditional dealers entered the
month with already high inventory levels, making it
difficult for them to absorb customer sales of offthe-run Treasury securities (Chart B.3). Additionally,
traditional dealers reportedly reduced market-making
activities in both on- and off-the-run securities after
hitting internal risk management limits under the
sudden and intense selling of off-the-run Treasury
securities from their customers. At the same time,
PTFs significantly reduced their market-making
activities in on-the-run securities. The extreme
volatility, combined with a breakdown in typical crossasset correlations, caused PTFs, in aggregate, to
lower order book replenishment rates, which lowered
market depth in Treasury futures and on-the-run or
benchmark nominal coupon markets. Ultimately, the
pullback by PTFs in aggregate and dealers’ inability
or unwillingness to absorb record Treasury overflows
caused liquidity conditions in Treasury markets

2 0 2 0 F S O C / / Annual Report

to deteriorate sufficiently to result in disorderly market
conditions, necessitating the first official intervention to
restore Treasury market functioning since 1970.
B.3 Primary Dealer Inventories

B.3 Primary Dealer Inventories
Billions of US$
As Of: 30-Sep-2020
350
Treasury Notes and Bonds
300
Treasury Bills

Billions of US$
350
300

250

200

150

100

-50
2015

2016

2017

2018

2019

2020

-50

Source: FRBNY

Real Money Investors and Leveraged Hedge Funds
In early March, real money investors began selling off-therun Treasury securities to either raise cash balances or
rebalance portfolios. Notably, foreign investors (including
central banks) sold Treasuries to raise dollar liquidity, while
pension funds and other asset managers sold longerdated securities to rebalance after large price gains in
Treasury securities and losses in equities. This heavy
selling pressure by real money investors, in addition to
putting pressure on the Treasury cash market, likely
served as a catalyst for the widening in the cash-futures
basis, which may have precipitated the unwinding of the
positions of some leveraged investors.

3.3.2

As described in Section 3.6.2.5, hedge funds
increased their exposures to Treasury securities
in the lead up to the COVID-19 pandemic. A
significant proportion of this growth has been
concentrated in relative value hedge funds that
seek to exploit pricing discrepancies between
similar products or securities. A popular relative
value strategy has been the “cash-futures basis
trade,” whereby funds try to capture the spread
between the implied repo rate and general
collateral repo rates over the term of the trade.
Once the basis began to widen in March and
Treasury volatility spiked, some leveraged
investors unwound their positions due to internal
risk-management stop-outs, increased margin
requirements for futures, and tightening in
financing conditions. Leveraged hedge funds
employing other trading strategies may have
amplified long-dated Treasury yield volatility
through positive feedback.

Municipal Bond Market

Municipal bond markets continued to experience strong
retail investor demand at the start of the year, which
helped drive steady net inflows into municipal bond
funds and sent bond prices upward. This changed in
March 2020 with the onset of the COVID-19 pandemic,
as individual investors pulled money out of bonds in
a flight to cash. Pricing became unstable and issuers
responded by delaying planned bond issuances.
On April 9, 2020, the Federal Reserve announced the
launch of its Municipal Liquidity Facility (MLF) to buy
municipal notes from eligible state and local issuers.
On August 11, 2020, the Federal Reserve extended
the termination of the MLF from September 30, 2020
to year-end 2020. While some investors had already
begun to return to the municipal market, the April
announcement helped improve investor confidence,
resulting in stabilized pricing and increased issuance.

Given the rapid decline in market liquidity, the
selling by central banks and real money investors,
in conjunction with the unwind of certain hedge
fund positions, contributed to “one-way” pressure
on the cash market and the widening of the cashfutures basis until late March, when the Federal
Reserve began to aggressively purchase off-therun Treasury securities, including cheapest-todeliver securities, which are typically excluded
from purchase operations.
Further Study Needed
The Federal Reserve’s actions restored market
functioning, yet the events of March 2020
exposed fragilities in Treasury markets that will
require further study with an eye toward making
future official interventions less likely. Factors that
likely contributed to the breakdown in market
functioning include massive selling by real and
levered investors, dealer risk management and
balance sheet constraints, and the rapid decline in
liquidity provisioning by PTFs.

Fina nc ia l De vel opment s

3.3.2.1 Changes in State and Local Government Tax Revenues

3.3.2.1 Changes in State and Local Government Tax Revenues
Percent
12

As Of: 2020 Q2

Percent
12

-3

-6
1998

2001

2004

2007

2010

2013

2016

-6

2019

Note: Data represents year-over-year percentage change. Revenue
measures includes revenues from property, individual income, corporate
income, and sales taxes. Gray bars signify NBER recessions.

Source: U.S. Census
Bureau, Haver Analytics

3.3.2.2 Municipal Bond Mutual Fund Flows
3.3.2.2 Municipal Bond Mutual Fund Flows
Billions of US$
30

Billions of US$
30

As Of: Sep-2020

-10

-20

-30

-40

-50
2010

2012

2014

2016

Source: ICI, Haver Analytics

2018

-50

2020

Note: Net fund flows.

3.3.2.3 Municipal Bonds to U.S. Treasuries
3.3.2.3 Municipal Bonds to U.S. Treasuries
As Of: 25-Sep-2020

Percent
600

500

400

300

200

100

0
2005

2008

Source: Municipal Market
Advisors, Bloomberg, L.P.

Percent
600

30-Year AAA
10-Year AAA
5-Year AAA

500

2011

2014

2017

2020

Note: Percentage of municipal yields against equivalent Treasury
yields. Bloomberg's BVAL AAA Benchmark replaced MMA as the
provider for municipal yields on September 1, 2010.

2 0 2 0 F S O C / / Annual Report

State and local government tax revenues
were strong in 2019 and the first quarter of
2020 compared to 2018. Total state and local
government tax revenues in the second half
of 2019 were 6.0 percent higher than in the
second half of 2018 (Chart 3.3.2.1). However,
delayed tax filings and business closures due
to COVID-19 negatively affected tax revenues
in the second quarter of 2020, with economic
contraction expected to hold down tax revenues
for the rest of the year.
Municipal bond ratings continued to improve
in 2019, and state and local tax revenues for the
full year were 7.0 percent higher than in 2018.
State reserve fund balances across the country
increased in 2019, with the median rainyday fund balance as a share of general fund
expenditures rising to 7.8 percent, based on
data aggregated from all 50 state budget offices.
However, by the second quarter of 2020, states
began to draw down rainy-day balances to offset
falling revenues.
Municipal bond funds experienced record
net inflows in 2019 and the first two months
of 2020. In 2019, net fund inflows totaled $93
billion, compared to $4.2 billion of net inflows
for 2018 (Chart 3.3.2.2). In March and April,
however, investors responded to the COVID-19
pandemic by withdrawing $45 billion from
municipal bond funds, with market analysts
pointing to a substantial flight into money
market funds. This was followed by a net inflow
of $43 billion between May and September 2020
as market conditions stabilized. Cumulative
net flows totaled $18 billion for the first
nine months of 2020, a decline of 74 percent
compared to the first nine months of 2019.
During the market displacement from midMarch through April, diverging municipal
bond and Treasury bond prices resulted in the
ratio of 10-year AAA-rated general obligation to
10-year Treasury yields spiking to 340 percent
(Chart 3.3.2.3). By September 25, 2020, this
municipal-to-Treasury ratio dropped to 124
percent—still well above the historical norm of
98 percent.

Annual municipal debt issuance was up
23 percent in 2019 over 2018, and monthly
municipal bond sales continued at above
average levels at the start of 2020 (Chart
3.3.2.4). In March, however, primary market
issuance fell 53 percent from the previous
month as issuers withdrew scheduled bond
sales in response to significantly lower retail
demand. Municipal debt issuance recovered in
the following months and as of September 2020,
year-to-date issuances totaled $347 billion, a 24
percent increase relative to the same period in
2019. In particular, taxable issuance increased
sharply, driven by overall low interest rates and
changes in the tax code that no longer allow
tax-exempt advance refundings.

3.3.2.4 Municipal Bond Issuance
3.3.2.4 Municipal Bond Issuance
Billions of US$
600
500

As Of: Sep-2020

Billions of US$
600

Private Placement
General Obligation
Revenue

500

400

300

200

100

2006

2008

Source: Thomson
Reuters, SIFMA

2010

2012

2014

2016

2018

2020
YTD

Note: Excludes maturities of less than 13 months.

Over the medium-term, expected impacts of
the COVID-19 crisis include lower state and
local revenues and increased debt obligations
and debt service. Longer-term credit weaknesses
in the area of pension and retiree health care
liabilities remain concerns in the municipal
market. Despite these challenges, credit rating
agencies have taken relatively few negative
rating actions against municipal debt. S&P and
Moody’s only downgraded approximately one
percent of the municipal borrowers they rate in
the second quarter of 2020.
The fiscal crisis of Puerto Rico remains
distinctive in a sector with few defaults
historically. The Puerto Rico Oversight,
Management, and Economic Stability Act
(PROMESA), enacted in June 2016, provided
for the establishment of the Financial Oversight
and Management Board for Puerto Rico
(the FOMB) and a resolution process for
Puerto Rico’s $74 billion in public sector debt
(excluding pension liabilities). In 2017, the
Commonwealth and four of its instrumentalities
filed to pursue debt restructuring under
Title III of PROMESA, followed by a Title III
filing of the Puerto Rico Public Buildings
Authority (PBA) in September 2019. The Puerto
Rico Urgent Interest Fund Corporation—a
government-owned corporation created to
securitize Puerto Rican sales and use tax

Fina nc ia l De v el opment s

proceeds—is the only Commonwealth entity to have
reached a resolution of its debt obligations.
In May 2019, the Puerto Rico Electric Power
Authority (PREPA) entered into a restructuring
support agreement to restructure $8.9 billion of
the authority’s bonded debt. As of November 2020,
court confirmation of the agreement is pending.
PREPA’s 2020 Fiscal Plan requires it to cede its main
operating assets to private service providers by the
second half of 2022.
In February 2020, the FOMB filed an amended
Plan of Adjustment to restructure more than $50
billion of pension liabilities and $35 billion of debt
and other claims against the Commonwealth, PBA,
and the Employee Retirement System. If approved,
the plan would reduce $35 billion of debt and
other claims by almost 70 percent to approximately
$11 billion. Weak structural reform execution
and revenue impacts of COVID-19, however,
have substantially reduced the Commonwealth’s
forecasted surplus from the 2019 Fiscal Plan,
a key input to the Plan of Adjustment. The
Commonwealth’s 2020 Fiscal Plan requires fiscal
measures and structural reforms expected to
contribute to an average annual pre-debt service
surplus of $578 million over five years, down from an
expected $2.1 billion in the 2019 Fiscal Plan
In fiscal year 2020, the Commonwealth’s annual
general fund collections fell 22 percent from the
previous year. The 2020 Fiscal Plan forecasts that a
lack of robust structural reforms, rising healthcare
costs, and the phase-out of federal aid will lead to
annual deficits starting in 2032—six years earlier
than projected in the 2019 plan.
While federal disaster-related funds are having an
ameliorative effect, Hurricane Maria highlighted
weaknesses in the island’s electric, water, and
transport infrastructure that undermine the island’s
manufacturing base and feed outmigration.

2 0 2 0 F S O C / / Annual Report

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

Most state and local governments entered 2020 with
increased reserves and record-high rainy-day funds.
Despite these strengths, municipal markets became
increasingly volatile as the pandemic worsened
in March. Mutual fund investors pulled over $41
billion of assets out of the market in less than three
weeks. Withdrawals were accompanied by widening
spreads, hindering state and local governments’
ability to borrow in a time of delayed and lower tax
revenue. Between March 9 and March 20, state
and local governments sold only $6 billion of the
$16 billion in bonds they sought to issue, and most
new issues were canceled due to collapsed investor
demand. Market functioning deteriorated to the point
where buyers and sellers had difficulty determining
prices, and state and local authorities were effectively
shut out of the primary market.
In response to stressed markets, the Federal
Reserve extended asset eligibility for the Money
Market Mutual Fund Liquidity Facility (MMLF) and the
Commercial Paper Funding Facility (CPFF) to include
certain short-term municipal securities on March
23. On April 9, the Federal Reserve announced the
establishment of the MLF, which would purchase
up to $500 billion of short-term notes directly from
eligible state and local issuers. Markets responded
positively to this announcement; outflows slowed
in April and municipal mutual funds have received
consecutive weeks of positive inflows since early May.
Participation in the MLF remains limited, however,
with only the state of Illinois and the Metropolitan
Transportation Authority of New York tapping the
facility for a total outstanding amount of $1.7 billion as
of September 30, 2020.

Challenges in the current environment
Despite improved primary and secondary market
conditions, municipal fundamentals remain stressed.
In particular, declining tax revenues and increased
pandemic-related spending pose challenges for
state governments. States derive the bulk of their
tax revenue from individual income and sales taxes,
and the Tax Policy Center estimates total tax revenue
shortfalls of $75 billion and $125 billion for fiscal years
2020 and 2021, respectively. Tourism-dependent
and oil-producing states face additional headwinds
given lower tax revenues. Ongoing fiscal negotiations
also add uncertainty, as federal aid is a significant
source of state budget funds. Most states have
balanced budget requirements, making it difficult
to fund spending obligations and investment during
times of decreased tax revenue. Pension liabilities,
which were already underfunded, are under pressure
as investment portfolios try to recoup losses from
market volatility. In light of the deteriorating outlook
for revenues, many states are already looking to cut
expenditures, tap reserves, and issue debt/notes to
bridge deficits and address short-term liquidity needs.

Box C: Fina nc e s of Sta te a nd Loc a l Authoritie s a nd the COVI D- 19 P andemi c

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

In contrast to state governments, local governments
generate the majority of revenue through property
taxes, insulating them from immediate declines in
sales and income tax revenues (Charts C.1, C.2).
C.1 Breakdown of State Tax Revenues
C.1 Breakdown of State Tax Revenues
As Of: 2019

5%
2%

38%

47%

Other
Corporate Income
Property
Sales
Individual Income

Source: U.S. Census Bureau

C.2
of of
Local
TaxTax
Revenues
C.2Breakdown
Breakdown
Local
Revenues
As Of: 2019
1% 5%

5%
18%

72%

Other
Corporate Income
Property
Sales
Individual Income

2020 and 2021. According to the National League
of Cities and the National Association of Counties,
localities (such as cities, towns, and villages) are
estimated to see total revenue losses of $134 billion
and $117 billion in fiscal years 2020 and 2021,
respectively, while counties are estimated to lose
$114 billion in revenue from fiscal year 2020 to 2021.
While the estimated $365 billion in lost revenues
does not take into account offsets from CARES
Act funding, it also does not consider additional
expenditures or the impact of deferring pension
contributions.
Some state and local governments are deferring
or reducing scheduled pension payments in 2020
to cover budget shortfalls caused by constrained
budgets. Deferring pension contributions may not
materially impact creditworthiness or future pension
payments for those municipalities with well-funded
pension plans; however, a number of pension funds
were in materially underfunded positions prior to the
COVID-19 pandemic, and deferring contributions
could have serious implications for the sustainability
of these plans. As of fiscal year 2018, 16 pension
funds in seven states were less than 50 percent
funded, with unfunded liabilities totaling nearly $270
billion (Chart C.3).
C.3 Liabilities of Severely Underfunded Public Pension Plans

C.3 Liabilities of Severely Underfunded Public Pension Plans
Billions of US$
300
250

As Of: 2018

Percent
100

Local unfunded liability (left axis)
State unfunded liability (left axis)

90
80

200
Source: U.S. Census Bureau

Nevertheless, the potential for declines in property
tax revenues, as well as potential reductions in
federal and state aid, constitute a risk for local
authorities in the coming years, given the inherent
lag in property tax assessment and collections.
Moreover, municipalities that are reliant on sales and
income taxes, such as New York City, are expected
to see material declines in revenues for fiscal years

2 0 2 0 F S O C / / Annual Report

150
Contribution rate
(right axis)

100

50
0
2001

2003

2005

2007

Source: publicplansdata.org

2009

2011

2013

2015

2017

Note: Includes state and local pension plans with UAAL below 50
percent as of 2018. Contribution rate calculated as the weighted
average contribution as a percent of actuarially required contribution.

3.4

Financial Markets

3.4.1

Wholesale Funding Markets: Unsecured
Borrowing
Commercial Paper
The commercial paper (CP) market is an
important source of unsecured funding for
financial and nonfinancial companies to meet
current operating needs. CP is a financial
instrument with maturity up to 270 days, and
firms generally rollover outstanding balances.
Thus, companies relying on the CP market for
funding are susceptible to changing market
conditions during the rollover period.
Total CP outstanding was $957 billion at the
end of September 2020, down from $1,075
billion in September 2019 (Chart 3.4.1.1). CP
outstanding issued by financial firms declined
to $533 billion in September 2020, from $552
billion in September 2019. These issuers
represent 56 percent of the amount outstanding
compared to 51 percent outstanding the year
prior. Nonfinancial firm issuers, which include
industrial firms, service firms, and public
utilities, among others, account for 19 percent
of the balances outstanding as of September
2020. Nonfinancial issuers saw a $100 billion
decline, or 35 percent, in CP balances over
the one-year period. Most of the decline
occurred in the second quarter of 2020 when
nonfinancial CP balances fell by $69 billion.
ABCP, which accounted for the remaining 25
percent of CP outstanding, rose 0.5 percent over
the past year, totaling to $241 billion at the end
of September 2020. Unlike 2007-2009, ABCP
issuers were able to issue new CP or rollover CP
balances during the COVID-19 market stress
(Chart 3.4.1.2).

3.4.1.1 CP Outstanding by Issuer Type
3.4.1.1 CP Outstanding by Issuer Type
Trillions of US$
2.5

As Of: Sep-2020

Trillions of US$
2.5

Other
Foreign Nonfinancial
Foreign Financial
Domestic Nonfinancial
Domestic Financial
Asset-Backed

2.0
1.5

1.0

0.5

0.0
2001

2004

2007

Source: Federal Reserve,
Haver Analytics

2010

2013

2016

2019

0.0

Note: Not seasonally adjusted; domestic includes CP
issued in the U.S. by entities with foreign parents.

3.4.1.2 CP Issuance by Issuer Type and Rating
3.4.1.2 CP Issuance by Issuer Type and Rating
Billions of US$
60

As Of: Sep-2020

Billions of US$
60

AA ABCP
AA Financial
A2/P2 Nonfinancial
AA Nonfinancial

50
40

0
Jan:2019

May:2019

Source: Federal Reserve,
Haver Analytics

Sep:2019

Jan:2020

May:2020

0
Sep:2020

Note: Monthly average.

Nonfinancial companies have few options other
than CP and bank revolving credit facilities
for short-term ﬁnancing. A freezing of the CP
market for nonfinancial companies is a risk
for these firms and for the banks that provide
revolving credit facilities that backstop CP
programs.

Fina nc ia l De v el opment s

3.4.1.3 CP Outstanding & MMF Holdings

3.4.1.3 CP Outstanding & MMF Holdings
Billions of US$
1200

As Of: Sep-2020

Billions of US$
450

Commercial Paper
Outstanding (left axis)

1150

400

1100

350

1050

300

1000

250
Money Market Fund Commercial
Paper Holdings (right axis)

950
900
Jan:2017

Jan:2018

Jan:2019

200
150

Jan:2020

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

3.4.1.4 Three Month CP Interest Rate Spreads

3.4.1.4 Three Month CP Interest Rate Spreads
Percent
4

As Of: 30-Sep-2020

Percent
4

A2/P2-Rated Nonfinancial
AA-Rated ABCP
AA-Rated Financial
AA-Rated Nonfinancial

0
Jan:2019

Jun:2019

Nov:2019

Source: FRBNY, Bloomberg L.P.,
Haver Analytics, OFR

Apr:2020

Sep:2020

Note: Spread to 3-Month
Overnight Index Swap (OIS) rate.

3.4.1.5 Weekly CP Issuance by Tenor
3.4.1.5 Weekly CP Issuance by Tenor
Billions of US$
120

100

As Of: 25-Sep-2020

10+ Days
5-9 Days
1-4 Days

100

0
Jan:2019

Jul:2019

Source: Federal Reserve,
Haver Analytics

Billions of US$
120

2 0 2 0 F S O C / / Annual Report

Jan:2020

Jul:2020

Note: Weekly average.

In mid-March, the U.S. CP market was severely
disrupted amid economic uncertainty arising
from the COVID-19 pandemic. Prime MMFs—
which are significant purchasers of CP—sought
to reduce CP holdings to raise cash in response
to actual and expected investor redemptions
(Chart 3.4.1.3). Dealers faced balance
sheet limits and were unable or unwilling
to intermediate in the secondary market. In
addition, the Risk Management Association’s
Quarterly Aggregate Data Survey shows that
securities lending cash collateral reinvestment
accounts—which are also significant purchasers
of CP—reduced their holdings by 29 percent
in the first quarter of 2020 (see Section 3.4.2).
Survey data does not provide information
concerning the amount of ABCP held by these
accounts.
The resulting lack of demand for new
unsecured exposures, and the forced selling
of short-term assets, propelled credit spreads
and absolute yields to rise relative to less-risky
benchmarks, such as the effective federal funds
rate, the overnight index swap (OIS) rate, and
SOFR. LIBOR also widened relative to less-risky
benchmark rates. The spread between the 90day AA Nonfinancial CP rate and the OIS rate
reached a peak of 210 basis points on March 26,
a level not seen since the 2008 financial crisis.
The spread on the 90-day A2/P2 Nonfinancial
CP rate peaked at 376 basis points on March 20
(Chart 3.4.1.4).
Many firms reportedly were unable to issue
CP or to only issue at a very high yield, thus
increasing their rollover risk and reducing
the ability of CP to support their short-term
funding and liquidity needs. Issuances with
tenors of less than four days also markedly
increased in March (Chart 3.4.1.5).
In mid-March, the Federal Reserve took a series
of actions to address the dislocation in the
wholesale funding markets by announcing the
establishment of lending facilities under section
13(3) of the Federal Reserve Act, including
the CPFF on March 17 and the MMLF on
March 18. The former allows highly rated U.S.

CP issuers to sell CP to the Federal Reserve’s
special purpose vehicle. The latter makes loans
available to U.S. depository institutions and
BHCs to finance their purchases of certain
types of assets from MMFs (see Section 4.1).
The MMLF helped support liquidity in the
markets for the assets held by MMFs.
Outflows from prime MMFs gradually reversed
following the announcement of the MMLF
and CPFF, contributing to improvements in
CP market condition and potentially reducing
the usage of the bank backstop facilities.
Outstanding amounts under the MMLF and
the CPFF were $7.1 billion and $.03 billion,
respectively, at the end of September 2020. This
is down from a peak of $54.1 billion on April 6,
2020, under the MMLF and $4.3 billion on May
13, 2020, under the CPFF.

3.4.1.6 Commercial Bank Deposit Growth

3.4.1.6 Commercial Bank Deposit Growth
Percent
30

As Of: 30-Sep-2020

Percent
30
20

Total Deposits

-10
-20

-10

Large Time Deposits

-30
2007

2009

2011

Source: Federal Reserve,
Haver Analytics

-20

2013

2015

2017

2019

-30

Note: Year-over-year percentage change.

Bank Deposits
Deposits can form a stable source of funding
for banks, although the stability of different
types of deposits can vary. Brokered certificates
of deposit and large denominated deposits are
considered riskier sources of funding because
they can be more vulnerable to changes in
short-term interest rates if the customer finds a
more appealing rate elsewhere.
In the first nine months of 2020, total deposits
at U.S. commercial banks grew by $2.5 trillion
to $16 trillion at the end of September.
Large time deposits, which include wholesale
certificates of deposit (CDs), declined 15
percent in the first nine months of 2020 to
$1.6 trillion and 11 percent on a year-over-year
basis (Chart 3.4.1.6). In the first half of 2020,
estimated insured deposits at domestic office
banks increased by over $1 trillion, and stood at
$8.8 trillion at the end of June 2020.

3.4.2 Wholesale Funding Markets: Secured
Borrowing
Repo Markets
The repo market is an integral part of the
STFMs, providing secured, short-term, markedto-market funding against various forms
of securities collateral. SOFR, the ARRC’s
Fina nc ia l De v el opment s

3.4.2.1 FICC Repo Balances and MMF Holdings
3.4.2.1 FICC Repo Balances and MMF Holdings
Billions of US$
800

700

As Of: Sep-2020

Billions of US$
300

Overnight Treasury FICC
DVP Repo (left axis)

250

600

200

500

150

400
300

Money Market Fund FICC Repo
Holdings (right axis)

100

200
0
Apr:2018
Oct:2018
Apr:2019
Oct:2019
Apr:2020
Source: FRBNY, SEC Form
Note: FICC cleared bilateral excludes term
N-MFP, Bloomberg L.P.
repo and repo backed by agency collateral.

3.4.2.2 Primary Dealer Repo Agreements
3.4.2.2 Primary Dealer Repo Agreements
Trillions of US$
As Of: 30-Sep-2020
5
Overnight/Continuing
Term
4

Trillions of US$
5
4

0
0
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
Source: FRBNY,
Haver Analytics

Note: Aggregation method removes missing data when
occurs due to disclosure edits or non-trading days for
specific security repo agreements.

3.4.2.3 Overnight Repo Volumes and Dealer Inventories
3.4.2.3 Overnight Repo Volumes and Dealer Inventories
Billions of US$
As Of: 30-Sep-2020
500
Primary Dealer Treasury
Inventories (left axis)
400 Overnight Treasury Repo
Volume (right axis)

1300

300

1100

200

900

100

700

0
2016
2017
2018
Source: FRBNY, Staff
Calculations, Haver Analytics

Billions of US$
1500

2 0 2 0 F S O C / / Annual Report

2019

2020

500

Note: Overnight Treasury repo volume
includes published volumes for SOFR.

preferred alternative to LIBOR, is a broad
measure of overnight Treasury repo rates,
furthering the importance of this market.
Repo borrowing, as reported in the Financial
Accounts of the United States, totaled nearly
$4.1 trillion as of the second quarter of 2020,
down from $4.3 trillion a year earlier. The
market consists of two segments: tri-party repo,
in which settlement occurs within the custodial
accounts of a clearing bank, and bilateral repo,
which typically refers to all activity not settled
within the tri-party system, includes repo
transactions cleared through the Fixed Income
Clearing Corporation (FICC). Primary dealers,
which are trading counterparties of FRBNY, are
active in both segments of the market. Tri-party
collateral balances declined 9.2 percent from a
year earlier to $2.2 trillion in September 2020.
Most of the decline occurred in the second
quarter of 2020.
Recently, cleared bilateral repo transaction
volume has become comparable to, if not larger
than, the tri-party volume. This is partly due
to the growth of sponsored repo, which allows
sponsoring members to minimize balance
sheet usage by netting their repo lending and
borrowing. Sponsored repo allows MMFs as
cash lenders, on one side of the transaction,
and repo borrowers, on the other side, to
participate in the FICC-cleared segment, but it
also increases overall market exposure to FICC
as a central counterparty (Chart 3.4.2.1).
Primary dealer cash borrowing in the repo
market, including borrowing from FRBNY’s
temporary open market operations, stood at
$2.5 trillion as of September 30, 2020, relatively
flat compared to a year earlier but down from
a peak of $3.0 trillion in the third week of
March (Chart 3.4.2.2). Increased overnight
cash borrowing through the first quarter
can be attributed to, among other things,
primary dealers’ elevated financing of Treasury
inventories (Chart 3.4.2.3). The total repo
volumes reference all tenors and collateral
types.

Similarly, cash lending by primary dealers
in the repo market (reverse repo) decreased
slightly over the past year, from $2.0 trillion
on September 26, 2019 to $1.9 trillion on
September 30, 2020, after reaching $2.3 trillion
on March 18, 2020. The share of overnight
reverse repo compared to term reverse repo has
increased over the past several years, accounting
for 50 percent of repo lending in September
2020, up from 39 percent in September 2016
(Chart 3.4.2.4). Lending at maturities of one
month or longer continues to account for
approximately two-thirds of term reverse repo
lending.
As of September 2020, 93 percent of primary
dealer repo transactions were collateralized by
Treasuries or agency MBS, up from 92 percent
in September 2019 and 86 percent five years
prior (Chart 3.4.2.5). Within the tri-party
market, 82 percent of repo transactions were
backed by Treasuries or agency MBS as of
September 2020 compared to 83 percent in
September 2019 and 71 percent in September
2015 (Chart 3.4.2.6). Median haircuts on
collateral used in tri-party repo transactions
were relatively flat for the year across most
collateral classes.

3.4.2.4 Primary Dealer Reverse Repo Agreements
3.4.2.4 Primary Dealer Reverse Repo Agreements
Trillions of US$
As Of: 30-Sep-2020
4
Overnight/Continuing
Term

Trillions of US$
4

0
0
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
Source: FRBNY, Haver Analytics

3.4.2.5 Primary Dealer Repo Collateral
3.4.2.5 Primary Dealer Repo Collateral
Trillions of US$
3.5

As Of: 30-Sep-2020
Agency Debt
Agency MBS
U.S. Treasuries

3.0

Other
Equities
Corporates

Trillions of US$
3.5
3.0

2.5

2.0

1.5

1.0

0.5

0.0
2014

2015

2016

2017

Source: FRBNY,
Haver Analytics

2018

2019

2020

0.0

Note: U.S. Treasuries includes TIPS.

3.4.2.6 Collateral in the Tri-Party Repo Market
3.4.2.6 Collateral in the Tri-Party Repo Market
Trillions of US$
3.0
2.5

As Of: Sep-2020
Other Agency Securities
Agency MBS
U.S. Treasuries

Trillions of US$
3.0
Other
Equities
Corporates

2.5

2.0

1.5

1.0

0.5

0.0
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

0.0

Source: FRBNY,
Haver Analytics

Note: Other includes ABS, CDOs, private label
CMOs, international securities, money markets,
municipal debt, and whole loans.

Fina nc ia l De v el opment s

3.4.2.7 Repo Rate Spreads
3.4.2.7 Repo Rate Spreads
Percent
As Of: 30-Sep-2020
4
3 Month GCF Repo – 3 Month OIS
Overnight SOFR – Overnight EFFR
3 Overnight GCF – Overnight EFFR

Percent
4
3

-1
Jun:2018

Dec:2018

Jun:2019

Source: FRBNY, Bloomberg, L.P.

Dec:2019

Jun:2020

-1

The repo market has experienced two recent
periods of unexpected major volatility. The
first was when overnight repo rates spiked in
mid-September 2019, with SOFR increasing by
approximately 300 basis points (Chart 3.4.2.7).
The unexpectedly high volatility in September
2019 appeared to be attributed to technical
factors, including an increase in demand for
funds (for example, to finance new Treasury
settlements), and a decline in funds available
from banks and MMFs that was tied to outflows
as corporations paid taxes in mid-September.
While the spillover to the fed funds market was
relatively modest, repo market pressure pushed
the effective federal funds rate slightly above
the Federal Reserve’s target range.
Certain dealers may adjust their activity at
quarter ends to meet regulatory requirements,
a practice referred to as window-dressing, which
can result in temporary increases in repo rates
and may have contributed to repo market stress.
Balance sheet constraints may also factor into
repo rate increases observed on some Treasury
settlement and tax dates, but these periodic
increases have been small compared to the
September 2019 spike.
In accordance with the FOMC’s directive, on
September 17, 2019, FRBNY began to conduct
a series of overnight and term repo operations
to help maintain the federal funds rate within
the target range by adding reserves to the
banking system. The operations were effective
in stabilizing conditions in funding markets.
Additionally, the Federal Reserve commenced
reserve management purchases of Treasury
bills in October 2019, at the pace of $60
billion per month, in order to rebuild reserves
to a level that is commensurate with policy
implementation.
The repo market was strained again because
of the market dislocations caused by the
COVID-19 pandemic, with SOFR increasing
by 29 basis points above the effective federal
funds rate on March 17. Overnight and term
repo rates against Treasury collateral spiked
and term repo market functioning deteriorated

2 0 2 0 F S O C / / Annual Report

amid increased dealer holdings and short-term
policy uncertainty. Investors also began selling
less-liquid securities to raise cash. To address
this strain in the market, the Federal Reserve
stepped in again to purchase Treasury securities
– initially at a pace of $75 billion per day. The
Federal Reserve also increased available tenors
and offering amounts of its repo operations,
which increased the supply of bank reserves
and countered some of the pressure in repo
rates. Federal Reserve purchases of Treasury
securities reduced the supply of Treasuries in
the market and alleviated dealer balance sheet
pressure so dealers could better intermediate
across all asset classes and between the cash
and repo markets. Repo rates have been well
contained since March.

3.4.2.8 Value of Securities on Loan
3.4.2.8 Value of Securities on Loan
Trillions of US$
3.0
2.5

As Of: 30-Sep-2020

Trillions of US$
3.0
2.5

Global Market
(including U.S.)

2.0

1.5

U.S. Market

1.0
0.5
2015

1.0

2016

Source: Markit

2017

2018

2019

2020

0.5

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

Securities Lending
Securities lenders generally engage in securities
lending to earn additional income, but
securities lending may also be used as a source
of funding by some financial institutions. It is
an unstable source of funding, however, as most
arrangements allow the borrower to return the
borrowed securities on short notice in exchange
for the collateral posted. Data on the securities
lending market are estimated based on surveys.
The estimated value of securities on loan
globally was $2.5 trillion as of the end of
September, 2020, up from $2.4 trillion in the
end of September 2019 but down from $2.6
trillion in early March (Chart 3.4.2.8). The
estimated U.S. share of the global activity grew
to 57 percent at the end of September 2020
from 55 percent a year earlier.
Government bonds and equities continue
to account for the majority of the estimated
securities on loan globally. As of September
30, 2020, the share represented by equities
was estimated at 40 percent, while government
securities were estimated to account for
approximately 47 percent of the total securities
on loan.
While shares of ETFs were estimated to only
account for 3.1 percent of securities on loan
Fina nc ia l De v el opment s

3.4.2.9 U.S. Securities Lending Cash Reinvestment
3.4.2.9 U.S. Securities Lending Cash Reinvestment
Trillions of US$
As Of: 2020 Q3
2.4
Total Cash Reinvestment
(left axis)
2.0

Days
300

250

1.6

200
Mean WAM (right axis)

1.2

150

Median WAM (right axis)

0.8

100

0.4

0.0
2006

2008

2010

2012

2014

Source: The Risk
Management Association

2016

2018

2020

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

3.4.2.10 U.S. Securities Lending Cash Reinvestment Collateral

3.4.2.10 U.S. Securities Lending Cash Reinvestment Collateral
As Of: 2020 Q3

Percent of Total

100

Other
Commercial Paper
Bank Deposits

Money Market Funds

60
40

Percent of Total

Government Repo

Corporate Securities

20
Nongovernment Repo
2014

Source: The Risk Management
Association, OFR

2 0 2 0 F S O C / / Annual Report

2016

2018

Reinvestment of cash collateral from
securities lending in the U.S. was estimated
at approximately $600 billion as of the third
quarter of 2020, down $20 billion from the
previous year (Chart 3.4.2.9). A growing number
of the cash reinvestment managers surveyed
have shortened portfolio duration amid market
uncertainty. The median weighted average
maturity (WAM) of cash reinvestment portfolios
decreased to 54 days in the third quarter of 2020
compared to 67 days in the third quarter of 2019,
while the mean WAM dropped from 86 days to
63 days over the same period.

20
0
2012

globally, the amount of shares of ETFs on loan
has increased by approximately 40 percent
for the twelve months ended September 30,
2020. One potential reason for this increase in
demand could be that ETFs are an efficient way
for hedge funds to gain short exposure. As with
the trend for securities lending overall, however,
the estimate of the value of ETF shares on loan
decreased after peaking in early March.

2020

Note: Nongovernment repos have collateral of whole
loans, equity, and corporate debt. Other includes ABS,
funding agreements, other funds, and other vehicles.
Data is based on a survey of agent-based lenders.

As noted in Box D, cash collateral is often
invested in the short-term funding markets
(STFMs). The estimated share of cash
reinvestment portfolios allocated to repos
backed by non-government collateral recorded
a decline during the first quarter of 2020 from
28 percent to 17 percent, before increasing to 27
percent during the third quarter of 2020. The
share of bank deposit and government repo rose
to 18 percent and 13 percent respectively before
declining to 16 percent and 11 percent in the
third quarter. The share of CP used as collateral
in repo transactions declined to 5.8 percent in
the first quarter, before increasing to 9.2 percent
in the third quarter (Chart 3.4.2.10).

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

STFMs are the $10 trillion network of markets
and entities that help provide short-term credit for
corporations, governments, and financial institutions.
These include secured borrowing markets such
as those for repos and securities lending, as well
as unsecured borrowing markets such as bank
deposits and CP. Since some of the intermediaries
that participate in the federal funds market also
participate in other STFMs, well-functioning STFMs
are critical not only for financial stability but also for
the implementation of monetary policy.
Amid escalating concerns about the economic
impact of the COVID-19 pandemic, market
participants rapidly reduced their tolerance for risk
and generally shifted their risk preferences toward
cash and other highly liquid instruments. This rapid
shift in investor sentiment placed stress on both the
secured and unsecured components of STFMs and
the intermediaries operating in these markets.
Unsecured Funding
Bank Funding
With sources of market liquidity drying up, businesses
drew heavily on bank lines of credit. Several factors
have helped banks meet this surge in liquidity
demand. First, post-crisis regulation has required that
banks maintain strong capital and liquidity positions
while reducing their reliance on short-term wholesale
funding. Second, deposit inflows surged because
businesses deposited their precautionary credit-line
withdrawals, businesses and consumers deposited
government stimulus payments, and investors moved
away from risky illiquid assets into cash. Third,
some banks increased discount window borrowing
and Federal Home Loan Bank (FHLB) advances to
manage the surge in liquidity demand. The FHLBs
generally expanded eligible categories of collateral to
reflect the new funding programs and facilities of the
SBA and Federal Reserve, reduced rates, extended
grants to members, and waived fees for certain
products. For its part, the Federal Reserve lowered

the discount rate by 150 basis points and was
successful in encouraging and destigmatizing the use
of its discount window.
Money Market Mutual Funds
Market conditions for unsecured short-term debt
instruments, such as CP and negotiable certificates
of deposit (NCDs), began to deteriorate rapidly in
the second week of March. Spreads for money
market instruments began widening sharply, and
new issuance of CP and NCDs declined markedly
and shifted to short tenors. Stress among MMFs
likely contributed to these problems, as prime funds
reduced their holdings of CP disproportionately
compared to other holders. At the end of February
2020, prime MMFs offered to the public owned
approximately $215 billion of CP, or about 19 percent
of the $1.1 trillion outstanding CP at that time. From
March 10 to March 24, these funds cut holdings
of CP by $35 billion, and this reduction accounted
for 74 percent of the $48 billion overall decline in
outstanding CP over those two weeks.
Conditions in the short-term municipal debt markets
also worsened rapidly in mid-March. On March
18, the Securities Industry and Financial Markets
Association (SIFMA) Municipal Swap Index yield—a
benchmark rate in these markets—rose to 520 basis
points, a 392 basis point increase from the prior
week. The spike in the SIFMA index yield caused
drops in market-based net asset values (NAVs) of taxexempt MMFs (which mostly still have stable, rounded
NAVs) and likely contributed to outflows from these
funds. Stress among tax-exempt MMFs also likely
contributed to worsening market conditions. A period
of unusually heavy redemptions from tax-exempt
MMFs began on March 12, and outflows accelerated
over the next week. Tax-exempt funds reduced their
holdings of variable-rate demand notes (VRDNs) by
about 16 percent ($15 billion) in the two weeks from
March 9 to 23. Primary dealer VRDN inventories
nearly tripled in the week ending March 18. Stress in

B ox D: Re c e nt Stre ss in Short- Te rm Whole sa le Fund in g Mark et s

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

municipal markets also contributed to strains on taxexempt MMFs.
As part of the general deterioration in STFM
conditions, prime and tax-exempt MMFs experienced
heavy redemptions beginning in the second week
of March 2020. Outflows increased quickly, peaking
on March 17 for prime funds (the day the Federal
Reserve announced the CPFF) and on March 23 for
tax-exempt funds (one business day after the MMLF
was expanded to include tax-exempt securities).
Among institutional prime MMFs offered to the public,
outflows as a percentage of fund assets exceeded
those in the September 2008 crisis. Over the twoweek period from March 11 to 24, net redemptions
from publicly offered institutional prime funds totaled
30 percent (about $100 billion) of the funds’ assets.
For comparison, in September 2008, the worst
outflows from these funds over a two-week period
were about 26 percent (about $350 billion) of assets.
For retail prime funds, outflows as a share of assets
in March 2020 exceeded those that occurred during
the 2008 crisis, although heavy redemptions began a
couple of days after those for institutional funds. Net
redemptions totaled 9 percent (just over $40 billion)
of assets over the two weeks from March 13 to 26.
In September 2008, the heaviest retail outflows over
a two-week period totaled 5 percent of assets. Retail
prime funds had about 60 percent more assets in
2008 than earlier this year, so outflows were similar in
dollar terms in both crises.
Outflows from tax-exempt MMFs, which are largely
retail funds, were 8 percent ($11 billion) of assets
during the two weeks from March 12 to 25. In 2008,
when tax-exempt MMF assets were more than four
times larger than earlier this year, such funds had
outflows of 7 percent (almost $40 billion) of assets in
one two-week period.
Outflows from MMFs abated fairly quickly after the
Federal Reserve’s announcement of its support
for the STFMs, including support for MMFs in midMarch. Market conditions began to improve after

2 0 2 0 F S O C / / Annual Report

the launch of the MMLF. The share of CP issuance
with overnight maturity began falling on March 24, and
spreads to OIS for most types of term CP began falling
a few days later. After the expansion of the MMLF to
include municipal securities on March 20 (and VRDNs
on March 23), tax-exempt MMF outflows eased and
conditions in the short-term muni markets improved.
While stress affected a variety of money-market
instruments and investment vehicles, the availability of
secondary-market liquidity for MMFs’ assets via the
MMLF appears to have had a broad calming effect on
STFMs. For example, although assets of other funds,
including European dollar-denominated MMFs, could not
be financed through MMLF loans, outflows from these
funds abated shortly after the MMLF began operations
on March 23.
Secured Funding
Repurchase Agreements
The market for repos consists of many different
participants that provide or demand secured shortterm funding against securities (typically Treasury and
agency MBS) posted as collateral. It is a critical source
of liquidity for a variety of market participants, many of
whom depend predominantly on this market for their
funding.
Broker-dealers, many of whom are subsidiaries of large
BHCs, play a key role in the U.S. repo market as they
intermediate funds between ultimate cash lenders,
such as MMFs, and ultimate cash borrowers (such
as hedge funds). Other market participants include
asset managers, such as mutual funds and ETFs, who
borrow from as well as lend to the repo market. Certain
leveraged participants, such as hedge funds and
mortgage REITs, typically fund themselves using shortterm repo funding.
With economic prospects declining at the onset of the
pandemic, many investors and market participants
increased their demand for liquidity. Investors sought to
sell traditionally liquid securities with minimal credit risk,
such as Treasuries and agency MBS, to obtain cash. In

the case of Treasuries, there had been significant
selling pressure from foreign investors and foreign
central banks (see Box B). As noted in Section
5.5, these selling pressures likely stressed balance
sheets of the securities dealers that intermediate in
the repo market.
Securities Lending
Securities lending supports the orderly operation
of capital markets, principally by enabling the
establishment of short positions and thereby
facilitating price discovery and hedging. This lending
typically is secured by cash or other securities. As
noted in Section 3.5.2, it is estimated that at the
end of September 2020 the global securities lending
volume outstanding was $2.5 trillion, with around 57
percent of it attributed to the U.S.

in both markets. While MMFs cannot participate in the
federal funds market, some MMFs invest in closely related
certificates of deposit issued outside the U.S., known as
Eurodollar instruments. Similarly, securities dealers are
major participants in the secured (repo) market. Given
these interconnections, stress in one market can be
readily transmitted to another and more generally, to the
broader financial markets.

The key interconnection between this market and
the broader financial system stems from the fact that
a large portion of cash collateral is reinvested in the
STFMs. The fall in asset prices in March 2020 led
to deleveraging by market participants that typically
borrow securities, and the lower asset prices and
lower demand for new securities lending in general
reduced the amount of cash collateral reinvested
in the STFMs. This deleveraging limited the supply
of capital available in the STFMs, making it more
difficult for issuers in the real economy to access
capital.
Interconnection of STFMs and Other Financial
Markets
The STFMs are a complex ecosystem that involve
significant daily flows through a network of highly
interconnected market segments and the economy
more generally. Depository institutions can
participate in the secured (repo) and the unsecured
(federal funds) market. For example, depository
institutions have participated as cash lenders in
the repo market when the repo rates exceeded the
interest on excess reserves. In addition, other market
participants, such as the FHLBs, also participate

Box D: Re c e nt Stre ss in Short- Te rm Whole sa le Fund in g Mark et s

3.4.3 Derivatives Markets
3.4.3.1 Futures

3.4.3.1 U.S. Futures Markets: Volume
3.4.3.1 U.S. Futures Markets Volume
Billions of Contracts
6

As Of: Jul-2020

Billions of Contracts
6

2015

2016

2017

2018

Source: CFTC

2019

2020 (JanJul)

Note: 2020 volume annualized.

3.4.3.2 3-Month Implied Volatility
3.4.3.2 3-Month Implied Volatility
Percent

As Of: 30-Sep-2020

Percent

150

150
Crude Oil
S&P 500
Corn
Gold

120
90

0
Sep:2019

Dec:2019

Mar:2020

Jun:2020

Sep:2020

Source: Bloomberg, L.P., CFTC

3.4.3.3 U.S. Futures Markets Open Interest
3.4.3.3 U.S. Futures Markets Open Interest
Trillions of US$
35

5
2015

Source: CFTC

Trillions of US$
35

As Of: Jun-2020

U.S. futures markets generally performed
well through the March and April COVID-19
market stress, providing price formation, price
discovery, and risk management functions
for market participants during a period of
increased uncertainty. Commercial participants
such as farmers, ranchers, producers, service
providers, and intermediaries as well as noncommercial participants such as asset managers,
hedge funds, market makers, and various retail
and other investors contributed to record levels
of activity across multiple futures markets.
During the first seven months of 2020, volume
levels across U.S. futures exchanges rose by over
15 percent on an annualized basis compared
to 2019, due to higher volatility, an increase of
short-term trading activities, and significant
hedging and investment needs (Chart 3.4.3.1).

2016

2017

2018

2019

2020

Note: Futures contracts are dollarized using prices
from contract definitions and other relevant data.

2 0 2 0 F S O C / / Annual Report

The pandemic’s impact on the U.S. futures
markets was most significant during March and
April when various fundamental and market
risk factors drove implied volatility to extreme
levels (Chart 3.4.3.2). At the same time, futures
liquidity, as represented by top-of-book depth,
declined and the steep drop in asset prices
drove volumes higher, while the notional
amount of open interest decreased (Chart
3.4.3.3). The pace of the global news flow and
the accompanying sell-offs triggered limit down
in various asset classes. For example, e-mini
S&P 500 futures hit the 5 percent limit down
band in five overnight sessions in March and hit
the 5 percent limit up band in another three
overnight sessions.
Exchanges took various emergency actions
to address operational concerns and enable
efficient price discovery and price transparency.
The CFTC also issued no-action letters
providing temporary, targeted relief to futures
commission merchants (FCMs), introducing
brokers, floor brokers, certain designated
contract markets, and other market participants
to help facilitate orderly trading and liquidity
while market participants operated away from
their normal business sites.

Over the past year, open interest in “micro”
futures contracts has increased significantly,
totaling $3 billion as of June 2020 (Chart
3.4.3.4). Micro contracts are designed to
make futures trading more accessible to retail
investors and are typically one-tenth of the size
of benchmark futures contracts. Micro equity
futures, which were first introduced in May
2019, have driven much of the recent growth in
micro contracts. Micro metals contracts have
also driven the recent growth, and open interest
in micro metals has more than quadrupled
since 2018. Despite this growth, micro futures
account for a small share of open interest. For
example, the notional amount outstanding for
the micro e-mini S&P 500 index is less than
1 percent of that for the benchmark e-mini
futures contract.
As discussed in Box B, open interest in U.S.
Treasury futures indicated a significant shift in
positioning by asset managers and leveraged
funds (Chart 3.4.3.5). The asset managers,
which include pension and other long-only
unleveraged funds, are long futures across
the Treasury curve, while leveraged funds are
short futures across the curve. In 2018 and
the first half of 2019, leveraged funds and
asset managers significantly increased their
net exposures in Treasury futures, peaking
at around $600 billion in the third quarter
of 2019. Since the pandemic and given the
current interest rate environment and outlook,
the aggregate level of open interest across all
Treasury futures contracts has nearly halved.
This reduction in net positions has primarily
been in the 2-year and 10-year Treasury futures.

3.4.3.4 Micro Futures: Open Interest
3.4.3.4 Micro Futures Open Interest
Billions of US$
4
Energy
Stock Indices
Metals
3
Currencies

Billions of US$
4

As Of: Jun-2020

2015

2016

2017

2018

2019

2020

Note: Futures contracts are dollarized using prices
from contract definitions and other relevant data.

Source: CFTC

3.4.3.5 U.S. Treasury Futures: Open Interest
3.4.3.5 U.S Treasury Futures Open Interest
Billions of US$
900
Asset
Managers
600

As Of: 29-Sep-2020
5Y
2Y

30Y
10Y

Billions of US$
900

600

300

300
0

-300

-300
-600

Leveraged
Funds

-900
Jan:2016

Source: CFTC

Jan:2017

5Y
2Y

-600

30Y
10Y

Jan:2018

Jan:2019

Jan:2020

-900

Note: Net notional amount of open interest by trader type. 10Y
includes 10Y and 10Y Ultra Treasury Note Futures; 30Y
includes Treasury Bond and Ultra Treasury Bond Futures.

3.4.3.2 Options
Equity Options
In early 2020, the COVID-19 pandemic
impacted the operations of the five equity
options exchanges that maintain a physical
trading floor, causing each of them to transition
to fully-electronic trading as social distancing
restrictions came into effect. Trading returned
to the physical floors as they began to reopen
at the end of the second quarter of 2020, but
floor volumes remain below pre-pandemic
Fina nc ia l De v el opment s

3.4.3.6 Exchange-Traded Equity Option Volume

3.4.3.6 Exchange-Traded Equity Option Volume
Millions of Contracts
25

As Of: Sep-2020

Millions of Contracts
25

Put Options
Call Options

0
Jan:2019

Jul:2019

Source: The OCC

0
Jan:2020
Jul:2020
Note: Average daily volume. Excludes index
and ETF options.

3.4.3.7 Call Option Volume for Select Technology Stocks

3.4.3.7 Call Option Volume for Select Technology Stocks
Millions of Contracts

As Of: 30-Sep-2020

Millions of Contracts
14

14
12

Daily Volume
20-Day Moving Average

0
2016

2017

2018

2019

2020

Note: Includes daily call option volume for TSLA,
AAPL, NFLX, GOOG, FB, and MSFT.

Source: Bloomberg, L.P.

3.4.3.8 Options on Futures: Open Interest
3.4.3.8 Options on Futures: Open Interest

2.5

Agriculture
Stock Indices
Treasury Futures

Energy
Currencies
Metals

Trillions of US$
3.0

2.5

2.0

1.5

1.0

0.5

0.0

2015

Source: CFTC

As Of: Jun-2020

2016

2017

2018

2019

2020

0.0

Note: Excludes Eurodollar futures on options.

2 0 2 0 F S O C / / Annual Report

Thousands

Trillions of US$
3.0

levels. At the same time, overall options volume
has dramatically increased, with average daily
volumes for exchange-traded equity options
reaching a record 20 million contracts in
September 2020 (Chart 3.4.3.6).
The recent growth of option volumes has been
concentrated in call options on technology
stocks. For example, the average daily volume
for call options on six large technology stocks
has roughly tripled over the past year, peaking
at over 6 million contracts in August (Chart
3.4.3.7). Some reports indicate that the
increase in volume has been driven, in part,
by an increase in retail investor participation
as broker-dealers have enhanced their
options trading offerings and have lowered or
eliminated their trading commissions.

Exchange-Traded Options on Futures

Over the past five years, open interest for U.S.
exchange-traded options on futures averaged
approximately $40 trillion on a non-delta
adjusted basis. Notional exposures to options
on futures are concentrated in the highly liquid
benchmark CME 3-month Eurodollar interest
rate contract. Excluding Eurodollars, open
interest for options on futures contracts stood
at approximately $2.2 trillion in non-delta
adjusted notional value in 2019 (Chart 3.4.3.8).

Option volumes across all markets increased
between 2014 and 2019; over one billion option
contracts traded in 2019 (Chart 3.4.3.9). Over
the past five years, Eurodollar options volume
has accounted for approximately 35 percent of all
volume on exchange-traded options on futures.
Between 2015 and 2019, the delta-adjusted
notional amount of options on futures nearly
tripled, from $6.9 trillion in June 2015 to $18
trillion in June 2019 (Chart 3.4.3.10). Much of
this growth could be attributed to increased
open interest in Eurodollar options contracts.
Open interest for options on futures fell to $13
trillion in June 2020 as interest in Eurodollar
contracts declined given the reduced
uncertainty in the outlook for short-term
interest rates.

3.4.3.9 Options on Futures: Volume
3.4.3.9 Options on Futures: Volume
As Of: Jun-2020
Millions of Contracts
1250
Other Options
Eurodollar Options
1000

Millions of Contracts
1250
1000

750

500

250

2015

2016

2017

2018

2019

2020

Source: CFTC

3.4.3.10 Options on Futures: Delta Adjusted Open Interest

Excluding Eurodollar instruments, options
referencing financial futures account for
approximately 58 percent of outstanding, with
options on equity indices, Treasury futures,
and currencies accounting for 31 percent, 23
percent, and 4.3 percent of delta-adjusted open
interest, respectively (Chart 3.4.3.11). Within
the commodity space, options on metals,
energy, and agriculture futures account for
22 percent, 12 percent, and 8 percent of deltaadjusted open-interest, respectively.

Trillions of US$
20

Options on Treasury futures are considered to
be among the most liquid options on futures
contracts, with significant activity in low-delta,
or deep-out-of-the-money options. Low-delta
options (less than 0.2) have strike prices far
away from prevailing futures prices and provide
protection against tail-risk events. Consequently,
trading and open interest in low delta options
tend to pick up during periods of increased
uncertainty or volatility in the rates market.
The ratio of puts to calls is a good indicator of
the overall bias of the marketplace. Higher puts
relative to calls may indicate increased hedges
against rising rates (in yield terms) and lower
puts relative to calls may indicate a bias towards
falling rates. After the put-call ratio on 10-year
Treasury futures spiked in March 2020, those

Source: CFTC

As Of: Jun-2020

Trillions of US$
20

2015

2016

2017

2018

2019

2020

Note: Delta adjusted open interest as of June 30 of
each year. Includes Eurodollar futures on options.

3.4.3.11 Delta Adjusted Options on Futures by Asset Classes

3.4.3.11 Delta Adjusted Options on Futures by Asset Class
$0.7B

As Of: Jul-2020

$81.3B
$115.7B
$29.7B

$16.3B

$44.4B

Other
Stock Index
Energy
Treasuries
Currencies
Agriculture
Metals

$83.9B

Source: CFTC

Note: Delta adjusted open interest.
Excludes Eurodollar options.
Fina nc ia l De v el opment s

ratios declined to more normal levels (Chart
3.4.3.12).

3.4.3.12 Options on 10-Year Treasury Futures
3.4.3.12 Options on 10-Year Treasury Futures
Millions of Contracts

As Of: 28-Jul-2020

Ratio

5
4

Tail Risk Puts (left axis)
Tail Risk Calls (left axis)
Put / Call Ratio (right axis)

OTC Options

According to the Bank for International
Settlements (BIS), the global gross notional
amount outstanding of over-the-counter (OTC)
options remained relatively steady at around $56
trillion as of December 2019. Interest rate option
contracts represent the bulk of that figure,
ending 2019 at just under $40 trillion in notional
outstanding, which is down slightly from 2018.
The notional amount of OTC equity options as
of the fourth quarter of 2019 was approximately
$3.7 trillion, remaining below the peak of $8.5
trillion in the second quarter of 2008.

7
6

5
4

3
2

1
0
2016

2017

2018

2019

2020

Source: CFTC

3.4.3.13 OTC Options: BHC Gross Notional Outstanding
3.4.3.13 OTC Options: BHC Gross Notional Outstanding
Trillions of US$

60
50

As Of: 2020 Q2

Other (left axis)
Equity (left axis)
Foreign Exchange (left axis)
Interest Rate (left axis)

Percent

Percent Held by 6 Largest
BHCs by Total Assets (right
axis)

99
98

10
0

100

94
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Source: FR Y-9C, Staff
Calculations

Note: Other includes credit,
commodity, and other OTC options.

At the end of the second quarter of 2020, BHCs
held $39 trillion in OTC options, a decline from
earlier years (Chart 3.4.3.13). This decrease
is primarily attributable to a reduction in
exposures at certain large BHCs. As a result, the
share of option exposures attributed to the six
largest BHCs fell from 98 percent in the fourth
quarter of 2018 to 95 percent in the second
quarter of 2020. Over the same period, BHC net
notional exposures to options—as measured
by written minus purchased options—fell from
$3.2 trillion to $2.5 trillion, though they are
still well above levels observed between 2011
and 2016 (Chart 3.4.3.14).

3.4.3.3 OTC Derivatives

3.4.3.14 OTC Options: BHC Net Notional Outstanding
3.4.3.14 OTC Options: BHC Net Notional Outstanding
Trillions of US$
4
3

Trillions of US$
4

Other
Equity
Foreign Exchange
Interest Rate

-1

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Source: FR Y-9C, Staff
Calculations

As Of: 2020 Q2

2 0 2 0 F S O C / / Annual Report

-1

Note: Other includes credit,
commodity, and other OTC options.

Activity in the OTC derivatives market
increased sharply during the March 2020
market stress. In March 2020, interest rate
swap trading volumes hit record levels, with
weekly volumes peaking at over $20 trillion
for the week ending March 6, 2020. Volumes
in CDS markets roughly doubled from the
previous year but remained below their peak
weekly volume in 2016. The increase in trading
volumes is largely related to market participants
repositioning portfolios in response to central
bank interest rate cuts and increased economic
uncertainty. Additionally, some reports suggest
that institutional investors relied on CDS
markets due to the rapid deterioration of
liquidity conditions in the underlying corporate

bond markets. OTC activity has since decreased
to pre-pandemic levels (Chart 3.4.3.15).
Concurrently, the notional amount of OTC
derivatives outstanding rose during the
COVID-19 market stress but have since returned
to pre-pandemic levels (Chart 3.4.3.16). The
notional amount of index CDS outstanding
peaked at $5.7 trillion in the last week of March,
a nearly 50 percent increase from year-end
2019; interest rate swaps outstanding peaked at
over $300 trillion in the first week of March, a
20 percent increase from year-end 2019. By the
end of September 2020, the notional amount of
index CDS and interest rate derivatives declined
to $4.4 trillion and $250 trillion, respectively.
As discussed in Box A of the Council’s 2018
annual report, the size of the interest rate
swaps market can also be expressed on an
entity-netted notional (ENN) basis, which
attempts to risk-adjust notional amounts by (1)
expressing the notional amount of each swap
in 5-year equivalents; and (2) netting offsetting
positions for every pair of counterparties. While
the notional amount of interest rate swaps has
decreased to pre-pandemic levels, risk-adjusted
ENN exposures remain elevated, indicating the
increased market risk transfer in the interest
rate swaps markets (Chart 3.4.3.17).

3.4.3.15 Derivatives Notional Volume
3.4.3.15 Derivatives Notional Volume
Trillions of US$
Trillions of US$
As Of: 25-Sep-2020
1.0
15
Credit Default Swaps
Interest
Rate
Swaps
(left axis)
(right axis)
0.8
12

0.6

0.4

0.2

0.0
2015

2016

2017

2018

2019

2020

Note: 12-week moving-averages.
Excludes security-based swaps.

Source: CFTC

3.4.3.16 Derivatives Notional Amount Outstanding
3.4.3.16 Derivatives Notional Amount Outstanding
Trillions of US$
12

Trillions of US$
500

As Of: 25-Sep-2020

Interest Rate Swaps
(right axis)

400
300

6
4
2

200
Credit Default Swaps
(left axis)

0
2014

2015

2016

100

2017

2018

2019

2020

Note: Weekly Swaps Report not issued between Dec. 22,
2018 and Jan. 26, 2019 due to a lapse in government
funding. Excludes security-based swaps.

Source: CFTC

3.4.3.17 Size of Interest Rate Swap Market
3.4.3.17 Size of Interest Rate Swap Market
Trillions of US$
280

As Of: 2020 Q2

Trillions of US$
18

Notional Amounts
(left axis)

260

240

220

15
Entity-Netted Notional
(right axis)

200
180
Mar:2018

Sep:2018

Source: CFTC Office of
Chief Economist

Mar:2019

Sep:2019

Mar:2020

Note: Total notional amount and entity-netted notional
amount as reported in “Introducing ENNs: A Measure
of the Size of Interest Rate Swap Markets.”

Fina nc ia l De v el opment s

3.4.3.18 Global OTC Positions
3.4.3.18 Global OTC Positions
Trillions of US$
1,000

As Of: 2020 Q2

Trillions of US$
40

Notional Amounts
(left axis)

800
600

Gross Market Values
(right axis)

Gross Credit Exposures
(right axis)

20
400
10

200
0
2000

2003

2006

2009

2012

2015

2018

Source: BIS, Haver Analytics

3.4.3.19 Commodity Index Swaps: Annual Open Interest

Billions of US$
70

As Of: Jun-2020

Billions of US$
70

2015

Source: CFTC

2016

2017

2018

2019

2020

Note: Notional exposure of commodity index swaps.

3.4.3.20 Commodity Index Swaps: Monthly Open Interest

Billions of US$
100

As Of: Jul-2020

0
Aug:2019

Nov:2019

Source: CFTC

Billions of US$
100

2 0 2 0 F S O C / / Annual Report

Feb:2020

May:2020

Note: Month-end notional exposure of
commodity index swaps.

The notional amount of global OTC derivative
positions totaled $607 trillion as of June 2020,
a 5.2 percent decrease compared to June 2019
(Chart 3.4.3.18). This decline was largely driven
by a decline in the amount of outstanding OTC
interest rate and FX derivatives contracts, which
fell by $29 trillion and $4.8 trillion respectively.
In contrast, the gross market value of
outstanding OTC derivatives, which provides a
measure of amounts at risk, rose to $15 trillion
as of June 2020, a $3.4 trillion increase over the
year. Interest rate derivatives saw the largest
increase in gross market value, as the decline
in central bank policy rates lifted the market
value of outstanding interest rate derivatives.
Gross credit exposures, which adjust gross
market values for legally enforceable bilateral
netting agreements (but not for collateral), also
increased, from $2.7 trillion as of June 2019 to
$3.2 trillion as of June 2020.

Commodity Index Swaps

During the past five years, the use of commodity
index swaps has expanded significantly, with
approximately $62 billion outstanding in 2019
versus $27 billion in 2015 (Chart 3.4.3.19). The
overall exposure of commodity index swaps,
however, declined during the pandemic months
as investors reduced exposures to commodities.
Commodity index swap exposures, which fell to
as low as $35 billion, have since rebounded to
$50 billion as of June 2020 (Chart 3.4.3.20).

Similarly, the use of single commodity swaps
has increased significantly over the past five
years (Chart 3.4.3.21). This growth can be
attributed largely to an increase in commercialdriven activity, particularly with customization
of commodity swaps. Energy-based swaps are
the most popular category of single commodity
swaps, with natural gas- and crude oil-based
swaps accounting for 31 percent and 28 percent
of total single commodity swaps outstanding
over the past five years, respectively (Chart
3.4.3.22).

3.4.3.4 Futures Commission Merchants
FCMs collect funds from customers to margin
centrally cleared futures, options on futures,
and swap transactions. In addition to managing
the deposit and withdrawal of customer
margin funds with CCPs, FCMs guarantee the
performance of their customers to the CCP.
Concerning centrally cleared futures and
options on futures, the level of customer
margin funds held by FCMs remained fairly flat
prior to the pandemic, but has since increased
significantly (Chart 3.4.3.23). In March 2020,
the amount of required client margin for U.S.
and foreign futures spiked to $318 billion,
a $104 billion increase from February 2020.
Similarly, the amount of required client margin
for swaps increased by $33 billion to $153
billion in March. Increased trading volumes,
along with increases in CCP and FCM margin
requirements, caused a sharp increase in
required client margin. While market volatility
has since subsided, the total amount of required
client margin held by FCMs remained elevated
through the summer, totaling $439 billion in
September 2020.
Over the last two decades, the number of
FCMs holding customer funds has declined
considerably, with the number of FCMs clearing
futures for clients falling from over 100 in
2002 to 53 as of September 2020; 26 of these
are bank-affiliated. The number of FCMs that
report holding segregated client funds for the
centrally cleared swaps business decreased
from 23 at year-end 2014 to 16 (of which 14

3.4.3.21 Commodity Swaps: Open Interest
3.4.3.21 Commodity Swaps: Open Interest
Billions of US$
1500

As Of: Jun-2020

Billions of US$
1500

1250

1000

750

500

250

2015

2016

2017

2018

2019

2020

Note: Average month-end notional
exposure across 25 key contracts.

Source: CFTC

3.4.3.22 Commodity Swaps by Asset Class
3.4.3.22 Commodity Swaps by Asset Class
As Of: Jul-2020

$59B
$57B

$189B

$56B
$59B

Other Softs
Oil Seeds
Grains
Metals
Other Energy
Natural Gas
Crude

$43B
$204B

Source: CFTC

Note: 5-year average notional contribution
of the major commodity categories.

3.4.3.23 Margin Funds Held at CFTC Registered FCMs
3.4.3.23 Margin Funds Held at CFTC Registered FCMs
Billions of US$
As Of: Sep-2020
500
Swaps
Foreign Futures
U.S. Futures
400

Billions of US$
500
400

300

200

100

0
0
2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
Source: CFTC
Fina nc ia l De v el opment s

3.4.3.24 FCM Concentration: Customer Futures Balances

Percent
100
Top 10

Percent
100

As Of: 2020 Q3
Top 5

Top 3

2014

2015

2016

2017

2018

2019

2020

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.

Source: CFTC

are bank-affiliated) as of September 2020. The
pace of consolidation in the FCM industry has
slowed since 2015, however, and the number of
FCMs clearing swaps and futures for customers
remained relatively consistent over the last
several years.
Between the first quarter of 2014 and the third
quarter of 2020, the top five clearing members
at futures exchanges held between 48 and 60
percent of client margin for futures products,
and the top five swap clearing members held
between 68 and 78 percent of client margin for
swaps products (Charts 3.4.3.24, 3.4.3.25).

3.4.3.5 Swap Dealers
3.4.3.25 FCM Concentration: Customer Swap Balances

3.4.3.25 FCM Concentration: Customer Swap Balances
As Of: 2020 Q3
Top 10 Top 5 Top 3

Percent
100

2014

2015

Source: CFTC

2016

2017

2018

2019

2020

Note: Represents the amount of funds an FCM is required
to segregate for customers who trade cleared swaps.

Swap dealers (SDs) began registering with the
CFTC in December 2012; as of October 2020,
there were 109 registered SDs, an increase from
the 80 provisionally registered SDs at the end
of 2013. Between 2014 and 2018, registered SD
activity remained concentrated, with the top
three SDs accounting for over 30 percent of
swap positions and the top ten SDs accounting
for over 55 percent of swap positions. Since
2018, the concentration of swap contracts with
the largest SDs has declined slightly. As of the
third quarter of 2020, the share of contracts
held by the top three SDs totaled 27 percent,
while the share of contracts held by the top ten
SDs totaled 50 percent (Chart 3.4.3.26).

3.4.3.6 Swap Execution Facilities

3.4.3.26 Concentration of Swap Positions for Registered SDs

Percent
70

Top 10

Top 5

Percent
70

Top 3

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

Source: CFTC

As Of: 2020 Q3

Note: Positions between two Swap Dealers (SDs) in the same
category (e.g., Top 3 or Top 5) are double-counted (i.e., a trade
between the #1 SD and #3 SD would be counted twice).

2 0 2 0 F S O C / / Annual Report

Certain interest rate swaps and index CDS have
been “made available to trade,” and therefore
are required to be executed on a Swap
Execution Facility (SEF), an exempt SEF, or a
designated contract market. Combined with
mandatory central clearing, these regulated
trading platforms have increased pre-trade
price transparency, reduced operational risk,
and improved end-to-end processing.
The level of U.S.-regulated swaps executed
on SEFs has continued to rise and SEF trade
volumes picked up considerably during the
COVID-19 market volatility. In March 2020,
the notional amount of interest rate swaps
traded on-SEFs averaged $689 trillion, down

slightly from its January 2020 peak, but 13
percent higher compared to March 2019 (Chart
3.4.3.27). Nonetheless, the share of interest
rate swaps trading that occurred on SEFs fell to
below 50 percent in February and March 2020,
as off-SEF trading hit record levels. The share
of interest rate swaps traded on SEFs has since
rebounded to 62 percent in September 2020.
The average daily volume for index CDS SEF
trading surged to $78 billion in March 2020,
well above the previous monthly record set
in February 2018 and a 115 percent increase
from March 2019 (Chart 3.4.3.28). In recent
years, the share of index CDS swaps trading
that occurred on SEFs has remained relatively
stable at around 70 to 80 percent. During the
COVID-19 market stress, the share of index
CDS trading that occurred on SEFs increased
slightly to 82 percent in March 2020. SEF
trading volumes have since declined, but the
share of index CDS executed on SEFs has
remained elevated, totaling 81 percent in
September 2020.

3.4.4 Commodities Market
The U.S. commodity derivatives markets cover
energy, agricultural, and metals industries
through various products, including futures,
options, swaps (both single commodity and
commodity index), and a growing commodity
ETF and exchange-traded notes (ETN) market.
The U.S. commodity derivatives markets serve
important price formation and price discovery
functions, allowing both U.S. and global
participants to hedge, invest, and manage risk.
These markets also provide a basis for global
trade to be priced in U.S. dollars, contributing
to the U.S. dollar’s status as the world’s reserve
currency.

3.4.3.27 Interest Rate Swap SEF Trading Volumes
3.4.3.27 Interest Rate Swap SEF Trading Volumes
Billions of US$
1250
1000

As Of: Sep-2020
On-SEF Interest Rate
Swap Volume (left axis)

Percent
80

Share of Total Interest Rate
Swap Volume (right axis)

750

500

250

0
Jan:17

Jan:18

Jan:19

Source: CFTC

Jan:20

Note: Average daily notional volume.

3.4.3.28 Credit Default Swap SEF Trading Volumes
3.4.3.28 Credit Default Swap SEF Trading Volumes
Billions of US$
100
80

As Of: Sep-2020

Percent
100

Share of Total CDS
Volume (right axis)

On-SEF CDS Volume
(left axis)

0
Jan:17
Source: CFTC

Jan:18

Jan:19

Jan:20

Note: Average daily notional volume.
Excludes security-based swaps.

Fina nc ia l De v el opment s

3.4.4.1 Commodities Futures & Options: Open Interest
3.4.4.1 Commodities Futures & Options: Open Interest
Trillions of US$
2.5
2.0

As Of: Jul-2020

Trillions of US$
2.5

Options
Futures

2.0

1.5

1.0

0.5

0.0

2015

2016

2017

2018

2019

0.0

2020

Note: Notional amount outstanding. Options are
not delta-adjusted

Source: CFTC

3.4.4.2 Total Net Asset Value – Commodity ETFs
3.4.4.2 Total Net Asset Value: Commodity ETFs
Billions of US$
160

As Of: Sep-2020

Billions of US$
160

140

120

100

2015

2016

2017

2018

2019

2020

Note: Data are as of end of September in
each given year.

Source: Morningstar, Inc.

3.4.4.3 Metals Indices
3.4.4.3 Metals Indices
Index

As Of: 30-Sep-2020

Bloomberg Precious
Metals Index

150

125

100

100
75

Bloomberg Industrial
Metals Index

50
2015
2016
2017
Source: Bloomberg, L.P.

Index
175

175

2 0 2 0 F S O C / / Annual Report

2018

50
2019
2020
Note: Indexed to 01-Jan-2015.

Over the past five years, the notional amount
of U.S. futures and options outstanding has
averaged approximately $1.5 trillion (Chart
3.4.4.1). Commodity exchange-traded products
(ETPs), which provide retail investors with
a vehicle to gain exposures to commodity
markets, saw significant growth in net AUM
during the first nine months of 2020 (Chart
3.4.4.2). Commodity ETP growth has been
driven by inflows into bullion-backed gold
ETFs, as investors sought to gain portfolio
diversification in a low-yield environment.

Precious and Industrial Metals
Between 2015 and 2019, gold and other precious
metals traded in a relatively narrow price band.
During the extreme volatility observed in March
2020, precious metals sold off substantially.
Despite gold’s typical position as a safe haven
asset, gold prices fell by approximately 12
percent between March 9 and March 19 as
investors and central banks sought to raise
dollars amid the global flight to liquidity. Since
then, precious metals have rallied considerably
(Chart 3.4.4.3). Gold and silver have driven
this recovery in precious metals prices, with
gold futures reaching an all-time high of $2,089
per troy ounce on August 7 and silver futures
rising to a seven-and-a-half-year high of almost
$30 per troy ounce on the same day. Physicallybacked ETF holdings for gold and silver have
also surged in 2020, as investors use these
instruments to gain exposure to rising prices.
While platinum and palladium prices have
recovered from their March 2020 lows, as of
September 30, 2020, they were still 13 percent
and 19 percent, respectively, below their prepandemic highs, which can be attributed to
increased uncertainty around future demand
given that these metals are used in automotive
catalysts to reduce emissions.
Similar to other commodities, industrial
metals prices dropped steeply in March and
April 2020 as COVID-19 lockdowns depressed
demand from the manufacturing and
construction industries. Global markets have
since rebounded on strong China demand,
government stimulus efforts, and a lower U.S.

dollar. Iron ore prices increased significantly
since April due to a reduction of stocks, which
were impacted by a slowdown in seaborne
supply during the first quarter, and Chinese
steelmakers ramping up production in the
second quarter. Helping to support aluminum
prices, U.S. tariffs were re-imposed on
unalloyed, unwrought aluminum imports from
Canada on August 16.
Gold markets experienced significant price
dislocations at the height of the COVID-19
market stress. For example, the New York
COMEX gold futures price diverged materially
from the London spot price, which can largely
be attributed to supply chain disruptions and
contract specifications. Typically, if there is a
shortage of gold at COMEX, gold refineries
will recast 400 ounce London bullion bars
into the 100-ounce bars that are required to
settle futures contacts in New York. Increased
demand for gold coupled with disruptions in
air travel and shutdowns at major refineries,
however, raised concerns that there could be a
shortage of 100-ounce COMEX bars at the time
of settlement. At the height of the COVID-19
crisis, the spot and futures price spread widened
to over $50 per ounce (Chart 3.4.4.4).

Agriculture Markets
COVID-19 impacted the agricultural markets
in numerous ways, including multiple price
distortions, increased volatility, and significant
dislocations. Some agricultural products, like
milk and bacon, faced a supply glut due to the
sharp drop off in purchases from restaurants
and other commercial end-users, while others,
such as ground beef, saw shortages due to
rolling shutdowns of meatpacking factories with
COVID-19 infections. Temporary government
payment programs have helped stave off farm
bankruptcies, but the outlook for the sector is
uncertain.

3.4.4.4 Cash-Futures Spread: Gold
3.4.4.4 Cash-Futures Spread: Gold
Price Per Ounce (US$)
2200

As Of: 31-Jul-2020

Spread Per Ounce (US$)
75

2000

1800

1600

1400

Spread (right axis)
Cash: London Bullion (left axis)
Futures: COMEX (left axis)

1200
Jan:2020

Mar:2020

May:2020

Source: Bloomberg, L.P., CFTC

Jul:2020

-25
-50

Note: London 4:00pm fix minus COMEX
10:00am volume weighted average price.

3.4.4.5 Agriculture Prices
3.4.4.5 Agriculture Prices
Index

As Of: 24-Sep-2020

Index

120
110

120
Lean Hogs
Live Cattle

Sugar
Cotton

Soybeans
Corn

Wheat

110

100

60
Dec:2019

Feb:2020

Apr:2020

Source: Bloomberg, L.P., CFTC

Jun:2020

Aug:2020

Note: Indexed to year-end 2019.

Most agricultural commodity prices fell sharply
with the pandemic, declining by anywhere from
10 percent to 35 percent in March and April
(Chart 3.4.4.5). Agricultural markets were
also down before the pandemic due to trade
Fina nc ia l De v el opment s

3.4.4.6 Cash-Futures Spread: Cattle
3.4.4.6 Cash-Futures Spread: Cattle
Price Per 100lbs
As Of: 30-Sep-2020
Price Per 100lbs
500
150
Cash: Boxed Beef (left axis)
Futures: Live Cattle
140
(right axis)
Spread (left axis)
400
130
120

300

110
200

100
90

100

0
Jan:2020

Mar:2020

May:2020

Source: Bloomberg, L.P., CFTC

Jul:2020

Sep:2020

Note: Box beef choice cut prices
minus live cattle front month contract

3.4.4.7 Net Farm Income
3.4.4.7 Net Farm Income
Billions of US$
175
150
125

As Of: 2-Sep-2020

Other Direct Farm Programs
Market Facilitation Program
COVID-19 Programs
Net Income (excl. Direct Farm Programs)

Billions of US$
175
150
125

100

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020F

Source: USDA

Note: The Market Facilitation Program provides direct payments to
help producers who have been directly impacted by illegal retaliatory
tariffs. COVID-19 Programs include $16 billion in Coronavirus Food
Assistance Program payments and $5.8 billion in PPP payments.

disruptions with China and bearish supply and
demand fundamentals. The gradual lifting
of virus restrictions, a pick-up in Chinese
purchases, and a weaker U.S. dollar relative
to the April 2020 peak, have all provided
support to most agricultural markets. By the
end of September, prices for most agricultural
products have returned to pre-pandemic
levels. However, livestock prices were still down
approximately 10 percent year-to-date through
September 30, 2020. Price volatility, which
declined over the summer, remained elevated
relative to pre-pandemic levels.
In March 2020, the shutdown in economic
activity and the rapid change in consumer
behavior led to dislocations between futures
and underlying cash markets for various
commodities. During this period, retail beef
and pork prices spiked due to an increase
in consumer demand related to stockpiling,
coupled with a decline in supply due to
COVID-19 outbreaks at meat processing plants.
By mid-May, beef and pork production was
40 percent below 2019 levels. As processing
plants struggled to remain open, demand for
live cattle and lean hogs fell, which pushed
futures prices lower, and by mid-May, the spread
between choice boxed-beef (cash markets) and
live cattle (futures) in particular was driven
to historical highs (Chart 3.4.4.6). Given the
unprecedented challenges facing the livestock
industry, the CFTC has formed a Livestock
Taskforce to monitor events in the agriculture
market.
According to the September 2020 United States
Department of Agriculture (USDA) forecast,
net farm income is projected to increase to $103
billion in 2020, which can largely be attributed
to a significant increase in direct government
payments (Chart 3.4.4.7). Direct government
payments are projected to total $37 billion in
2020, or 36 percent of net farm income. These
programs have helped offset the decline in
cash receipts for all commodities, which are
projected to decrease to $358 billion in 2020,
down $12 billion from 2019. The bulk of 2019
and 2020 direct federal government payments

2 0 2 0 F S O C / / Annual Report

can be attributed to the Market Facilitation
Program, which provides temporary assistance
to farmers in response to trade disruptions, and
COVID-19 disaster assistance programs.
Prior to the COVID-19 pandemic, the
agricultural sector faced stress due to low
commodity prices, U.S.-China trade tensions,
and the severe flooding in the Midwest. Federal
assistance programs and forbearance programs
have helped keep family farms afloat through
the COVID-19 pandemic. In fact, the number
of family farms filing for bankruptcy under
Chapter 12 fell to 284 in the first six months of
2020 compared to 294 in the first six months of
2019. Nevertheless, the outlook for the sector
remains uncertain.

Energy Markets

The U.S energy futures markets are critical
for the U.S. economy, spanning petroleum
products, natural gas, and electricity (Charts
3.4.4.8, 3.4.4.9). These markets are central
to price formation and price discovery for
various producers, refiners, storage providers,
intermediaries, and distributors, and serve
as key benchmarks to price-related cash
transactions and associated swap, ETF, and
commodity index products that attract a
broader set of investors.
In the months leading up to the COVID-19
pandemic, crude oil prices were trending
upwards due to more positive economic
conditions and a thawing in global trade
tensions. By year-end 2019, the West Texas
Intermediate (WTI) spot price was $61 per
barrel, up from $54 per barrel on September
30, 2019. In late-January, crude oil prices began
trending lower, as investors anticipated lower
Chinese demand amid the COVID-19-related
lockdowns and travel restrictions. The decline
in crude oil prices rapidly accelerated in March
as global demand collapsed and Saudi Arabia
and Russia failed to reach an agreement on
production cuts. By March 30, WTI fell to a
seventeen-year low of $14 per barrel. By April
2020, global demand for liquid fuel fell to an
estimated 81 million barrels per day, while

3.4.4.8 Energy Futures & Options: Open Interest
3.4.4.8 Energy Futures & Options: Open Interest
Billions of US$
2000

As Of: Jul-2020

Billions of US$
2000

Options
Futures

1500

1000

500

2015

2016

2017

2018

2019

2020

Source: CFTC

3.4.4.9 Energy Futures & Options by Product
3.4.4.9 Energy Futures & Options by Product
Percent
100

As Of: Jul-2020

Percent
100

2015

2016
Electricity

2017
2018
Natural Gas

2019
2020
Petroleum

Source: CFTC

Fina nc ia l De v el opment s

3.4.4.10 Global Petroleum Consumption and Production
3.4.4.10 Global Petroleum Consumption and Production
Millions of Barrels
115

As Of: Sep-2020

Consumption (left axis)

105

Millions of Barrels
30

Change in Inventories
(right axis)

Production (left axis)

20
10
0

-10
85
-20
75
2015

2016

2017

2018

2019

-30

2020

Note: Millions of barrels per day. Change in
inventories represents the difference between
production and consumption.

Source: U.S. Energy
Information Administration

3.4.4.11 WTI Crude Oil Futures
3.4.4.11 WTI Crude Oil Futures
Price Per Barrel (US$)
100
WTI 3rd Month
75
WTI Front Month

As Of: 30-Sep-2020

Price Per Barrel (US$)
100

-25
-50
2016

-25

2017

2018

2019

2020

-50

Source: U.S. Energy Information Administration

3.4.4.12 Natural Gas Inventories
3.4.4.12 Natural Gas Inventories
Billions of Cubic Feet
As Of: 25-Sep-2020
5000
Weekly Natural Gas Inventories
5-Year Average
4000

4000

3000

2000

1000

0
2017

2018

Source: U.S. Energy
Information Administration

Billions of Cubic Feet
5000
5-Year Range

2 0 2 0 F S O C / / Annual Report

2019

2020

Note: The shaded area and dotted line indicate
the rolling 5-year range and average.

global production remained fairly constant at
100 million barrels per day (Chart 3.4.4.10).
The resulting growth in crude oil inventories
led to concerns that oil production in the U.S.
midcontinent could overwhelm storage capacity
in the trading hub of Cushing, Oklahoma. In
light of these storage constraints, the frontmonth WTI oil futures contract began trading
negative for the first time in history, settling to
a record low -$38 per barrel on April 20, 2020
(Chart 3.4.4.11). WTI futures quickly returned
to positive levels, however, as it became clear
that regional facilities were likely adequate to
manage near-term oil storage needs.
In May, WTI oil prices rebounded sharply
and have since stabilized around $40 per
barrel amid sustained production cuts by
the Organization of Petroleum Exporting
Countries (OPEC) and its partner countries,
declining U.S. crude supplies, and recovering
demand. In April 2020, OPEC and Russia
(OPEC+) agreed to reduce oil production by
about 9.7 million barrels per day from October
2018 production levels in order to address the
challenge of global oversupply. OPEC+ has
maintained significant cuts into the second half
of 2020, with some adjustments. The decline in
production while global economies reopened
ultimately helped rebalance markets, although
demand for refined products remains well
below seasonal levels.
Prior to the COVID-19 pandemic, natural gas
inventories were elevated as the relatively mild
winter led to lower consumption during the
2019-2020 heating season. The pandemic led to
a sharp decline in commercial and industrial
demand for natural gas, with a delayed
production response leading to the highest
seasonal inventory levels in five years
(Chart 3.4.4.12).
Similar to natural gas inventories, the natural
gas futures curve typically exhibits seasonality,
with summer contracts trading at a discount
relative to winter contracts. Beginning in midMarch, this spread widened considerably, as
the reduction in demand and high inventory

levels put downward pressure on the front of
the futures curve, while anticipated production
cuts kept the back end of the curve relatively
stable. A summer to winter differential of greater
than 60 cents is rarely seen in natural gas, and
yet the spread between the July 2020 contract
and January 2021 contract exceeded $1.30 per
million British thermal units in the week prior to
the July 2020 contract expiration
(Chart 3.4.4.13).

3.4.5 Residential Real Estate Markets
3.4.5.1 Residential Housing Finance
Real estate markets and home prices continued
their steady, upward long-run path during
the first quarter of 2020, just prior to the
COVID-19 crisis. Nationally, house prices rose
by 6.1 percent between the first quarter of 2019
and the first quarter of 2020, according to
the seasonally adjusted, purchase-only FHFA
House Price Index® (HPI). Across census
divisions, gains were highest in the Mountain
division, which posted an 8.8 percent year-overyear price increase. The majority of the U.S.,
including all of the top 100 largest metropolitan
statistical areas, experienced positive growth. In
general, prices were buoyed by a combination of
historically low interest rates, a healthy economy
characterized by low unemployment (until the
spring), and a constrained supply of houses
available for sale. Although not unaffected by
the COVID-19 pandemic, housing has been
remarkably resilient in part due to substantial
government support of both renters and
homeowners.

3.4.4.13 Natural Gas Forward Curves
3.4.4.13 Natural Gas Forward Curves
Price Per MMBtu (US$)
4.0

As Of: 26-Jun-2020

3.5

January 2021 Futures Contract
(left axis)

3.0

July 2020 Futures Contract
(left axis)

Spread per MMBtu (US$)
1.5

Spread (right axis)
1.2
0.9

2.5
0.6

2.0

0.3

1.5
1.0
Sep:2019

Dec:2019

Mar:2020

Jun:2020

0.0

Source: Bloomberg, L.P.

3.4.5.1 House Prices by Census Division
3.4.5.1 House Prices by Census Division
Index
450
400
350
300
250
200

As Of: Aug-2020

Index
450

Mountain
Pacific
West South Central
South Atlantic
West North Central
Total U.S.
New England
East South Central
Middle Atlantic
East North Central

400
350
300
250
200

150

100

50
1991

1995

1999

Source: Federal Housing
Finance Agency

2003

2007

2011

2015

2019

Note: Purchase-only, seasonally adjusted, nominal,
constant-quality price index. January 1991 = 100.

Between August 2019 and August 2020, FHFA’s
HPI increased 8.0 percent for the nation, while
census division gains ranged from a low of 7.2
percent in the West North Central division to
a high of 9.7 percent in the Mountain division
(Chart 3.4.5.1). The monthly decline of 0.2
percent from April to May likely reflected the
muted impact of the COVID-19 pandemic
on the housing market. During this spring
period, many states were under broad stay-athome orders and many individuals engaged in
voluntary social distancing efforts to combat
the spread of COVID-19. These actions led
Fina nc ia l De v el opment s

3.4.5.2 Home Sales
3.4.5.2 Home Sales
Millions of Sales
1.2

As Of: Aug-2020

Millions of Sales
6.5

Existing Home Sales
(right axis)

1.0

6.0
5.5
5.0

0.8

0.6

New Home Sales
(left axis)

4.5
4.0

0.4
2015

2016

2017

Source: NAR, Census
Bureau, HUD

2018

2019

2020

3.5

Note: Series are seasonally adjusted annual rates and
are expressed in millions of single-family housing units.

3.4.5.3 New Housing Starts and Price Changes
3.4.5.3 New Housing Starts and Price Changes
Millions of Housing Units
2.5

As Of: Aug-2020

Percentage Change
15

House Price Changes
(right axis)

2.0

1.5

1.0

Housing Starts
(left axis)

-5

0.5
0.0
2000

-10
2003

2006

Source: U.S. Census
Bureau, FHFA, HUD

2009

2012

2015

2018

-15

Note: Data are seasonally adjusted annual rates. House
Price Changes series is the year-over-year percentage
change of the FHFA National House Price Index.

to a decrease in overall economic activity,
including the temporary halting or slowing of
many activities like construction, real estate
showings, interior appraisals, and in-person
closings. Together these factors appear to have
temporarily dampened sales activity.
As a result of the pandemic, existing home
sales fell from 5.8 million sales in February to
3.9 million in May on a seasonally adjusted,
annualized basis. Existing home sales have since
rebounded to 6.0 million in August 2020 (Chart
3.4.5.2). Similarly, new home sales fell markedly
in March and April, but have since rebounded
to over 1 million in August 2020, well above prepandemic levels. Low interest rates and strong
growth in purchase mortgage applications and
pending home sales in the third quarter suggest
that this rebound will continue in the near
term. Beyond this time frame, the path of the
employment recovery and limitations on the
supply of homes for sale could constrain sales
growth.
According to Realtor.com, the inventory of
existing homes for sale was lower in September
by nearly 40 percent compared to the prior
year. In the face of this tight housing supply,
new home sales rose to the highest levels
observed since 2006 as demand spilled over
into new construction. In response, singlefamily housing starts are expected to increase
during the remainder of the year, so long as
land for building permits remains available and
demand is sustained. Creating new housing
supply continues to remain a challenge for the
U.S., with new starts only sluggishly responding
since the last housing crisis despite persistent
increases in home prices (Chart 3.4.5.3).
According to the Census Bureau, the national
homeownership rate rose from 64 percent in
the first quarter of 2019 to 65 percent in the
first quarter of 2020. While this is down from
the all-time high of 69 percent in 2004, the June
reading was above the average homeownership
rate for the preceding 30 years. Following the
Great Recession, the homeownership rate fell
to a low of 63 percent in the second quarter of

2 0 2 0 F S O C / / Annual Report

2016 – the lowest rate in decades. Rental vacancy
rates have also improved, falling from the fiveyear average of 6.9 percent to 6.6 percent in the
first quarter of 2020 (Chart 3.4.5.4).

3.4.5.4 Homeownership and Vacancy Rates
3.4.5.4 Homeownership and Vacancy Rates
Percent

As Of: 2020 Q1

Percent

Mortgage Originations, Servicing, and
Loan Performance

According to the Freddie Mac Primary
Mortgage Market Survey®, the average 30year fixed mortgage rate dropped 81 basis
points during 2019 and has continued to
decline through 2020. In the first nine months
of 2020, the average 30-year fixed mortgage
rate decreased a further 84 basis points to 2.9
percent as of September 2020. This decline in
rates has helped to sustain borrower demand
and increase the attractiveness of both
purchase and refinance mortgages. Primary
mortgage rates, which often track 10-year U.S.
Treasury yields, have not declined as much as
10-year U.S. Treasury yields, which fell by 123
basis points year-to-date through September 30,
2020. The economic uncertainty surrounding
the COVID-19 pandemic and the growth in
origination volumes due to lower rates have left
primary mortgage to Treasury yield spreads
somewhat elevated, though the spread has
narrowed compared to early in the COVID-19
crisis as a result of Federal Reserve market
interventions.

Based on the National Mortgage Database
(NMDB®), refinance originations remained
robust in 2020, rising to $396 billion in the
second quarter of 2020 as mortgage rates
reached their lowest levels in decades (Chart
3.4.5.5). This was an increase in refinance
originations of $191 billion from the second
quarter of 2019. Over the same time period,
home purchase originations decreased from
$315 billion to $215 billion.

Rental Vacancy Rate
(right axis)

Homeownership Rate
(left axis)

62
2015

5
2016
2017
2018
2019
2020
Source: U.S. Census Bureau, Current
Note: Data are non-seasonally
adjusted quarterly percentages.
Population Survey/Housing Vacancy Survey

3.4.5.5 Mortgage Originations and Rates
3.4.5.5 Mortgage Originations and Rates
Billions of US$
As Of: 2020 Q2
800
Refinance (left axis)
Purchase (left axis)
30-Year Mortgage
600
Rate (right axis)

Percent
6

400

200

0
2015

2016

2017

Source: NMDB®, Freddie Mac
Primary Mortgage Market Survey®

2018

2019

2020

Note: Quarterly originations represent all
1-4 family homes with first-lien, closedend residential mortgages.

The market share of different types of mortgage
originators has changed over time. Nondepository institutions have been expanding
their share of the mortgage origination market
in recent years. As tracked in Home Mortgage
Disclosure Act data, the non-depository share
of mortgage originations was approximately 60
Fina nc ia l De v el opment s

3.4.5.6 Purchase Origination Volume by Credit Score
3.4.5.6 Purchase Origination Volume by Credit Score
As Of: 2020 Q2

Percent of Originations
100

>780

80
60

Percent of Originations
100

80
60

661-780

40
20

601-660

<601
0
2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

Note: Based on first-borrower VantageScore 3.0 for
first-lien, closed-end residential purchase mortgages.

Source: NMDB®

3.4.5.7 Shares of Mortgages by Equity Percentage
3.4.5.7 Shares of Mortgages by Equity Percentage
As Of: 2020 Q2

Percent
100

<0%

0 to <5%

Percent
100
80

5 to <20%
60

Percentage of mortgages with
20% or more equity

40
20

0
0
2000 2002 2004 2006 2008 2011 2013 2015 2017 2019
Source: NMDB®

Note: Quarterly percentage of all mortgage
loans that are not closed or terminated.

percent in 2019 compared to approximately 30
percent in the years prior to the 2008 financial
crisis. In recent years, depository institutions
with assets between $100 billion and $1 trillion
have increased their share of originations,
from 11 percent of total depository originations
in 2016 to 18 percent in the first half of 2020
according to Inside Mortgage Finance. The
share of depository institution originations by
banks with assets between $10 and $100 billion
has increased from 16 percent in 2016 to 26
percent in the first half of 2020. Over that time,
the market shares of the largest depositories
(over $1 trillion in assets) and the smallest
depositories (less than $10 billion in assets)
have decreased.
Credit quality of new purchase mortgages
remained relatively strong through the first
half of 2020 (Chart 3.4.5.6). The percentage
of borrowers with scores in the middle of the
credit spectrum (VantageScore 3.0 scores
between 661 and 780) remained relatively
stable at approximately 50 percent for the last
two decades. The highest credit quality group,
borrowers with scores at or above 781, saw their
share gain steadily since the 2008 financial
crisis, and represented around 30 percent of
the market as of the second quarter of 2020.
The percentage of borrowers in the lowest score
categories (below 661) declined from a high
of 36 percent in the first quarter of 2006 to a
low of 8.8 percent in the third quarter of 2012
before increasing to 15 percent in the second
quarter of 2020.
Positive equity continued to strengthen, with
90 percent of active mortgages having 20
percent or more of positive equity in the home,
and over 99 percent of mortgages having at
least 5 percent of positive equity as of the
second quarter of 2020 (Chart 3.4.5.7). Recent
improvement to borrower equity positions has
been driven in part by more than eight years
of house price appreciation, providing a stark
contrast with the bottom of the last housing
cycle. Over the last two decades, positive equity
reached its lowest point in the third quarter of

2 0 2 0 F S O C / / Annual Report

2012, with only 61 percent of borrowers holding
equity of 20 percent or more.

3.4.5.8 Mortgage Delinquency

3.4.5.8 Mortgage Delinquency
Percent

In response to the unprecedented level of
unemployment claims caused by the pandemic,
federal and state governments enacted a
series of public assistance policies to support
household incomes, suspend foreclosures and
evictions, and offer flexibility in home purchase
and mortgage acquisition processes. Under
the CARES Act, borrowers with a federally
backed mortgage are able temporarily to
request mortgage payment forbearance, and
the CARES Act specifies that loans that were
current when they entered forbearance must
be subsequently reported as current even when
borrowers are not making payments. As a
result, mortgage performance, as reported to
the credit bureaus and reflected in the NMDB,
differs from mortgage performance reported
directly by mortgage servicers; for example, in
Mortgage Bankers Association surveys, loans in
forbearance are reported as delinquent if the
payment was not made based on the original
terms of the mortgage.

As Of: 2020 Q2

90 to 180 Days
Past Due

5
4

Percent

30 or 60 Days
Past Due

3
2
1

4
3

In process of
foreclosure,
bankruptcy or
deed-in-lieu

2
1

0
0
2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Source: NMDB®

Note: Quarterly percentage of all mortgage
loans that are not closed or terminated.

As a potential consequence of these policies,
the percentage of borrowers who were reported
to the credit bureaus as being in the process
of foreclosure, bankruptcy, or deed-in-lieu
remained stable at 0.3 percent from the fourth
quarter of 2019 to the second quarter of 2020
(Chart 3.4.5.8). Following the CARES Act, the
percentage of borrowers reported to the credit
bureaus as 30 or 60 days past due dropped
from 2.0 percent in the first quarter of 2020
to 1.0 percent in the second quarter. Similarly,
the percentage of borrowers reported as 90
to 180 days past due dropped from 0.9 to 0.7
percent in the same time period. However, as
noted above, some of this decline may be due
to the CARES Act reporting requirements, and
thus may not be reflective of borrowers’ true
economic circumstances. The Mortgage Bankers
Association’s National Delinquency Survey, for
example, estimated a 7.7 percent delinquency
rate in the third quarter of 2020, an increase of
3.7 percentage points from a year ago.

Fina nc ia l De v el opment s

3.4.5.9 Forbearance Rates by Investor Type

3.4.5.9 Forbearance Rates by Investor Type
Percent
16

As Of: Sep-2020
FHA, VA, and RHS
Total
GSE
Other (PLS, Portfolio, etc.)

Percent
16

0
0
Mar:2020 Apr:2020 May:2020 Jun:2020 Jul:2020 Aug:2020 Sep:2020
Source: NMDB®

Note: Rates are the weekly percentage of servicing
portfolio volume in forbearance by investor type over time.

Forbearance rates were relatively low prior to
COVID-19, with total single-family forbearance
rates at just 1.1 percent in March 2020. After
the passage of the CARES Act, forbearance
rates jumped quickly to 6.1 percent in April and
peaked at 7.2 percent in May (Chart 3.4.5.9).
Forbearance rates were higher for certain
investor products and programs.
Not all borrowers that have requested
forbearance have actually missed payments, and
not all delinquent borrowers that are eligible
for forbearance have entered forbearance
programs. Nonetheless, forbearances had
an immediate and significant benefit for
borrowers; more than half of borrowers in
forbearance did not make their June mortgage
payment but were reported as current.
Overall, this represents about 3.4 percent of
all outstanding mortgages which, if treated as
being late with payments, would have more than
doubled the national mortgage delinquency
rate. The path of the economic recovery and
the impact on servicers of the additional costs
of non-paying loans remains uncertain. The
refinance boom, however, has simultaneously
provided servicers with a temporary source of
liquidity to help sustain operations.
The average credit score (VantageScore 3.0)
of mortgage borrowers increased by about 9
points in July 2020 compared to December
2019. Credit score decreases of 20 points or
more were only seen in about 10 percent of
borrowers. The absence of a negative COVIDeffect on credit scores may be in part due to the
CARES Act’s provision for creditors to continue
to report borrowers granted a COVID related
workout according to their pre-pandemic
payment status. For borrowers with mortgage
forbearance, decreasing credit scores may
indicate growing problems with their nonmortgage obligations, though forbearance is
available in some instances for other credit
obligations, such as auto loans.

2 0 2 0 F S O C / / Annual Report

3.4.5.2 Government-Sponsored Enterprises and the
Secondary Mortgage Market
The federal government continues to back
the majority of new mortgages either directly
through the Federal Housing Administration
(FHA), the U.S. Department of Veterans Affairs
(VA), and the USDA, or indirectly through
Fannie Mae and Freddie Mac (the Enterprises).
The federal government share of mortgage
originations—which averaged 77 percent over
the past decade—was 73 percent at the end of
2019 (Chart 3.4.5.10). However, this share has
increased since the onset of COVID-19, as the
government has performed its countercyclical
role of maintaining the flow of credit.
The COVID-19 pandemic resulted in a
contraction of both portfolio lending and
private-label securitizations. New mortgages
not securitized by Ginnie Mae (GNMA) or the
Enterprises continue to be held mostly in lender
portfolios rather than securitized in the privatelabel market. Non-agency RMBS issuance
totaled $63 billion in 2019, but only $12 billion
in the first half of 2020. This is the second
consecutive year with an over 60 percent decline
compared to the same period during the prior
year (Chart 3.4.5.11). In contrast, agency RMBS
issuance totaled $1.3 trillion in the first six
months of 2020, almost double that of the same
period in 2019, and reached $2.3 trillion by
September 2020.

3.4.5.10 Mortgage Originations by Product
3.4.5.10 Mortgage Originations by Product
As Of: 2019 Q4

Percent of Originations
100

Private Portfolio
and Securitized

60
GSE

20
FHA, VA & RHS

0
1998

2001

2004

2007

2010

2013

2016

2019

Note: Quarterly data for first-lien,
closed-end residential mortgages.

Source: NMDB®

3.4.5.11 RMBS Issuance
3.4.5.11 RMBS Issuance
Trillions of US$
3.5

As Of: Sep-2020

Trillions of US$
3.5

Nonagency
Agency

3.0

2.5

2.0

1.5

1.0

0.5

0.0

2004

2006

2008

2010

2012

2014

2016

2018

2020
YTD

0.0

Source: FHLMC, FNMA, GNMA, NCUA, FDIC,
Bloomberg, L.P., Dealogic, Thomson Reuters, SIFMA

A notable change in early 2020 has been
the early and persistent federal response to
the COVID-19 pandemic. The FHFA, CFPB,
and HUD have worked together to provide
assistance under the CARES Act in the form
of temporary mortgage relief, payment
suspensions, protection for renters, remittance
transfers, and informational resources (see
Section 4.5). Also, as it had done during the
2008 financial crisis, the Federal Reserve
quickly restarted its open market operations
to stabilize financial markets when volatility
began to increase in the middle of March 2020.
The Federal Reserve’s agency MBS purchases
totaled approximately $560 billion through
the end of April and $1.1 trillion by the end of
Fina nc ia l De v el opment s

3.4.5.12 Cumulative MBS Purchases by the Federal Reserve

3.4.5.12 Cumulative MBS Purchases by the Federal Reserve
Billions of US$
1250
1000

As Of: 30-Sep-2020

Billions of US$
1250

UMBS
GNMA

1000

750

500

250

0
Mar:2020 Apr:2020 May:2020 Jul:2020 Aug:2020 Sep:2020
Source: FRBNY

Note: Cumulative 2020 purchases. Weekly series are aggregated
from daily Agency MBS operations in the TBA pool.

September 2020 (Chart 3.4.5.12). The pace of
Federal Reserve purchases has slowed as market
functioning stabilized.

Fannie Mae and Freddie Mac

The Enterprises, currently in their thirteenth
year of conservatorship, are an important
source of liquidity to the mortgage market
and of stability to the housing market. After
the onset of the pandemic, the Enterprises
took numerous actions at the direction of
FHFA to support borrowers and renters, such
as suspending foreclosures and evictions.
While the full costs of the pandemic are yet
to be realized, the Enterprises continue to be
profitable. The Enterprises reported net income
of $3.4 billion during the second quarter of
2020, an increase from $1.1 billion in income
during the first quarter of 2020.
The Enterprises’ single-family and multifamily
books of business increased over the last year.
The Enterprises’ single-family guaranty book of
business increased to $5.1 trillion as of June 30,
2020, a 5 percent increase from June 30, 2019.
This was partially driven by the Enterprises’ 77
percent increase in new business activity in the
second quarter of 2020 compared to the first
quarter of 2020. The Enterprises’ multifamily
portfolios increased to $639 billion, or by
12 percent, in the second quarter of 2020,
compared to the same period in 2019.
The Enterprises have been transitioning
financial instruments to SOFR and away from
LIBOR. LIBOR may not be published after yearend 2021, requiring a transition of all financial
instruments referencing the rate. FHFA worked
with the Enterprises to develop parameters for a
SOFR adjustable-rate mortgage (ARM) along
with fallback language for replacement
rates. Transition announcements were
released in February 2020 and a transition
playbook was issued in May. Fannie Mae
and Freddie Mac will each cease issuance of
single-family and multifamily LIBOR-based
credit risk transfer (CRT) transactions
in December 2020. LIBOR-based ARMs

2 0 2 0 F S O C / / Annual Report

will no longer be purchased with maturities
beyond 2021.
The Enterprises have continued to transfer
risk to private capital in the mortgage market
and reduce taxpayer risk through their CRT
transactions. Fannie Mae has primarily
transferred risk through its issuance of
Connecticut Avenue Securities and Credit
Insurance Risk Transfer transactions. In
2019, Fannie Mae transferred a portion of
the credit risk on single-family mortgages
with unpaid principal balance (UPB) of
$488 billion and risk-in-force of $15 billion.
Since inception of its risk transfer programs,
Fannie Mae has transferred a portion of the
credit risk on single-family mortgages with
UPB of nearly $2.1 trillion through 2019.
Fannie Mae has not entered into a new CRT
transaction, however, since the first quarter
of 2020. Freddie Mac transferred a portion
of the credit risk on $220 billion in UPB of
single-family mortgage loans in 2019 with
risk-in-force of $8.8 billion, primarily through
its issuance of Structured Agency Credit Risk
securities and through its Agency Credit
Insurance Structure transactions. Through the
first three quarters of 2020, Freddie Mac has
transferred $12 billion of risk-in-force on $309
billion of UPB. Since it began undertaking
CRTs, Freddie Mac has executed transactions
covering over $1.7 trillion in UPB for singlefamily mortgages through September 2020.
In September 2019, Treasury and the FHFA
agreed to modifications to the Preferred
Stock Purchase Agreements (PSPAs) that
permit Fannie Mae and Freddie Mac to retain
$25 billion and $20 billion in earnings,
respectively. Net worth in excess of these
limits would be paid out to the Treasury as
dividends. Through June 30, 2020, dividends
to the Treasury have totaled $301 billion, with
cumulative dividends paid by Fannie Mae and
Freddie Mac totaling $181 billion and $120
billion, respectively.

Federal Home Loan Banks

The FHLBs continued to serve as an important source
of liquidity for the mortgage market and to exhibit
strong financial performance. From June 30, 2019
to June 30, 2020, the FHLBs reported aggregate net
income of $2.9 billion, which is moderately down
compared to recent years.
Total assets decreased $130 billion over the same
12-month period, but there were significant
fluctuations in 2020. The total assets of the FHLBs
have decreased from $1.3 trillion on March 31, 2020 to
$1.0 trillion as of June 30, 2020. Advances, the largest
component of FHLB assets, are a loan product FHLBs
extend to their members to help them meet short
and long-term liquidity and housing finance needs.
Advances increased by 26 percent in the first quarter
of 2020 and reached their post-2008 crisis peak of
$807 billion as a result of the market crisis caused by
the pandemic. As market volatility subsided and FHLB
members’ liquidity needs decreased, advances fell by 31
percent, to $558 billion, by June 30, 2020.
While assets decreased primarily due to a decline in
advances, mortgage holdings purchased from FHLB
members continued to increase at the FHLBs. From
June 30, 2019, to June 30, 2020, mortgages increased
$6.4 billion to $73 billion. Additionally, retained
earnings continued to grow at the FHLBs, increasing
to $21 billion on June 30, 2020, an all-time high for the
FHLB System.

3.4.6 Commercial Real Estate Market
With the onset of the global pandemic, commercial
real estate (CRE) experienced significant challenges in
the first three quarters of 2020 stemming from public
health measures taken in response to COVID-19. In
particular, pandemic-imposed travel restrictions and
mandatory and voluntary social distancing efforts
accelerated the decline in brick and mortar retail and
adversely impacted occupancy of hotel CRE properties.
The CRE loan delinquency rate has increased
significantly for those loans whose underlying
properties experienced severe pandemic-induced
cash flow disruptions. The percent of seriously
delinquent loans in non-agency conduit CMBS deals—
as measured by loans that have been delinquent
for 60 days or more, as well as those in collateral
Fina nc ia l De v el opment s

3.4.6.1 Conduit CMBS Delinquency and Foreclosure Rate

3.4.6.1 Conduit CMBS Delinquency and Foreclosure Rate
Percent

As Of: Sep-2020

Percent

60+ Days
Delinquent

4
Foreclosure /
Real Estate
Owned

0
0
2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
Note: Delinquency rate includes FC/REO.

Source: JPMorgan, Trepp

3.4.6.2 Conduit CMBS Delinquency Rates by Industry

3.4.6.2 Conduit CMBS Delinquency Rates by Industry
Percent
20

As Of: Sep-2020
Industrial
Office
Retail
Lodging
Multifamily

0
2017

2018

Source: JPMorgan, Trepp

Percent
20

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2019

2020

Note: 60+ delinquency rate; includes FC/REO.

foreclosure—increased from 2.2 percent in
May to 6.9 percent in September. The rate of
seriously delinquent loans peaked at 7.1 percent
in July, its highest level since 2013 (Chart
3.4.6.1).
Loan delinquencies vary widely across property
sectors (Chart 3.4.6.2). As of September 2020,
loans in conduit CMBS deals collateralized by
lodging properties, such as hotels, represent the
highest percentage of seriously delinquent loans
at 19 percent, followed by loans collateralized
by retail properties at 11 percent. Industrial,
multifamily, and office loans have the lowest
CRE delinquency rates of 1.2 percent, 2.1
percent, and 2.2 percent, respectively. Though
office loans have relatively low delinquency
rates, there is a high degree of uncertainty
with respect to the long-term impact of the
pandemic on office properties, due to large
numbers of people teleworking.
Pursuant to the CARES Act, FHFA and HUD
announced that they would offer forbearance
to multifamily property owners affected by
COVID-19, to help ease the financial burden
stemming from public health measures.
Lenders may not charge borrowers under
a forbearance any late fees or proceed with
evictions for tenants for the duration of their
forbearance. Not all multifamily renters and
owners, however, are eligible for this assistance.
Fannie Mae and Freddie Mac have provided
explicit guidance that renters are permitted
to receive eviction moratoria during the
forbearance period, while the property owners
can seek temporary mortgage relief if the
loan qualifies for forbearance. At the end of
September, 95 percent of renters had made
their monthly rent payments according to
the National Multifamily Housing Council’s
analysis of data collected on approximately 11
million rental units, compared to 96 percent
for September 2019. As of September 2020, the
percentage of Enterprise multifamily loans in
forbearance remains low—about 1.3 percent for
Fannie Mae and 2.2 percent for Freddie Mac.
The pace of growth in forbearance appears to
have slowed down for both Fannie Mae and

Freddie Mac as the market has improved, but
warrants continued monitoring. In addition,
student and senior housing properties, as well
as multifamily properties with smaller units,
have been negatively impacted by the COVID-19
crisis, as evidenced by a higher percentage of
loans in forbearance.
According to the Federal Reserve’s Financial
Accounts of the United States, as of the second
quarter of 2020, outstanding CRE loans totaled
$4.7 trillion, a 6.6 percent increase year-overyear. The total amount of CRE loans outstanding
equates to approximately 24 percent of GDP,
and has consistently increased since the fourth
quarter of 2013, similar to the high reached in
the second quarter of 2009. The government
agencies, including Fannie Mae, Freddie Mac,
and Ginnie Mae (collectively the agencies)
continue to be major players in multifamily
lending and fund or guarantee about 46 percent
of total outstanding multifamily mortgages.
CRE loans held by life insurance companies
continued to increase, with year-over-year CRE
loan growth at insurance companies outpacing
that of banks. As of the second quarter of 2020,
CRE loans outstanding at U.S. chartered banks
were $2.3 trillion (a 5.7 percent increase yearover-year) and the corresponding total for life
insurers was $574 billion (a 6.4 percent increase
year-over-year). In the Federal Reserve’s July
SLOOS, banks reported tightened standards and
weaker demand for CRE loans.

3.4.6.3 CMBS Issuance
3.4.6.3 CMBS Issuance
As Of: 2020 Q3

Billions of US$
300

Non-Agency
Agency

250

200

150

100

2004

2006

2008

2010

2012

2014

2016

2018

2020
YTD

Source: Inside Mortgage Finance

Overall CMBS issuance totaling $178 billion
through the third quarter of 2020 was roughly
flat compared to the same period in 2019.
However, agency and non-agency CMBS issuance
trends diverged in 2020, with non-agency CMBS
issuance declining by 18 percent and agency
CMBS issuance increasing by 27 percent yearto-date through September (Chart 3.4.6.3).
Non-agency CMBS issuance came to a near
halt in the second quarter of 2020, when only
$9.5 billion of non-agency CMBS was issued.
Non-agency CMBS issuance picked up in the
third quarter of 2020, but remained below prepandemic levels. Agency CMBS issuance, which
is predominantly collateralized by multifamily
Fina nc ia l De v el opment s

3.4.6.4 Commercial Property Price Growth
3.4.6.4 Commercial Property Price Growth
As Of: Sep-2020

Percent
20

-10
-20

-10

Apartment
Industrial
Office
Retail
National

-30
2005

2007

-20

2009

2011

2013

Source: Real Capital Analytics,
Bloomberg, L.P.

2015

2017

2019

-30

Note: Year-over-year price change.

3.4.6.5 Capitalization Rates and Spreads
3.4.6.5 Capitalization Rates and Spreads
As Of: Sep-2020

Percent
12

10
Average Cap Rate

2
0
2001

Average Cap Rate Spread
2004

2007

Source: Real Capital Analytics,
Bloomberg, L.P.

2010

2013

2016

2019

properties, experienced modest disruption
in March but issuance resumed subsequently
in April, benefiting in part from the agency
guarantee. Agency CMBS issuance accounted
for 70 percent of total CMBS issuance in the
first nine months of 2020 compared to 60
percent of total CMBS issuance in 2019.
The emergency actions taken by the Federal
Reserve and Treasury have contributed to the
stabilization of CMBS market conditions. In
particular, the inclusion of agency CMBS in the
Federal Reserve’s direct purchase operation
has supported the return of normal market
conditions. In addition, the establishment of
the Term Asset-Backed Securities Loan Facility
(TALF) and inclusion of legacy conduit CMBS
in the facility appears to have contributed to
significant tightening of CMBS spreads, thereby
improving market conditions.
As of September 2020, national CRE prices
increased by 1.4 percent year-over-year versus
6.7 percent the previous year. Prices of retail
and office properties declined for the first
time since 2011, while prices of industrial
and apartment properties held up relatively
well (Chart 3.4.6.4). There is a high degree
of ongoing uncertainty regarding the longterm impact on office properties as companies
re-examine office space needs in the postpandemic working environment.
CRE capitalization rates—the ratio of a
property’s annual net operating income to
its price—remain low by historical standards
(Chart 3.4.6.5). However, one measure of the
risk premium in CRE—the spread between
CRE capitalization rates and the 10-year
Treasury yield—increased rapidly in 2020 as
the Treasury yield declined by about 125 basis
points through September.
According to Real Capital Analytics, the
volume of CRE property sales peaked in
2019 at over $550 billion. The strong growth
trend was sustained in January and February
of 2020. However, the unprecedented speed
of the COVID-19-induced economic distress

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relative to prior downturns caused a sharp
decline in commercial real estate transactions.
Transaction volumes declined approximately
40 percent in the first three quarters of 2020
relative to the first three quarters of 2019.
The decline in transaction volumes were
concentrated in the second and third quarters
of 2020, when year-over-year transaction
volumes dropped by about 65 percent and
55 percent, respectively. Property types more
directly impacted by public health measures
in response to the pandemic, such as retail,
lodging, and office, experienced larger declines
in transaction volumes of 44 percent, 71
percent, and 46 percent, respectively, in the first
three quarters of 2020.

Fina nc ia l De v el opment s

Box E: Potential Risks in Commercial Real Estate

The COVID-19 pandemic shock has created
significant distress for firms and households
throughout the economy, leading to reductions in
the cash flows generated by commercial real estate
(CRE). The shock to CRE has been large, with the
hotel and retail sectors suffering the most significant
near-term losses. Considerable uncertainty remains
regarding the long-term recovery prospects for a
wider range of property types.
Certain features of the current CRE financing
environment may raise the potential for spillovers.
Hotel and retail loans are concentrated in non-agency
CMBS; servicing frictions may drive distressed
property sales, potentially triggering price declines.
Additionally, small and mid-sized regional banks are
highly exposed to CRE; losses on CRE loans at these
banks could drive a broader contraction in credit.
Furthermore, potential spillover effects from CRE
lending exposures may be greater in areas that are
more dependent on local sources of funding.
The Nature of the Shock
If equity REIT indices are broken out by property
type (Chart E.1), the ordering of the price impact
is consistent with the pandemic’s impact on cash
flows by sector. Industrial properties have generally
performed well, as the shift to online retail has
increased demand for warehouses. Fiscal policy
measures such as extended unemployment benefits
E.1 Sector Equity REIT Indices
E.1 Sector Equity REIT Indices
As Of: 30-Sep-2020

Percent
120

100

60
40
20

Lodging
Retail
Office
Apartment
Industrial

0
Jan:2020

Mar:2020

60
40
20

May:2020

Source: NAREIT, Bloomberg, L.P.

Percent
120

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Jul:2020

Sep:2020

Note: Indexed to February 14, 2020.

supported rent payments for apartments through
the summer, mitigating income losses in this sector
to date. Although widespread work-from-home
policies have driven an increase in office vacancy
rates, tenants in long-term leases are largely making
their rent payments. The hardest-hit properties have
been in the lodging and retail sectors, as travel has
sharply contracted and retail stores have closed due
to stay-at-home orders. Even as parts of the economy
have reopened, COVID-19 has resulted in increased
operational costs for hotel and retail sectors due to
enhanced focus on cleaning, sanitation, and security
measures.
Mortgage delinquency rates across sectors tell
a similar story. Based on survey data from the
Mortgage Bankers Association, as of August, the
share of loans at any stage of delinquency remains
near pre-pandemic levels for industrial and office
properties. However, mortgage delinquencies
on hotels and retail properties have surged to
23 percent and 15 percent, respectively, and the
same survey showed 16 percent and 8 percent of
respective hotel and retail mortgages in forbearance.
As of August, properties on Morningstar’s CMBS
servicer watchlist, a more forward-looking measure
of distress, suggest ongoing stress in the hotel and
retail sectors, with 37 percent and 22 percent of
loans outstanding on the watchlist compared to 18
percent and 11 percent in August last year.

Spillover Risks from Stress in CRE
Stress in CRE markets can exacerbate economic
downturns because CRE debt represents a large
source of credit exposure for the financial system –
about $4.7 trillion as of the second quarter of 2020,
according to data from the Financial Accounts of
the United States. Regulations and frameworks
regarding capital and liquidity, resolution planning,
and stress testing implemented after the 2008
financial crisis have lowered the potential for the
failure of large, interconnected banks exposed to
CRE. Two additional important pathways may cause
spillovers, however. First, declining cash flows in
certain CRE sectors could increase distressed
property sales, which in turn could reduce property
values and create price-spirals, though lenders may
work with borrowers to prevent distressed sales
during a market downturn. Second, if lenders accrue
large losses on CRE loans, they could further tighten
CRE underwriting standards, potentially hampering
economic growth.
The funding mechanism for CRE carries implications
for how likely spillovers are to materialize. Factors
influencing spillover risk include institutions’ ability
to manage losses from CRE and their importance
as a source of credit. According to data from the
Financial Accounts of the United States, about half
of outstanding CRE mortgages are funded by banks;
Fannie Mae, Freddie Mac, and other government
entities fund or guarantee about 17 percent; life
insurance companies fund about 13 percent; and
about 9 percent are securitized into non-agency
CMBS. These institutions’ exposure to pandemicdriven mortgage distress varies widely. For example,
retail and lodging loans account for about 40 percent
of loans securitized into non-agency CMBS; whereas
they make up only about a quarter of CRE loans
held by large banks and insurance companies. Small
and mid-sized regional banks account for over half
of outstanding bank-held CRE loans, but data are
limited on sector-specific exposures.

CRE lenders may prevent distressed property sales
during downturns and avoid losses from price declines
either by modifying the terms of delinquent mortgages
or by executing other effective workout plans until
CRE markets stabilize. But, institutions vary in their
willingness and ability to take these steps. In general,
banks, life insurance companies, and government
entities have wide discretion over loans’ terms and
are more likely to offer mortgage modifications
than are servicers of non-agency CMBS, which are
bound by servicing contracts and who do not directly
face losses. Similarly, large banks, large insurance
companies, and government entities may manage the
timing of property sales to minimize pricing spillovers
better than servicers of non-agency CMBS and smaller
banks.
Financial institutions can also transmit losses on CRE
loans to the broader economy if they are an important
source of non-CRE credit. This summer, the Federal
Reserve’s stress testing regime for large banks
included a scenario involving a sharp contraction in
the values of retail and lodging properties, and the
banks had enough capital to maintain the flow of credit
assuming a V-shaped recovery. Several firms, however,
would approach minimum capital ratios under a more
severe U or W-shaped scenario, which may result in
a sustained tightening of underwriting standards or
contraction of credit. Small and mid-sized regional
banks, however, are more highly exposed to CRE than
the stress-tested banks on average. For example,
as of the second quarter of 2020, CRE accounts for
about 40 percent of non-CCAR banks’ loan portfolios
and about 10 percent of CCAR banks’ loan portfolios,
according to bank FR Y9-C or Call Report filings.
These smaller banks are also an important source of
credit to small business and retail borrowers. Sharp
losses on CRE-backed loans at small and mid-sized
banks could drive a broad contraction in credit,
particularly in the sectors of the economy that rely on
local sources of financing.

B ox E: Pote ntia l Risks in Comme rc ia l Real E s t at e

Box E: Potential Risks in Commercial Real Estate

Temporary vs. Permanent Declines in Cash
Flows across Sectors
Considerable uncertainty remains about which
CRE sectors may recover completely following
the pandemic and which sectors face permanent
shifts in demand. Segments of the retail sector have
experienced years of decline as consumers have
gradually shifted toward online shopping and away
from shopping in physical stores; the pandemic may
have accelerated this trend. The changes facing
office and apartment properties are likewise unclear.
A permanent shift toward teleworking may reduce
demand for office space, driving economic activity
away from city centers where many apartments,
retail, restaurants/food outlets, and offices are
located. A permanent shift toward teleworking may
also shift demand toward single-family housing
and away from apartments. Once the shock fully
subsides, however, there may be a reversion to prepandemic business practices, in which case recent
trends in apartment and office vacancies would
likely reverse.
Permanent downward changes in cash flows will
lead to permanent declines in valuations in certain
sectors, and eventually, holders of CRE will realize
losses. But, as long as these losses accumulate
gradually, they are unlikely to trigger large
disruptions to the financial system.

2 0 2 0 F S O C / / Annual Report

3.5

Financial Institutions

3.5.1

Bank Holding Companies and
Depository Institutions
3.5.1.1 Bank Holding Companies and Dodd-Frank
Act Stress Tests
BHCs—inclusive of financial holding
companies—are companies registered under
the Bank Holding Company Act that control
at least one commercial bank. Subsidiaries
of BHCs may also include nonbanks such
as broker-dealers, investment advisers, or
insurance companies. According to rules
recently adopted by federal banking agencies to
tailor the regulatory framework for enhanced
prudential standards and the U.S. Basel III
capital and liquidity standards to more closely
match the risk profiles of domestic and foreign
banks (Tailoring rules), the largest BHCs with
total consolidated assets above $100 billion
are grouped in four risk-based categories for
determining the applicability of regulatory
capital and liquidity requirements. Under
the final rule, such requirements increase in
stringency based on measures of size, crossjurisdictional activity, weighted short-term
wholesale funding, nonbank assets, and offbalance sheet exposures. There are currently
eight U.S. global systemically important banks
(G-SIBs) (Category I BHCs) and two groups
of large BHCs: large complex (Category II and
III BHCs) and large noncomplex (Category IV
BHCs) (Chart 3.5.1.1). Other BHCs with total
consolidated assets less than $100 billion are
not subject to the annual stress test exercise
or liquidity requirements. Foreign banking
organizations (FBOs) with sizeable operations
in the United States must hold all non-branch
interests in U.S. subsidiaries in an intermediate
holding company (IHC).

3.5.1.1 Categorization of Large U.S. BHCs
3.5.1.1 Categorization of Large U.S. BHCs
Description

U.S. Domestic Banking Org.
Bank of America

JPMorgan Chase

Category I

Bank of New York Mellon

Morgan Stanley

(U.S. G-SIBs)

Citigroup

State Street

Goldman Sachs

Wells Fargo

Category II
Northern Trust

(Large complex, ≥$700b Total assets, or ≥
$75b in Cross-Jurisdictional Activity)

Capital One

Truist Financial

(Large complex, ≥$250b Total assets or ≥ $75b
in NBA, wSTWF, or Off-balance sheet exposure)

Charles Schwab

U.S. Bancorp

Category IV

American Express

KeyCorp

(Large noncomplex, other firms with $100b
to $250b Total assets)

Citizens Financial

M&T Bank

Category III

PNC Financial
Ally Financial

Source: Federal Reserve

Huntington

Discover

Regions Financial

Fifth Third

Synchrony Financial

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

As of the second quarter of 2020, BHCs in the
United States (excluding IHCs) held about
$20 trillion in assets. U.S. G-SIBs account for
66 percent of this total. Large complex BHCs
account for 10 percent. Large noncomplex
BHCs account for 7 percent. All other BHCs
account for the remaining 17 percent of assets.
The 13 IHCs operating in the U.S.—BBVA,
Fina nc ia l De v el opment s

3.5.1.2 Total Assets by BHC Type
3.5.1.2 Total Assets by BHC Type
Trillions of US$
14

As Of: 2020 Q2

Trillions of US$
14

G-SIBs

Large
Complex

Large
Noncomplex

Other

IHCs

Source: FR Y-9C

3.5.1.3 Common Equity Tier 1 Ratios
3.5.1.3 Common Equity Tier 1 Ratios
Percent of RWA
16
14
12

Percent of RWA
16

Other
Large Noncomplex
Large Complex
G-SIBs

14
12

4
2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

Source: FR Y-9C,
Haver Analytics

As Of: 2020 Q2

Note: Tier 1 common capital is used as the numerator of the CET1 ratio
prior to 2014:Q1 for G-SIBs and large complex BHCs, and prior to
2015:Q1 for large noncomplex and other BHCs. The denominator is
risk-weighted assets (RWA). Shaded areas indicate NBER recessions.

2 0 2 0 F S O C / / Annual Report

BMO, BNP Paribas, MUFG, Credit Suisse,
Deutsche Bank, HSBC, TD Group, RBC,
Santander, UBS, Barclays, DWS—have more
than $2 trillion in consolidated domestic assets
(Chart 3.5.1.2).

Capital Adequacy

Equity capital provides a buffer to absorb losses
from defaulting loans, declines in market
value of securities and trading portfolios,
counterparty defaults, and operational and
legal risks. Capital adequacy in an economic
downturn determines banks’ ability to continue
lending and serve as a source of strength to
the rest of the economy. Due to enhanced
prudential regulation and robust economic
growth, equity capital increased significantly,
and the loss-absorbing capacity of the banking
sector stood at historically high levels at the end
of 2019. Following the disruptions in economic
activity caused by the COVID-19 pandemic, the
strengthened capital positions allowed BHCs
to honor large drawdowns on credit lines and
to absorb the significant increases in loan loss
provisions in anticipation of deteriorating credit
quality.
Bank capital adequacy is evaluated using
risk-based capital requirements and non-riskbased leverage requirements combined with
an annual stress test exercise for Category I-III
firms, and biennially for Category IV firms.
Common equity tier 1 (CET1) ratio is a riskbased capital requirement, defined as the ratio
of CET1 capital to the total risk-weighted assets
(RWAs). CET1 ratios decreased for all U.S.
G-SIBs as well as for large complex and large
noncomplex BHCs in the first quarter of 2020,
before rising slightly in the second quarter. The
declines in CET1 ratios at U.S. G-SIBs were
in large part due to increases in RWAs and to
a lesser degree due to contraction in CET1
capital (Chart 3.5.1.3). A primary driver for the
increases in RWAs were significant drawdowns
on credit lines, which materially increased
following the onset of the COVID-19 crisis,
that became on-balance sheet commercial and
industrial (C&I) loans. This resulted in higher
risk-weighted assets than an undrawn off-

balance sheet credit line commitment. Market
volatility, particularly for trading portfolios, also
contributed to the increase in RWAs. CET1 ratios
rose for the U.S. G-SIBs in the second quarter
as RWA fell on commercial credit line paydowns
and reductions in credit card balances.
On net, risk-based regulatory capital ratios
declined in the first half of 2020. However, U.S.
G-SIBs continue to meet Basel III standards
for the minimum risk-based weighted capital
requirement ratios including the G-SIB
surcharge and capital conservation buffer (Chart
3.5.1.4). Furthermore, U.S. G-SIBs as well as
other large or small BHCs maintained sizeable
voluntary capital buffers above minimum
requirements, allowing those banks to continue
to lend. The Federal regulatory banking
agencies issued a joint statement in March 2020
encouraging banks and other regulated lenders
to use their available capital and liquidity to
continue to provide credit to consumers and
small businesses affected by COVID-19.

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

3.5.1.4 Common Equity Tier 1 Ratios at U.S. G-SIBs
Percent of RWA
20
2020 Q2
2020 Q1
2019 Q2
16

As Of: 2020 Q2

Percent of RWA
20
Minimum including U.S. G-SIB
surcharge (2020)
16

JPM

BAC

WFC

STT

Source: FR-Y9C

In March 2020, the Federal Reserve adopted
the stress capital buffer (SCB) rule that came
into effect for the 2020 stress test cycle. The SCB
rule simplified the Board’s capital framework by
integrating non-stress and stress-based capital
requirements with the introduction of the SCB
requirement. In particular, the SCB replaced
the static 2.5 percent capital conservation
buffer with an SCB requirement. The SCB
requirement is floored at a minimum of 2.5
percent of risk-weighted assets and is calculated
as the difference between starting and minimum
projected CET1 capital ratios under the severely
adverse scenario in the supervisory stress test,
plus four quarters of planned common stock
dividends as a percentage of risk-weighted
assets. The final SCB rule did not include a
stress leverage buffer requirement. A BHC or
IHC subject to the rule whose regulatory capital
ratios are at or below its regulatory minimum
plus its SCB requirements, any applicable G-SIB
surcharge, or countercyclical capital buffer,
would be subject to automatic restrictions on
capital distributions and certain discretionary
bonus payments.
Fina nc ia l De v el opment s

3.5.1.5 Payout Rates at U.S. G-SIBs

As Of: 2020 Q2
Percent of NIAC
175
NIAC (right axis)
150
Common Stock Cash Dividends (left axis)
Stock Repurchases (left axis)
125

Billions of US$
140
120
100

100

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Source: FR Y-9C

Note: Payout rates are the ratios of stock repurchases plus cash dividends to
net income available to common shareholders (NIAC). NIAC is net income
minus preferred dividends. 2020 data represents YTD data through Q2.

3.5.1.6 Supplementary Leverage Ratios at U.S. G-SIBs
3.5.1.6 Supplementary Leverage Ratios at U.S. G-SIBs
Percent
20

As Of: 2020 Q2
2020 Q2 (non-modified)
2020 Q2 (modified)
2019 Q4
Minimum

JPM

BAC

Source: FR Y-9C,
Call Report

Percent
20

STT

WFC

Note: Enhanced supplementary leverage ratio is only required for the G-SIBs.
The ratio for 2019 Q4 is equal to tier 1 capital divided by total assets plus offbalance sheet exposures. The modified ratio for 2020 Q2 is equal to tier 1
capital divided by total assets minus Treasury securities and reserves.

2 0 2 0 F S O C / / Annual Report

The overall payout rates at U.S. G-SIBs, defined
as the sum of stock repurchases and common
stock dividends, were close to 100 percent of
the net income available to common equity in
2018 and exceeded 100 percent in 2019. Payouts
to shareholders fell slightly in the first quarter
of 2020 compared to the 2019 historic highs
(Chart 3.5.1.5). However, net income available
to common shareholders fell sharply in the
first quarter of 2020, and, subsequently, payout
rates were substantially above 100 percent of
net income. At the beginning of the COVID-19
crisis, all U.S. G-SIBs announced voluntary
suspension of share buybacks through at least
the first half of 2020. Following the release
of stress test results in June 2020, the Federal
Reserve temporarily halted stock repurchases
and capped dividends payments for all BHCs.
As a result, firms made dividend payments
based on a formula tied to recent net income.
The supplementary leverage ratio (SLR) is
a non-risk-based capital adequacy measure
defined as the ratio of tier 1 capital to
total assets, plus certain off-balance sheet
exposures. The SLR applies to large complex
BHCs and an enhanced version of the SLR
applies to U.S. G-SIBs. Since the start of the
COVID-19 pandemic, the depository institution
subsidiaries of BHCs have experienced large
inflows of deposits and significant balance
sheet expansion that reduced leverage ratios of
BHCs. In addition, borrowers’ drawdowns on
credit lines contributed to further balance sheet
increases and reductions in leverage ratios. The
Federal Reserve, FDIC, and OCC introduced
a temporary modification to the SLR rule that
allows BHCs to exclude Treasury securities
and reserves at the Federal Reserve from the
denominator of the ratio until March 31,
2021. Those temporary modifications provide
flexibility to certain banks to continue to
expand their balance sheets and provide credit
to households and businesses. The enhanced
SLRs under the temporary rule increased
substantially for some U.S. G-SIBs (Chart
3.5.1.6).

Profitability

Bank profitability as measured by return
on assets fell sharply across the four BHC
categories in the first half of 2020 and for some
BHCs net income became negative (Chart
3.5.1.7). This contraction in profitability
was mostly driven by increases in loan loss
provisions and to a lesser degree by declines
in other components of net income. In
particular, banks with significant credit card
loan portfolios experienced large increases
in loan loss provisions—following the change
to Current Expected Credit Losses (CECL)
accounting and deteriorating economic
conditions—and reported large contractions
in net incomes in the first half of 2020. Other
components of net income, such as net interest
margins (NIMs), declined across all four BHC
groups that file FR Y-9Cs (Chart 3.5.1.8).

Funding Sources

During and prior to the 2008 financial crisis,
BHCs relied heavily on short-term wholesale
funding, and disruptions in interbank markets
exposed BHCs to significant liquidity and
solvency risks. Since then, the ratio of such
unstable funding to total assets has declined
substantially below its 2007 level. At the
same time, BHCs attracted large inflows of
more stable sources of funding such as core
deposits. BHCs also maintained a steady share
of long-term debt in recent years, including
at U.S. G-SIBs, for purposes of meeting the
minimum long-term debt requirement under
TLAC (Chart 3.5.1.9). As a result of this more
stable funding mix, BHCs did not experience
significant disruptions in their funding during
the COVID-19 crisis. Furthermore, the Federal
Reserve established a number of credit and
liquidity facilities that helped stabilize STFMs.

3.5.1.7 Return on Assets
3.5.1.7 Return on Assets
Percent
3
Other
Large Noncomplex
Large Complex
2
G-SIBs

As Of: 2020 Q2

Percent
3

-1
2010

2012

2014

2016

2018

2020

-1

Note: Quarterly, seasonally-adjusted annual rate. Return on
assets is equal to net income divided by average assets.

Source: FR Y-9C

3.5.1.8 Net Interest Margins
3.5.1.8 Net Interest Margins
Percent
6

As Of: 2020 Q2

Percent
6

Other
Large Noncomplex
Large Complex
G-SIBs

5
4

1
2010

2012

2014

Source: FR Y-9C

2016

2018

2020

Note: Quarterly, seasonally-adjusted annual rate. Net
interest margin is equal to net interest income divided
by the quarterly average of interest-earning assets.

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

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

Percent of Total Liabilities
70

Short-Term Funding

As Of: 2020 Q2

Percent of Total Liabilities
70

60
Core Deposits

Long-Term Funding

10
0
2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

Source:
FR Y-9C

Note: ST funding: liabilities with maturities =< 1 yr, trading liabilities, repos, CP, and foreign deposits.
LT funding: other borrowed money, subordinated notes and large time deposits with maturities > 1 yr.
Core deposits: demand deposits, noninterest-bearing balances, transaction
accounts, money market deposits and time deposits <$250,000.Gray bars signify NBER recessions.

Fina nc ia l De v el opment s

3.5.1.10 Deposit Growth, All Commercial Banks
3.5.1.10 Deposit Growth, All Commercial Banks
Percent
25

As Of: Sep-2020

Percent
25

0
2001

2004

2007

Source: Federal Reserve,
Haver Analytics

2010

2013

2016

2019

Note: Statistical Release H.8, “Assets and Liabilities of
Commercial Banks in the United States.” Seasonally adjusted
values. Year-over-year percentage change.

3.5.1.11 Effective Deposit Rates by BHC Category
3.5.1.11 Effective Deposit Rates by BHC Category
Rates
1.50
1.25
1.00

As Of: 2020 Q2

Rates
1.50

Other
Large Noncomplex
Large Complex
G-SIBs

1.25
1.00

0.75

0.50

0.25

0.00
0.00
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Source: Call Report

Note: Effective deposit rates are defined as the ratio of the annualized
quarterly-average interest expense on deposits and the one-quarter lag
of the quarterly-average deposit balances.

3.5.1.12 Delinquency Rates on Real Estate Loans
3.5.1.12 Delinquency Rates on Real Estate Loans
Percent
20

As Of: 2020 Q2

Percent
20

16
Residential
Real Estate

12
8

Commercial
Real Estate

0
2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

Source: FR Y-9C

2 0 2 0 F S O C / / Annual Report

Note: Includes all loans in domestic and foreign
offices. Gray bars signify NBER recessions.

The unfolding of the COVID-19 pandemic
triggered flight-to-safety dynamics that led to
increases in bank deposits, while other sources
of funding remained mostly stable (Chart
3.5.1.10). A significant share of deposit inflows
was also due to corporations drawing on their
bank credit lines and depositing the proceeds
with banks, as well as payments from fiscal
programs.
Following the normalization of monetary
policy in December 2015, effective deposit rates
gradually increased through 2019 with the rise
in federal funds rates. The interest rate cuts in
2019 and the more recent return of the federal
funds rate to its effective lower bound resulted
in deposit rates nearly falling back to their 2015
levels (Chart 3.5.1.11).

Asset Quality

Overall delinquency rates remained low and
stable in 2019, in part due to low delinquency
rates for real estate loans (Chart 3.5.1.12).
Mortgage lending following the 2008
financial crisis has been predominantly to
households with prime credit scores and
lenders have applied significantly more
conservative underwriting standards. In

contrast, delinquency rates for consumer loans
such as credit cards and auto loans increased
slightly in 2019, consistent with higher shares
of originations to subprime borrowers (Chart
3.5.1.13).

3.5.1.13 Delinquency Rates on Selected Loans
3.5.1.13 Delinquency Rates on Selected Loans
Percent
8

As Of: 2020 Q2

Credit Card
Auto
C&I

The adverse effects of the COVID-19 pandemic
on economic activity resulted in significant
deterioration of liquidity positions and debt
servicing capacity of household and business
borrowers, leading to a reassessment of credit
policies by banks. In the responses to the July
2020 SLOOS, banks indicated on balance that
the levels of underwriting standards for most
loan categories were relatively tighter than the
mid-points of the ranges of those standards
since 2005. Banks reported weaker demand for
all commercial loan categories, and stronger
demand for all residential real estate loans
categories.
Despite disruptions in economic activity
caused by the pandemic, delinquency rates
in the first two quarters of 2020 did not
increase substantially from their existing
trends. Loan forbearance programs, along
with government stimulus and deferred tax
payments, contributed to better-than-expected
credit performance in the first two quarters of
2020. Mortgage forbearance programs provided
household borrowers with greater liquidity and
increased capacity to pay down other debt such
as credit cards and auto loans. However, BHCs
significantly increased their loan loss provisions
in the first half of 2020 (Chart 3.5.1.14).

Percent
8

0
2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

Note: Seasonally adjusted. Includes all loans in domestic
and foreign offices. Auto loans became available in 2011
Q1. Gray bars signify NBER recessions.

Source: FRY-9C,
Call Report

3.5.1.14 Provisions to Loans Ratios at BHCs
3.5.1.14 Provisions to Loans Ratios at BHCs
Percent
12
10

As Of: 2020 Q2

Percent
12

Credit Cards
Other Consumer
Residential Real Estate
Commercial Real Estate
C&I

0
2013

2014

Source: FR Y-9C

2015

2016

2017

2018

2019

2020

Note: Excludes Barclays, Credit Suisse, DB, and UBS.

The introduction of the CECL accounting
standard has, for those institutions that have
implemented CECL, changed how these
institutions provision for loan losses, from
using incurred losses under the previous
accounting standard to estimating losses over
the financial asset’s contractual term adjusted
for prepayments. Because the adoption of
CECL could lead to one-time reductions in
regulatory capital ratios, banks were given
the option to phase in the regulatory capital
effects of the updated accounting standard
over a period of three years. In addition, the
Fina nc ia l De v el opment s

3.5.1.15 C&I Loan Growth, All Commercial Banks
3.5.1.15 C&I Loan Growth, All Commercial Banks
Percent
40

As Of: Sep-2020

Percent
40

-10

-20

-30
2001

2004

2007

2010

2013

2016

2019

-30

Note: Statistical Release H.8, “Assets and Liabilities
of Commercial Banks in the United States.” Yearover-year percentage change.

Source: Federal Reserve,
Haver Analytics

3.5.1.16 Loans to Nondepository Financial Institutions
3.5.1.16 Loans to Nondepository Financial Institutions
Percent of Total Loans
12
Other
10
Large Noncomplex
Large Complex
8
G-SIBs

As Of: 2020 Q2

Percent of Total Loans
12
10
8

0
0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Source: FR Y-9C

3.5.1.17 High-Quality Liquid Assets by BHC Type
3.5.1.17 High-Quality Liquid Assets by BHC Type
Percent of Assets
30
Other
Large Noncomplex
25 Large Complex
G-SIB

As Of: 2020 Q2

Percent of Assets
30
25

5
5
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Source: FR Y-9C

2 0 2 0 F S O C / / Annual Report

Note: HQLA is estimated by adding excess reserves to an
estimate of securities that qualify for HQLA. Haircuts and
level 2 asset limitations are incorporated into the estimate.

supervisory stress test modeling framework
as it relates to projecting loan allowances and
provisions would not be revised to account for
CECL in the 2020 and 2021 cycles. To allow
banking organizations to better focus on
supporting lending to creditworthy households
and businesses in light of recent strains on the
U.S. economy as a result of COVID-19, while
also maintaining the quality of regulatory
capital, the federal banking regulators issued
a final rule on August 26, 2020, that allowed
the option to delay for two years an estimate
of CECL’s effect on regulatory capital, relative
to the incurred loss methodology’s effect on
regulatory capital, followed by a three-year
transition period.
Corporate borrowers, especially in industries
directly impacted by the pandemic, drew
their credit lines to meet current—and hedge
against future—liquidity and funding needs.
The drawdowns on credit lines resulted in
significant increases in outstanding C&I loans.
In addition, PPP loans outstanding, which were
mostly C&I loans and amounted to $484 billion
as of June 30, drove this increase. The average
year-over-year growth of C&I loans exceeded 20
percent from April through July 2020 (Chart
3.5.1.15).
Lending to nondepository financial institutions
has increased since 2010, significantly
outpacing the growth rates in commercial loans
to nonfinancial firms. The growth in loans to
nonbank financials accelerated notably at the
end of 2019 and in the first quarter of 2020. A
large part of the increase in the first quarter
of 2020 was due to drawdowns of credit lines
that were subsequently paid down in the second
quarter of 2020 (Chart 3.5.1.16).

Liquidity Management

In 2019, all BHCs subject to the liquidity
coverage ratio (LCR) reduced their holdings
of high-quality liquid assets (HQLA) and, in
particular, their reserves (Chart 3.5.1.17).
HQLA began to increase in the last quarter
of 2019 mostly due to increases in reserves
following interventions of the Federal

Reserve in repo markets in September
2019. The increase in reserves significantly
accelerated with the influx of deposits and the
establishment of the asset purchase programs
by the Federal Reserve in the first half of 2020
(Chart 3.5.1.18).

3.5.1.18 Selected Liquid Assets at All BHCs
3.5.1.18 Selected Liquid Assets at All BHCs
Percent of Assets
12
10

Deposit inflows and inflows of more stable
insured retail deposits helped alleviate liquidity
pressures from the large credit line drawdowns.
U.S. G-SIBs continued to maintain liquidity
ratios well above the 100 percent requirement in
the first two quarters of 2020 (Chart 3.5.1.19).
LCR ratios rose for six of the eight U.S. G-SIBs
in the second quarter of 2020. The Tailoring
rules exempted BHCs with total consolidated
assets below $100 billion from the LCR and
reduced LCR requirements for Categories III
and IV, based on their reliance on short-term
wholesale funding.
There was a large shift of held-to-maturity
investment securities to available-for-sale
status at the end of 2019, which reflected
re-optimization by banks after the Tailoring
rules went into effect on December 31, 2019.
The rules allowed large complex and large
noncomplex BHCs to opt-out of including
accumulated other comprehensive income
from available-for-sale accounts in their capital
calculation. Most large complex and some large
noncomplex BHCs shifted their entire holdings
of securities from held-to-maturity into
available-for-sale accounts (Chart 3.5.1.20).
The duration gap between the timing of cash
inflows from assets and the timing of cash
outflows from liabilities at U.S. G-SIBs and
large BHCs remained on balance unchanged in
2020, whereas the duration gap at other BHCs
increased slightly. Duration gaps are measures
of interest rate risk at BHCs. The flattening
of the yield curve and expectations for lower
interest rates are likely to negatively impact
profitability and capital at BHCs with smaller
duration gaps (Chart 3.5.1.21).

As Of: 2020 Q2

Percent of Assets
12

Reserve Balances
Fannie Mae and Freddie Mac MBS
Treasury Securities
Ginnie Mae MBS

0
0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Source: FR Y-9C, FR 2900

Note: Quarterly, NSA.

3.5.1.19 Liquidity Coverage Ratios at U.S. G-SIBs
3.5.1.19 Liquidity Coverage Ratios at U.S. G-SIBs
Percent
200

150

As Of: 2020 Q2

Percent
200

2020 Q2
2020 Q1
2019 Q4

150

100

JPM

BAC

Source: LCR Disclosures
from each banks’ websites

WFC

STT

Note: The solid line represents the
regulatory minimum.

3.5.1.20 Held-to-Maturity Securities
3.5.1.20 Held-to-Maturity Securities
Percent of Investment
Securities
40
Other
Large Noncomplex
Large Complex
30
G-SIB

Percent of Investment
Securities
40

As Of: 2020 Q2

0
1997

2001

Source: Call Report,
Haver Analytics

2005

2009

2013

2017

Note: Investment securities are held-to-maturity
securities plus available-for-sale securities. Gray
bars signify NBER recessions.

Fina nc ia l De v el opment s

Market Perception of Value and Risk

3.5.1.21 Duration Gap
3.5.1.21 Duration Gap
As Of: 2020 Q2

Years
3.5

Other
Large Noncomplex
Large Complex
G-SIBs

3.0

2.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0
2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

0.0

Note: Duration gap is the approximate weighted-average
time of cash inflows less the approximate weighted-average
time of cash outflows. Gray bars signify NBER recessions.

Source: Call Report,
Haver Analytics

3.5.1.22 Bank Stock Performance
3.5.1.22 Bank Stock Performance
Index
175
150

As Of: 29-Jun-2020

Index
175

S&P 500
EU Bank Stock Index
Other

Large Noncomplex
Large Complex
G-SIBs

150

125

100

50
Jan:2019

Apr:2019

Source: Yahoo Finance!,
Bloomberg, L.P.

Aug:2019

Dec:2019

Apr:2020

Note: January 2, 2019 = 100. EU Bank Stock Index created from
stock prices for the following banks: BCS, BNPQY, CS, ACA, DB,
SAN, UBS. All indexes are created by equally weighting banks.

3.5.1.23 Price-to-Book of Select U.S. G-SIBs
3.5.1.23 Price-to-Book for Select U.S. G-SIBs
Percent
300

As Of: Jun-2020
Goldman Sachs
Citigroup
Bank of America

250

Wells Fargo
JPMorgan Chase
Morgan Stanley

250

200

150

100

0
2008

2010

2012

Source: SNL

Percent
300

2 0 2 0 F S O C / / Annual Report

2014

2016

2018

2020

Note: Month-end values.

Investor expectations for significantly lower
bank profitability were reflected in sharp
declines in bank stock valuations and market
capitalization in March 2020. Even though bank
stock prices partially recovered in April through
June 2020, bank stocks performed notably
worse than the S&P 500 stock index (Chart
3.5.1.22).
Price-to-book ratios of the U.S. G-SIBs followed
similar patterns to their stock performance.
Despite the partial recovery of market
valuations, most U.S. G-SIBs’ price-to-book
ratios remained below or around 100 as of June
2020. Low market-based capital and price-tobook ratios limit BHCs’ ability to raise equity
capital externally (Chart 3.5.1.23).

CDS spreads of U.S. G-SIBs, a measure of
default risk, increased notably in the spring
but have since tightened. Some U.S. G-SIBs’
CDS spreads rose by more than 100 basis
points, exceeding the increases in CDS spreads
observed in February 2016 when markets were
concerned about a global economic slowdown
and the possibility of a low-for-long interest rate
environment. Nonetheless, the increases in CDS
spreads in 2020 were significantly smaller than
those observed during the 2008 financial crisis.
In large part, the lower CDS spreads at the
onset of the COVID-19 crisis reflect the much
better liquidity and capital positions of BHCs
(Chart 3.5.1.24). CDS spreads of foreign G-SIBs
performed similarly to U.S. G-SIBs with the
exception of Deutsche Bank, which experienced
the largest increase in CDS spreads among
foreign G-SIBs, exceeding 200 basis points
(Chart 3.5.1.25).

Dodd-Frank Act Stress Tests and the
Assessment of Bank Capital during
COVID-19 Event
The CCAR is an annual exercise by the Federal
Reserve to assess whether the largest BHCs
operating in the United States have sufficient
capital to continue operations throughout times
of economic and financial stress and that they
have robust, forward-looking capital-planning
processes that account for their unique risks.

3.5.1.24 5-Year CDS Premiums of Select U.S. G-SIBs
3.5.1.24 5-Year CDS Premiums Select U.S. G-SIBs
Basis Points
500
400

As Of: Jun-2020
Goldman Sachs
Citigroup
Bank of America

Basis Points
500

Wells Fargo
JPMorgan Chase
Morgan Stanley

400

300

200

100

0
0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Note: Monthly averages.

Source: Markit

3.5.1.25 5-Year CDS Premiums of Select Foreign Banks
3.5.1.25 5-Year CDS Premiums Select Foreign Banks
Basis Points
500
400

As Of: Jun-2020
Deutsche Bank
Société Générale
Credit Suisse
BNP Paribas

Basis Points
500
RBS
Santander
Barclays

400

300

200

100

0
0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Source: Markit

Note: Monthly averages.

As part of this exercise, the Federal Reserve
evaluates institutions’ capital adequacy,
internal capital adequacy assessment processes,
and their individual plans to make capital
distributions, such as dividend payments or
stock repurchases. Dodd-Frank Act stress
testing (DFAST)—a complementary exercise
to CCAR—is a forward-looking exercise that
evaluates the capital adequacy of BHCs and
IHCs to absorb losses over a nine-quarter
period resulting from stressful economic and
financial market conditions in hypothetical
supervisory scenarios. The stress test is
conducted by the Federal Reserve and the
supervisory stress scenarios are designed by the
Federal Reserve. The Federal Reserve consults
Fina nc ia l De v el opment s

3.5.1.26 Initial and Stressed Capital Ratios

3.5.1.26 Initial and Stressed Capital Ratios
Percent of RWA
16
Pre-Stress
Post-Stress DFAST

Percent of RWA
16

Post-Stress CCAR
Regulatory Minimum

2013
18

2014
30

Source: Federal
Reserve

2015
31

2016
33

2017
34

2018
35

2019
18

2020
33

Note: Regulatory minimum is 5% pre-2016 and 4.5% from 2016
onwards. For DFAST 2013-2015, bars show Tier 1 Common Capital
Ratio. DFAST 2016-2020 bars show Common Equity Tier 1 Ratio. The
x-axis labels represent the number of banks tested within a given year.

with the FDIC and OCC on the scenarios, which
are also used for company-run stress tests by
national banks, state nonmember banks, and
federal savings associations. As part of DFAST,
the firms must report their company-run stress
test results to the Federal Reserve, their primary
regulator, and the public.
In the 2020 stress test cycle, 34 BHCs and IHCs
were stress tested. The aggregate CET1 ratio
would decline from 12 percent in the fourth
quarter of 2019 to its minimum of 9.9 percent
as part of the severely adverse scenario. The
DFAST 2020 results were broadly similar to
those of prior year exercises (Chart 3.5.1.26).
In particular, aggregate loan losses as a
percentage of the average loan balances in the
severely adverse scenario in DFAST 2020 were
comparable to the past several years. Finally, the
Board did not object to the five IHCs (Barclays,
Credit Suisse, Deutsche Bank, DWS, and UBS),
whose capital planning practices were subject to
qualitative assessment as part of the stress test.
In June 2020, the Federal Reserve announced
that it had conducted a sensitivity analysis of
bank capital adequacy taking into account the
significant economic uncertainty during the
COVID-19 pandemic. The Federal Reserve
constructed three alternative downside
scenarios to model possible paths for the
economy: a rapid V-shaped recession and
recovery, a slower U-shaped recession and
recovery, and a W-shaped double-dip recession
with a short-lived interim recovery. All three
alternative downside scenarios featured higher
peak unemployment rates and larger declines
in GDP than the severely adverse scenario.
Furthermore, the sensitivity analysis did not
take into account the mitigating effects of
government stimulus programs and expanded
unemployment insurance.
The results of the sensitivity analysis showed
that aggregate loan losses ranged from $560
billion to $700 billion. Most firms remained
well-capitalized and aggregate capital ratios
declined from 12.0 percent in the fourth
quarter of 2019 to minimum values between

2 0 2 0 F S O C / / Annual Report

9.5 percent and 7.7 percent across the three
alternative scenarios. However, several firms
would approach minimum capital requirements
(Chart 3.5.1.27).

3.5.1.27 Minimum CET1 Capital Ratios in the Severely Adverse
3.5.1.27 Minimum CET1 Capital Ratios in the Severely
and Alternative Downside Scenarios
Adverse and Alternative Downside Scenarios

Minimum CET1 Capital Ratio

Scenario

The Federal Reserve took several actions to
preserve the resilience of the banking system
in light of significant economic uncertainty
during the pandemic. The Federal Reserve
required CCAR applicable banks to temporarily
suspend share repurchases and limit dividend
payments based on recent earnings. In
addition, the Federal Reserve required large
banks to re-evaluate and resubmit their longterm capital plans in early November. Results
from the CCAR 2020 resubmission and further
policy actions, if any, will be disclosed by
year-end 2020. On September 17, 2020, the
Board released two scenarios featuring severe
recessions for a second round of bank stress
tests that would reassess banks’ resiliency in
the face of the continued uncertainty from the
COVID-19 pandemic. The Board will release
firm-specific results from banks’ performance
under these scenarios by the end of the year.

3.5.1.2 Insured Commercial Banks and Savings
Institutions
As of the second quarter of 2020, the banking
industry included 5,066 FDIC-insured
commercial banks and savings institutions with
total assets of $21.1 trillion. There were 1,010
institutions with assets under $100 million
and 903 institutions with assets over $1 billion.
During 2019, 226 institutions were absorbed
by mergers, while 13 new charters were added.
Failures of insured depository institutions are
down significantly since the 2008 financial
crisis; four institutions failed in 2019 and four
had failed at the time of this report in 2020
(Chart 3.5.1.28).

25th
Percentile

75th
Percentile

Aggregate

12.3

9.9

V-shaped

7.5

11.3

9.5

U-shaped

5.5

10.8

8.1

W-shaped

4.8

10.5

7.7

Stress Test
Severely Adverse
Sensitivity Analysis

Source: Federal Reserve

Note: Excludes common distributions. Sample consists
of the 33 firms participating in DFAST 2020.

3.5.1.28 FDIC-Insured Failed Institutions
3.5.1.28 FDIC-Insured Failed Institutions
Number of Institutions
600
500

As Of: 2019

Number of
Institutions
(left axis)

400

Percent
5

Assets of Failed
Institutions as a Percent
of Nominal GDP
(right axis)

300

200

100

0
1980

1985

1990

Source: BEA, FDIC,
Haver Analytics

1995

2000

2005

2010

2015

Note: No FDIC-insured institutions
failed during 2005, 2006, and 2018.

As of year-end 2019, the FDIC’s “problem bank”
list included 51 institutions—1 percent of all
institutions—in comparison to 60 banks the
prior year. Banks on this list have financial,
operational, or managerial weaknesses that
require corrective action in order to operate in
a safe and sound manner.
Fina nc ia l De v el opment s

3.5.1.29 Commercial Bank and Thrift Net Income
3.5.1.29 Commercial Bank and Thrift Net Income
Billions of US$
1500
1000

As Of: 2020 Q2

Non-interest Income
Net Interest Income

Billions of US$
1500
Realized Gains/Losses
Net Income
1000

500

500
0

-500

-500
-1000
-1500

Income Tax Expense

Provisions
Noninterest Expense
2009

2011

2013

Source: FDIC

2015

2017

2019

-1000
-1500

Note: Includes all FDIC-insured commercial
banks and thrifts. Values are annualized.

The total assets of U.S. commercial banks
and savings institutions increased by $2.9
trillion between the second quarter of 2019
and the second quarter of 2020. Loans and
leases increased by $695 billion during that
period. While all major loan categories grew,
C&I increased the most, up $473 billion or
21 percent. Growth in the C&I portfolio was
driven by a combination of draws on lines of
credit by businesses and PPP lending. Banks
increased their investment securities by $737
billion since the second quarter of 2019, with
U.S. Treasury securities balances up by 51
percent and MBS up by 16 percent. Cash and
due from accounts also grew $1.3 trillion or 78
percent, driven by a large inflow of deposits,
and now represent 14 percent of total assets, up
from 9 percent a year ago.
For the first six months of 2020, net income
for all U.S. commercial banks and savings
institutions totaled $37 billion, a 70 percent
decline from the first six months of 2019, driven
by a decline in net interest income and rise
in loan loss provisions (Chart 3.5.1.29). Net
interest income fell by 3.5 percent in the first
half of 2020 due to interest income declines
outpacing interest expense declines. Interestearning assets grew 17 percent since June
2019; however, the yields on these assets do
not compensate for the 150 basis point drop in
rates in early 2020. These earnings trends were
broad-based throughout the industry, as more
than half of commercial banks and savings
institutions reported lower earnings in the first
half of 2020.
Credit quality has begun to show modest
deterioration. The noncurrent ratio rose 15 basis
points from the second quarter of 2019 to 1.08
percent of total loans. Loan loss provisions for the
first six months of 2020 rose $88 billion, reflecting
economic conditions and the implementation of
the CECL accounting standard.
The long-term trend of banking industry
consolidation continued in 2019 and 2020, as
the ten largest institutions continued to hold
over 50 percent of total industry assets (Chart

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3.5.1.30). The 100 largest institutions hold
about 82 percent of total industry assets, which
is a historical high. As of the second quarter of
2020, the total number of banks and savings
associations decreased to 5,066, which is a
historical low.

3.5.1.3 U.S. Branches and Agencies of
Foreign Banks
As of June 30, 2020, assets of U.S. branches and
agencies of foreign banks totaled $2.6 trillion,
up nearly six percent from June 30, 2019 (Chart
3.5.1.31). Reserve balances for U.S. branches
and agencies of foreign banks totaled $640.1
billion, comprising 25 percent of total assets as
of June 30, 2020. Reserve balances increased
24 percent year-over-year and accounted for
90 percent of asset growth during the same
timeframe. Noted growth in reserve balances
is largely attributed to increased borrowings
from head offices and related entities of U.S.
branches and agencies of foreign banks that
were placed on deposit at the Federal Reserve.
In addition, deposits of borrowings from the
Discount Window and certain Federal Reservesponsored liquidity facilities contributed
to the increase in reserve balances and the
maintenance of excess liquidity at U.S. branches
and agencies of foreign banks.
Securities purchased under agreement to
resell (reverse repos) and fed funds sold at
U.S. branches and agencies of foreign banks
decreased by $79 billion or 21 percent from
June 30, 2019, to June 30, 2020. Reverse repos
represented 12 percent of total assets at U.S.
branches and agencies of foreign banks as of
June 30, 2020, compared to nearly 16 percent of
total assets one year prior. The contraction in
reverse repos is consistent with reduced market
activity at the point of severe stress toward the
beginning of the outbreak and with the intent of
U.S. branches and agencies of foreign banks to
preserve liquidity at the onset of the pandemic.

3.5.1.30 Total Assets of Largest Insured Depository Institutions

3.5.1.30 Total Assets of Largest Insured Depository Institutions
Count (‘000s)
Trillions of US$
As Of: 2020 Q2
25
25
Top 10 IDIs (left axis)
Number of Insured
Top 100 IDIs (left axis)
Depository Institutions
20
20
(right axis)
Other IDIs (left axis)
15

0
1984

1989

1994

1999

2004

2009

2014

2019

Note: Fourth quarter data was used for years 1984 2019 and second quarter data was used for 2020.

Source: FFIEC Call Report

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

3.5.1.31 U.S. Branches and Agencies of Foreign Banks: Assets
Trillions of US$
4

As Of: 2020 Q2

Securities Purchased with Repos &
Fed Funds Sold
Net Due from Related Institutions
Reserve Balances
Cash and Balances Due from
Depository Institutions (Excluding
Reserve Balances)

Other Assets

Trillions of US$
4

Non-C&I Loans

C&I Loans

0
2004 2006 2008 2010
Source: Federal Reserve,
Haver Analytics

2012

2014

2016

2018

2020

Note: Other assets includes government
securities, ABS, and other trading assets.

As of June 30, 2020, total loan balances
accounted for approximately 34 percent of total
assets at U.S. branches and agencies of foreign
banks. C&I lending remained a significant
Fina nc ia l De v el opment s

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

3.5.1.32 U.S. Branches and Agencies of Foreign Banks: Liabilities
Trillions of US$
4

As Of: 2020 Q2

Other Liabilities
Securities Sold with Repos & Fed Funds Purchased

Trillions of US$
4

Deposits & Credit Balances
Net Due to Related Depository Institutions

0
2004

2006

2008

2010

Source: Federal Reserve,
Haver Analytics

2012

2014

2016

2018

2020

Note: Other liabilities includes transaction accounts,
non-transaction accounts, and other borrowed money.

portion of overall lending by U.S. branches and
agencies of foreign banks, with a ratio of C&I
loans to total loans of approximately 56 percent
as of June 30, 2020. C&I loan levels rose $78
billion or 19 percent between June 30, 2019 and
June 30, 2020. The most significant increases in
C&I loans occurred during the first quarter of
2020, driven by corporate draws on revolving
and committed lines of credit.
Deposits and credit balances represented 45
percent of total liabilities for U.S. branches
and agencies of foreign banks as of June 30,
2020 (Chart 3.5.1.32). Net due to related
depository institutions increased $60 billion
or 14 percent from June 30, 2019 to June 30,
2020. The year-over-year increase in net due
to related depository institutions was driven by
an uptick in head office borrowings from the
Federal Reserve’s liquidity swap lines in the first
quarter, which returned to more normal levels
by the end of the second quarter. This funding
was generally downstreamed to U.S. branches
and agencies of foreign banks to support local
operations and meet dollar liquidity needs.
Securities sold with repurchase agreements
(repos) and federal funds purchased decreased
$10 billion or two percent between June 30,
2019, and June 30, 2020. Repos totaled 35
percent of total liabilities for U.S. branches
and agencies of foreign banks as of June 30,
2020, and decreased two percent year-over-year.
While this figure initially increased in the first
quarter given enhanced participation in the
Federal Reserve’s emergency lending facilities,
particularly with the expansion of the repo
facility, it has since fallen.

3.5.1.4 Credit Unions
Credit unions are member-owned, not-forprofit, depository institutions. As of the second
quarter of 2020, there were 5,164 federally
insured credit unions with aggregate assets
of $1.75 trillion. Just over two-thirds of credit
unions (3,476) had assets under $100 million,
with 24 percent having less than $10 million
in assets. There were 1,331 credit unions with
assets between $100 million and $1 billion, and
357 credit unions with assets over $1 billion.
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Consistent with long-running trends among
depository institutions, consolidation in the
credit union industry has continued recently,
particularly at smaller institutions. The number
of credit unions with less than $50 million in
assets fell to 2,811 in the second quarter of
2020, bringing the cumulative decline over the
past five years to 28 percent. At the same time,
however, total industry assets have grown at an
annual average rate of 8.4 percent over the five
years ending in the second quarter of 2020.
Membership in federally insured credit unions
has grown 21 percent over the past five years,
reaching over 122 million members as of the
second quarter of 2020.

3.5.1.33 Credit Union Income
3.5.1.33 Credit Union Income
Billions of US$
As Of: 2020 Q2
100
Noninterest Income
Net Income
Net Interest Income

Billions of US$
100

-50

-100

Provisions
Noninterest Expense

2006

2008

Source: NCUA

2010

2012

Realized Gains/Losses
on Investments

2014

2016

2018

2020

-100

Note: Federally-insured credit unions.
Values are annualized.

The COVID-19 pandemic has presented the
credit union system and its members with
numerous challenges. The data generally show,
however, that financial performance at credit
unions was relatively solid in the first half of the
year, despite the sharp rise in unemployment
and a record-setting drop in economic
activity. Net income at consumer credit unions
amounted to $9.4 billion on an annualized basis
in the second quarter of 2020, a sharp decline
of 35 percent from the same period in 2019
(Chart 3.5.1.33). That fall was largely due to a
continued jump in provisioning for loan and
lease losses and credit loss expenses as a result
of the deterioration in economic conditions.
The amount of outstanding loans at credit
unions increased by 6.6 percent over the year
ending in the second quarter of 2020, up slightly
from the 6.4 percent pace registered during
the same period a year earlier. Credit union
real estate loans outstanding, which represent
roughly half of the industry’s loan portfolio,
increased a sizeable 10 percent in the most
recent four-quarter period. Record-low mortgage
rates have fueled strong real estate lending.
The industry also posted a large increase in
commercial loans, due mainly to Paycheck
Protection Program lending. In contrast, auto
loans, which represent one-third of the credit
union loan portfolio, grew only 1.1 percent over
the year ending in the second quarter of 2020, as
loans for new autos contracted.
Fina nc ia l De v el opment s

Overall loan performance remained strong
in the first half of 2020 despite the economic
stresses and a rising level of unemployment.
The system-wide delinquency rate declined
to 58 basis points in the latest quarter, nearly
matching a 13-year low reached last year. The
delinquency rates on fixed-rate real estate loans
and auto loans stood at 41 basis points and 47
basis points, respectively. The delinquency rate
on credit cards (just over 5 percent of total
credit union loans) declined in the second
quarter but remained elevated at 101 basis
points.
The credit union system experienced a return
on average assets (ROAA) of just 57 basis points
at an annual rate in the second quarter of 2020,
down sharply from 97 basis points a year earlier.
Both interest income and non-interest income
were up modestly, while the NIM among all
credit unions declined to 288 basis points from
318 basis points a year earlier.
Based on various standard measures, smaller
credit unions have continued to underperform
larger credit unions. These smaller institutions
account for the bulk of institutions but a very
modest (and shrinking) share of assets and
members. For example, credit unions with
less than $100 million in assets account for
67 percent of the number of institutions, but
only 5.4 percent of assets, while credit unions
with more than $1 billion in assets account for
70 percent of system-wide assets and 65 percent
of credit union members. ROAA at the smaller
institutions averaged 36 basis points on an
annualized basis in the second quarter of 2020,
while ROAA at credit unions with more than $1
billion in assets was higher at 63 basis points.
At the same time, the loan delinquency rate for
smaller credit unions was 87 basis points in the
second quarter of the year, compared with 55
basis points at the $1 billion-plus institutions.
Interest rates across the maturity spectrum have
fallen to historical lows amid the COVID-19
crisis. Credit union interest-sensitive deposits
as a share of total deposits have fallen from
over 60 percent a decade earlier to less than 50
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percent. The share of money market accounts
and IRA deposits has also been trending
lower (Chart 3.5.1.34). A measure of longterm assets—which consists of fixed-rate first
mortgages and investments with a term longer
than three years—has been relatively steady at
just under 28 percent of total assets in recent
years. That share remains elevated compared to
levels that prevailed 10 to 15 years ago (Chart
3.5.1.35).
The overall investment share of the asset side
of credit union balance sheets has shrunk
in recent years, while the loan share has
increased. Over the past five years, the share
of investments has declined from roughly 24
percent of total assets to 18 percent currently.
Over the same period, the share of assets
accounted for by loans rose from roughly 64
percent to 65 percent (Chart 3.5.1.36).
The loan-to-deposit ratio at credit unions
declined in the second quarter to 76.2 percent
but remains higher than levels from a decade
ago. An elevated loan share has generally
helped to support credit union profitability
in recent years. Consumers pulled back on
spending in the first half of the year, driving the
personal savings rate up to an all-time high. As
a result, total deposits at credit unions surged
by 16.5 percent in the year ending in the second
quarter, the largest four-quarter increase in
several decades.
The credit union industry remained wellcapitalized in the first half of the year. The
overall net worth ratio in the second quarter
of 2020 was 10.5 percent. In ordinary times,
under statutory guidelines, a credit union is
considered “well capitalized” if it holds a net
worth ratio at or above 7 percent.
While still maintaining the safety and
soundness of the credit union system, the
NCUA Board has undertaken a number of
measures to provide regulatory relief, flexibility,
and support for credit unions as they respond
to the COVID-19 pandemic. Federal legislation
has also provided assistance. For instance, the

3.5.1.34 Credit Union Deposits
3.5.1.34 Credit Union Deposits
As Of: 2020 Q2

Percent
68
64

Interest-Sensitive Deposit
Share (left axis)

Percent
36
34

Money Market and IRA
Deposit Share (right axis)

32
30

56
52

44
2006

2008

2010

2012

2014

2016

2018

2020

Note: Federally-insured credit unions. Interest-sensitive
deposit share includes money market and IRA deposit
share, share certificates, and certain other deposits.

Source: NCUA

3.5.1.35 Credit Union Net Long-Term Assets
3.5.1.35 Credit Union Net Long-Term Assets
Percent of Total Assets
As Of: 2020 Q2
40
Investments Longer Than 3 Years
Fixed Rate First Mortgages

Percent of Total Assets
40

0
2006

2008

2010

2012

2014

2016

2018

2020

Source: NCUA

3.5.1.36 Credit Union Composition of Assets
3.5.1.36 Credit Union Composition of Assets
Percent of Total Assets
100
Loans

As Of: 2020 Q2
Investments

Percent of Total Assets
100

0
2006

2008

2010

2012

2014

2016

2018

2020

Source: NCUA
Fina nc ia l De v el opment s

3.5.2.1 Number of Broker-Dealers and Industry Net Income

Number of Firms
5500

As Of: 2020 Q2

Billions of US$
60

Number of Broker-Dealers (left axis)
50

Net Income (right axis)

5000

4500

4000

3500
3000

10
2009

2011

2013

2015

2017

2019

Note: 2009 – 2019 data as of Q4 and 2020
net income is YTD through Q2.

Source: FINRA

3.5.2.2 Broker-Dealer Revenues
3.5.2.2 Broker-Dealer Revenues
Billions of US$

As Of: 2020 Q2

Billions of US$

500

400

300

200

100

CARES Act instituted temporary changes to
the Federal Credit Union Act to expand the
borrowing authority of the Central Liquidity
Facility (CLF). This enhanced an important
liquidity backstop for the industry. The NCUA
has also awarded $3.7 million in grants and nointerest loans to 162 low-income credit unions,
helping them provide affordable financial
services to their members and communities
during the COVID-19 pandemic.

2009

2011

2013

Source: FINRA

2015

2017

2019

3.5.2 Nonbank Financial Companies
3.5.2.1 Securities Broker-Dealers
As of June 2020, there were approximately
3,600 securities broker-dealers registered with
the SEC, a decline of 3.0 percent from yearend 2019, reflecting a steady decline since
2009 (Chart 3.5.2.1). Aggregate revenues in
the sector have trended higher in recent years,
increasing 7 percent in 2019 relative to 2018
(Chart 3.5.2.2).
Broker-dealers were impacted by COVID-19
pandemic-related market volatility and workfrom-home restrictions in 2020. In response,
the SEC and FINRA have provided targeted
regulatory assistance and relief in connection
with pandemic-related challenges.
COVID-19 pandemic-related market volatility
in 2020 resulted in significant increases in
trading volumes across products. The industry
experienced some operational issues due to
increased volumes, such as website outages.
Aggregate receivables from fails-to-deliver at
all broker-dealers more than doubled between
February and March month-ends but returned
to average levels by April month-end.
Aggregate YTD June 2020 net income equaled
full-year 2019 net income reflecting increased
market activity and lower interest and other
expenses. For the largest broker-dealers, gains
from interest rate/fixed income products
driven by wide bid-ask spreads and increased
volatility were offset by losses in equities.
Trading commission revenue increased on the
rise in market volumes, particularly in equities.

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Underwriting revenue rose largely as a result of
an increase in debt issuances.
The U.S. broker-dealer sector remains relatively
concentrated. The ten largest broker-dealers
account for 57 percent of industry assets, 30
percent of industry total revenues, and 40
percent of industry net income.

3.5.2.3 Broker-Dealer Assets and Leverage
3.5.2.3 Broker-Dealer Assets and Leverage
Trillions of US$
As Of: 2020 Q2
8
Total Assets (left axis) Leverage (right axis)

Ratio
25

4
10

Total assets in the U.S. broker-dealer industry
increased to $4.7 trillion as of the second
quarter of 2020 but were well below the peak
of $6.8 trillion in 2007 (Chart 3.5.2.3). Assets
of the largest broker-dealers, which act as
market makers, increased 12 percent between
the fourth quarter of 2019 and the first quarter
of 2020, driven by a 20 percent increase in
securities and spot commodities owned. Brokerdealers typically obtain leverage through the
use of secured lending arrangements such
as repos and securities lending transactions.
Broker-dealer leverage, measured in various
ways, has declined markedly since 2007. For
example, leverage measured as total assets
over regulatory capital (defined as ownership
equity qualified for net capital and allowable
subordinated liabilities) declined to 10.5 in
aggregate as of June 2020, down from 11.1 as of
year-end 2019, but still remains well below the
pre-crisis peak of 21 in 2006.

2005

2007

Source: FINRA

2009

2011

2013

2015

2017

2019

Note: Leverage is the ratio of total assets to total regulatory
capital. 2005 – 2019 data as of Q4 and 2020 data as of Q2.

3.5.2.2 REITs
Real estate investment trusts (REITs) are
companies that own or finance incomeproducing real estate across a range of
property sectors. Broadly speaking, REITs can
be broken down into two major categories:
equity REITs, which typically own and operate
income-producing real estate, and mortgage
REITs (mREITs), which provide financing for
purchasing or originating mortgages and MBS.
mREITs can be further divided into agency
mREITs, which invest in agency MBS, and nonagency mREITs, which invest in a broad range
of mortgage-related assets.
mREITs tend to deploy significantly more
leverage than equity REITs, and the amount of
leverage used by mREITs is largely dependent
Fina nc ia l De v el opment s

3.5.2.4 REITs Total Assets
3.5.2.4 REITs Total Assets
Billions of US$
1000

As Of: 2020 Q2

Billions of US$
1000

Equity REITs
mREITs

800

600

400

200

0
0
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
Source: Federal Reserve,
Haver Analytics

Note: Statistical Release Z.1, “Financial Accounts
of the United States.”

3.5.2.5 mREIT Stock Performance
3.5.2.5 mREIT Stock Performance
Index
150

125

As Of: 30-Sep-2020
S&P 500
Financials
mREITs

125

100

25
Sep:2019

Dec:2019

Source: Bloomberg, L.P.

Index
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2 0 2 0 F S O C / / Annual Report

Mar:2020

Jun:2020

25
Sep:2020

Note: Indexed to 100 as of 9/30/2019; mREITs
represents the BREIT Mortgage Index; Financials
represents the S&P 500 Financials Subindex.

on the credit quality and liquidity of the
underlying investments. mREITs typically
fund their operations through the short-term
repo markets, and the combination of high
leverage and short-term borrowing can lead
to considerable funding risk. In addition to
funding risk, non-agency mREITs can be
exposed to credit and liquidity risks. In normal
market conditions, these risks typically do not
extend to agency mREITs.
The size of the REIT industry grew considerably
prior to the COVID-19 pandemic, which
can be primarily attributed to the growth of
mREITs. As of the fourth quarter of 2019,
mREIT assets totaled $681 billion, a $513
billion increase from the fourth quarter of 2009
(Chart 3.5.2.4). Much of this growth has been
concentrated in the largest mREITs, and as of
the fourth quarter of 2019, three mREITs held
a combined $262 billion in agency MBS and
TBA securities, or approximately 75 percent of
total mREIT agency MBS and TBA securities
holdings. The growth of mREITs has been
accompanied by an increase in repo financing,
which increased from $90 billion as of the
fourth quarter of 2009 to $379 billion as of the
fourth quarter of 2019.
mREIT assets fell considerably in the first half
of 2020, as the sector came under significant
pressure during the COVID-19 market stress.
As of the second quarter of 2020, mREIT
assets totaled $502 billion, a 26 percent decline
relative to the fourth quarter of 2019. The stress
in the sector was most acute in March, with
mREIT stock prices falling by nearly 70 percent
between March 4 and April 3 (Chart 3.5.2.5).
During this period, prices of mortgage-linked
assets fell considerably, which triggered margin
calls from mREIT lenders. To raise liquidity,
mREITs sold mortgage collateral which,
similar to Treasury sales, expanded dealer
balance sheets and impacted term MBS repo
intermediation and pricing. However, given the
decline in liquidity provisioning in the MBS
market, these sales led to a sharp widening of the
MBS-Treasury spread, further straining mREIT

balance sheets and creating a negative feedback
loop for market functioning (Chart 3.5.2.6).

3.5.2.6 Agency MBS Spread to Treasuries
3.5.2.6 Agency MBS Spread to Treasuries
Basis Points

Quarterly changes in mREIT balance sheets
can provide insight into the magnitude of this
deleveraging campaign. In the first quarter of
2020, mREIT exposures to agency securities
fell by $124 billion or 37 percent compared to
the previous quarter. Similarly, mREIT repo
borrowing fell by $119 billion or 31 percent
over the quarter. Ultimately, FOMC actions
announced in March, which included purchases
of agency MBS and CMBS, gradually improved
liquidity conditions and market functioning in
these markets.

As Of: 30-Sep-2020

Basis Points

200

175

150

125

100

50
2015

2016

Source: Bloomberg, L.P.

2017

2018

2019

2020

Note: Fannie Mae 30-year current-coupon
spread to the 5/10-year Treasury blend.

3.5.2.3 Money Market Mutual Funds
MMFs are a type of mutual fund that are
generally used by investors to manage their
cash needs. The COVID-19 pandemic caused
stress in certain MMFs when, as noted in
Box D, market participants shifted risk
preferences towards cash and other highly
liquid instruments. This rapid shift resulted
in outflows from prime institutional MMFs,
which saw assets decline in March 2020 by
$77 billion. During the third week of March
alone, prime institutional MMFs saw outflows
of around $88 billion, or 8 percent of their
net assets. Anecdotally, some of the outflows
in March from prime institutional MMFs can
be attributed to investors’ concerns that prime
institutional funds would impose gates and fees
if their weekly liquid assets (WLAs), the share
of assets convertible to cash within five business
days, dropped below 30 percent of total assets.
In response to market dislocations, two banks
purchased assets from three affiliated prime
MMFs to increase the funds’ WLAs. One MMF
saw its weekly liquid assets decline to 28 percent
of total assets.
Shortly after the stress in March, as noted in
Section 3.4.1, the Federal Reserve announced
the establishment of the MMLF, which
helped to improve liquidity. Following this
announcement, assets in institutional prime
MMFs increased in April by roughly the same
amount of their decline in March.
Fina nc ia l De v el opment s

3.5.2.7 MMF Assets by Fund Type
3.5.2.7 MMF Assets by Fund Type
Trillions of US$
As Of: Sep-2020
6
Tax-Exempt
Government and Treasury
5
Prime

Trillions of US$
6
5

0
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Source: SEC

Despite the stress in prime institutional MMFs in
March 2020, MMF assets in the aggregate have
grown significantly over the past year because,
among other things, the COVID-19 pandemic
increased investors’ demand for cash and lowerrisk assets. According to the SEC’s Money Market
Fund Statistics, MMF net assets totaled $4.9
trillion in September 2020, a 26 percent increase
year-over-year (Chart 3.5.2.7). Inflows were
concentrated in government and Treasury MMFs,
which saw their assets increase by $1.1 trillion, or
41 percent, from September 2019. Government
and Treasury MMFs’ collective share of total assets
increased to 77 percent in September 2020 from
69 percent in September 2019.
Over the twelve months ended September 2020,
prime MMF assets decreased by $70 billion, or 6.6
percent. Prime MMFs’ share of total MMF assets
declined to 20 percent in September 2020, down
from 28 percent in September 2019. Net assets in
tax-exempt MMFs have declined by $18 billion
over the past twelve months to $121 billion as of
September 2020.
The long-term trend since 2016 towards
consolidation in the MMF sector, which slowed
down in 2019, accelerated in 2020. As of
September 2020, there were 352 MMFs, down
from 369 funds in September 2019. Similarly,
concentration in the MMF industry has gradually
increased over the past several years. As of
September 2020, the five largest MMF complexes
managed 53 percent of total assets, up from
approximately 46 percent at year-end 2015.
Further, three MMF sponsors have recently closed
some of their prime MMFs, potentially resulting
in additional concentration. More specifically,
two sponsors liquidated three institutional
prime funds, which represented 3.6 percent of
institutional prime assets as of year-end 2019.
One retail prime fund, representing 28 percent of
retail prime fund assets as of year-end 2019, was
converted into a government fund.
Since the SEC money market fund reforms in
October 2016, prime institutional and taxexempt institutional MMFs have been required
to price their shares at market, known as Floating

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Net Asset Value (FNAV), rather than at amortized
cost, known as Constant Net Asset Value. The
portion of assets of prime and tax-exempt
institutional MMFs, which are required to transact
at FNAV, has declined to 15 percent in September
2020 from 17 percent in September 2019.
Yields on MMFs declined after the Federal
Reserve cut its benchmark rate twice in March
2020. The average gross 7-day yield on prime
institutional MMFs dropped to 0.2 percent in
September 2020 from 2.1 percent in September
2019. The average gross 7-day yield on Treasury
MMFs was 0.2 percent in September 2020, down
from 2.0 percent in September 2019. Average
gross 7-day yields for tax-exempt institutional
MMFs were 0.2 percent in September 2020 down
from 1.6 percent in September 2019. These low
yields have resulted in many MMF sponsors
waiving their fees to keep the yields earned by
investors above zero.
Prime institutional MMFs’ daily liquidity—the
share of assets convertible to cash within one
business day—averaged 53 percent of assets
in September 2020, up from 38 percent in
September 2019. This substantially exceeds the
10 percent required by SEC rules. WLAs for
prime institutional MMFs averaged 66 percent
in September 2020, also up from 54 percent in
September 2019 and well above the 30 percent
minimum required under SEC rules (Chart
3.5.2.8).

3.5.2.8 Liquid Asset Shares of Prime MMFs
3.5.2.8 Liquid Asset Shares of Prime MMFs
Percent of Total Assets
70

As Of: Sep-2020

Percent of Total Assets
70

Weekly Liquid - Institutional

Weekly Liquid - Retail

40
30
20

40
Daily Liquid - Institutional

Daily Liquid - Retail

10
2017

2018

2019

2020

Note: Weighted by fund size.

Source: SEC

3.5.2.9 Weighted Average Maturities by Fund Type
3.5.2.9 Weighted Average Maturities by Fund Type
Days
60
50

As Of: Sep-2020

Days

Government and Treasury
Prime
Tax-Exempt

60
50

10
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Source: SEC

Note: Weighted by fund size.

The WAM of fund assets provides an indication
of the sensitivity of fund returns to changes in
market interest rates. MMF managers tend to
maintain a lower WAM during periods of rising
rates and extend their WAMs in anticipation
of stable or declining rates. Prime institutional
MMF WAM averaged 40 days in September
2020 versus 31 days in September 2019. These
averages were well below the 60-day maximum
permitted under SEC rules (Chart 3.5.2.9).
The weighted average life (WAL) of fund assets
provides an indication of the credit risk of an
MMF’s portfolio. MMFs that have higher WALs
are subject to increased risk when credit spreads
Fina nc ia l De v el opment s

101

rise. Prime institutional MMF WAL averaged
59 days in September 2020 versus 62 days in
September 2019. These averages were well below
the 120-day maximum permitted under SEC rules.
The Federal Reserve’s overnight reverse
repurchase agreement facility (ON RRPF) is a
supplementary policy tool that it uses to set the
floor on rates, to keep the federal funds rate in
the target range set by the FOMC. Eligible MMFs
have invested in the ON RRPF since regular
testing began in September 2013. Given the
low rate paid on investments in the ON RRPF,
MMFs generally use it when better investment
opportunities are not available in the afternoon
market. As of the end of September 2020, when
the ON RRPF paid a zero percent rate, MMFs’
investments in the ON RRPF were low at $850
million. In contrast, MMFs invested around $285
billion in the ON RRPF at the end of March
2020, despite a zero percent rate.
Use of the ON RRPF at the end of March peaked
due to a confluence of factors. Among other
things, massive inflows into government funds
drove repo rates to zero as repo supply outpaced
demand, which was further exacerbated by the
effects of window-dressing by certain dealers
typically seen around quarter-end. Supply of
Treasury bills was also light as the passage of
the CARES Act occurred only a few days before
quarter-end prior to Treasury issuance fully
ramping up. These factors led to Treasury bills
in the secondary market trading in negative
yield territory days before quarter-end, which
left government funds with few other investment
options than ON RRPF.
Repo holdings in MMFs totaled $1.1 trillion
in September 2020 (down from $1.3 trillion in
September 2019), or 22 percent of all assets.
In 2019, Fixed Income Clearing Corporation
(FICC) further expanded its sponsored repo
service to include prime brokerage, brokerdealers and non-U.S. based banks in addition to
custody banks, which were permitted to sponsor
qualified institutional buyers onto the cleared
repo platform. Over time, MMF investments in
sponsored repos, which are centrally cleared
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by FICC, have increased significantly—from
less than $1 billion in early 2017 to the alltime high of roughly $275 billion at the end of
December 2019. MMFs had just approximately
$140 billion invested in sponsored repos at the
end of September 2020. MMFs also are holding
more Treasury securities than the historical
norm, with government funds and prime funds
holding 56 percent and 28 percent of their
assets in Treasury securities respectively.

3.5.2.4 Registered Investment Companies
Mutual Funds
Mutual funds are investment vehicles that pool
money from many investors, invest in a variety
of securities or assets, and give investors daily
redemption rights. As of September 2020, net
assets of equity, bond, and hybrid mutual funds
totaled $18 trillion, or approximately 65 percent
of total U.S. investment company assets. Excluding
MMFs, U.S. mutual funds’ net assets increased by
0.5 percent in the first nine months of 2020 after
increasing 20 percent in 2019 (Chart 3.5.2.10).
Prior to the pandemic, fixed income mutual
funds saw consistent inflows while equity mutual
funds saw consistent outflows. Between January
2018 and February 2020, bond funds experienced
net inflows for 23 of the 26 months and equity
funds recorded net outflows for 24 of these
same 26 months. Over this period, bond funds
experienced $384 billion in net inflows while
equity funds had $674 billion in net outflows.
Flow patterns changed significantly in
March 2020 amid the economic and market
disruptions associated with the COVID-19
pandemic. Mutual funds experienced a record
monthly outflow in March in terms of both
dollar amount ($348 billion) and percentage of
assets (2.1 percent). Bond mutual fund outflows
were $255 billion, the highest on record, and
represented 73 percent of total outflows. Bond
mutual fund outflows moderated in April
and flows turned positive in May, likely due to
improved market-wide risk appetite for those
assets following the announcement of various
Federal Reserve programs (Charts 3.5.2.11,
3.5.2.12).

3.5.2.10 Net Assets of the Investment Company Industry

3.5.2.10 Net Assets of the Investment Company Industry
Trillions of US$
30

Trillions of US$

As Of: 2020 Q3

Other
ETFs
MMFs
Bond/Hybrid Mutual Funds
Equity Mutual Funds

25
20

1995

1998

2001

Source: ICI, Haver
Analytics

2004

2007

2010

2013

2016

2019

Note: Other is composed of unit investment trusts (UIT) and closed-end
funds. Q3 2020 figures include 2019 UIT data, which are reported annually
and Q2 2020 closed-end fund data, which are reported on a lag.

3.5.2.11 Monthly Bond Mutual Fund Flows
3.5.2.11 Monthly Bond Mutual Fund Flows
Billions of US$
200
Tax-Exempt
Taxable
100

Billions of US$
200

As Of: Sep-2020

100

-100

-200

-300

2017

2018

2019

Source: ICI, Haver Analytics

2020

-300

Note: Net fund flows.

3.5.2.12 Monthly Equity Mutual Fund Flows
3.5.2.12 Monthly Equity Mutual Fund Flows
Billions of US$
50

Billions of US$
50

As Of: Sep-2020

-25

-50

-75

-100

2017

2018

Source: ICI, Haver Analytics

2019

2020

-100

Note: Net fund flows.
Fina nc ia l De v el opment s

103

3.5.2.13 Monthly Bank Loan Mutual Fund Flows
3.5.2.13 Monthly Bank Loan Mutual Fund Flows
Billions of US$
10

As Of: Sep-2020

Billions of US$
10

-5

-10

-15

2017

2018

2019

Source: Morningstar, Inc.

-15

2020

Note: Net fund flows.

3.5.2.14 Monthly High-Yield Mutual Fund Flows
3.5.2.14 Monthly High-Yield Mutual Fund Flows
Billions of US$
15

As Of: Sep-2020

Billions of US$
15

-5

-10

-15

2017

2018

2019

Source: Morningstar, Inc.

-15

2020

Note: Net fund flows.

3.5.2.15 Cumulative Equity Fund Flows
3.5.2.15 Cumulative Equity Fund Flows
Billions of US$
400

As Of: Sep-2020

Billions of US$
400

200

-200
-400

-200
U.S. Passively Managed
International Passively Managed
International Actively Managed
U.S. Actively Managed

-600
Jan:2019

Jul:2019

Source: Morningstar, Inc.

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2 0 2 0 F S O C / / Annual Report

-400

Jan:2020

Jul:2020

-600

Note: Includes ETFs and mutual
funds. Cumulative net fund flows.

During the March 2020 market turmoil, bank
loan mutual fund monthly outflows exceeded
$11 billion, second only to the December 2018
record of over $13 billion (Chart 3.5.2.13).
These funds offer investors daily redemptions
and hold assets with lengthy settlement periods,
some of which may, during times of significant
market stress, take longer to sell and settle
than the redemption period offered. Bank
loan funds have experienced outflows for
23 consecutive months through September
2020, as floating rate notes became less
attractive relative to high-yield bonds, given
the anticipation for continued stable or falling
interest rates. Between November 2018 and
September 2020, cumulative outflows from
bank loan mutual funds totaled $75 billion,
or more than 54 percent of AUM. Bank loan
funds met redemptions throughout this period
of outflows, including during the significant
market stress in March 2020. Over the same
period, high-yield bond mutual fund inflows
totaled $24 billion, or 9.8 percent of AUM, as
modest net outflows for most of the period were
more than offset by April-August inflows of $39
billion (Chart 3.5.2.14).
Investors continued to gravitate away from
actively managed equity mutual funds and
towards lower-cost, index-based equity funds.
According to Morningstar, index-based mutual
funds and ETFs represented 51 percent of U.S.
equity fund assets as of September 2020, up
from 26 percent at year-end 2009. Between
January 2019 and September 2020, inflows
to index-based U.S. and international equity
funds totaled $205 billion, while their actively
managed counterparts saw outflows of $531
billion (Chart 3.5.2.15). In taxable bond

mutual funds, both actively managed and indexbased funds have continued to experience
inflows (Chart 3.5.2.16). Nevertheless, indexbased funds are gaining market share and as of
September 30, 2020, index-based mutual funds
and ETFs represented 35 percent of taxable
bond fund assets, up from 15 percent at yearend 2009.

Exchange-Traded Funds

Exchange-traded products (ETPs) include ETFs
registered under the Investment Company Act
of 1940 (’40 Act), non-’40 Act registered ETPs
(such as those that primarily hold commodities
or physical metals), and exchange-traded
notes. ETFs registered under the ’40 Act, which
account for over 99 percent of listed ETP assets,
continue to grow at a faster pace than mutual
funds and other SEC-registered investment
vehicles. By the third quarter of 2020, these
funds accounted for 17 percent of U.S.
investment company assets, up from 12 percent
in 2015 and 7.6 percent in 2010.
After rising 30 percent in 2019, ETF assets rose
another 7 percent over the first nine months
of 2020, settling at $4.7 trillion in September.
Recent years’ asset growth has been driven
primarily by inflows, which totaled $2.8 trillion
since 2009, rather than market appreciation
(Charts 3.5.2.17, 3.5.2.18).

3.5.2.16 Cumulative Equity and Fixed Income Fund Flows

3.5.2.16 Cumulative Equity and Fixed Income Fund Flows
Billions of US$
600

As Of: Sep-2020

Billions of US$
600

400

200

-200
-400

-200
Fixed Income Passively Managed
Fixed Income Actively Managed
Equity Passively Managed
Equity Actively Managed

-600
Jan:2019

Jul:2019

-400

Jan:2020

Jul:2020

-600

Note: Includes ETFs and mutual
funds. Cumulative net fund flows.

Source: Morningstar, Inc.

3.5.2.17 U.S.-Listed ETF AUM
3.5.2.17 U.S.-Listed ETF AUM
Trillions of US$
As Of: Sep-2020
5
AUM
Cumulative Market Appreciation
4
Cumulative Flows to ETFs

Trillions of US$
5
4

-1
2009

2011

2013

2015

2017

2019

-1

Source: Morningstar, Inc.

3.5.2.18 ETF Assets by Category of Investment
3.5.2.18 ETF Assets by Category of Investment
Trillions of US$
5
4
3

As Of: Sep-2020

Trillions of US$
5

Commodities
Alternative
Allocation
Fixed Income
Equity

4
3

0
2009

2011

2013

2015

2017

2019

Source: Morningstar, Inc.
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105

3.5.2.19 Monthly ETF Flows: Fixed Income Funds
3.5.2.19 Monthly ETF Flows: Fixed Income Funds
Billions of US$
40
Tax-Exempt
Taxable

Billions of US$
40

As Of: Sep-2020

-20

-40

-20

2017

2018

2019

-40

2020

Note: Net fund flows.

Source: Morningstar Direct

3.5.2.20 Monthly ETF Flows: Equity Funds
3.5.2.20 Monthly ETF Flows: Equity Funds
Billions of US$
80

Billions of US$
80

As Of: Sep-2020

-40

-80
2015

-40

2016

2017

2018

2019

2020

-80

Note: Net fund flows.

Source: Morningstar Direct

3.5.2.21 Monthly Inverse and Leveraged ETF Flows
3.5.2.21 Monthly Inverse and Leveraged ETF Flows
Billions of US$
10
Inverse
Leveraged
5

-5

-10
2015

2016

2017

Source: Morningstar Direct

106

Billions of US$
10

As Of: Sep-2020

2 0 2 0 F S O C / / Annual Report

2018

2019

2020

-10

Note: Net fund flows.

Equity and fixed income ETFs experienced
inflows for most months in 2019 and early 2020,
with equity funds showing more variability.
As the COVID-19 pandemic disrupted the
economy and financial markets in March 2020,
fixed income ETFs experienced record monthly
outflows, totaling $21 billion or 2.3 percent of
assets. Following the dislocation caused by the
COVID-19 pandemic, the market stabilized
and bond ETF flows and fixed income ETFs
experienced inflows totaling $143 billion
between April and September 2020 (Chart
3.5.2.19). Despite the March 2020 market
turmoil, equity ETF flows remained positive,
totaling $16 billion for the month (Chart
3.5.2.20).
A number of fixed income ETFs began
trading at discounts to their NAV amid the
onset of COVID-19 pandemic-related market
dislocations, but pricing began to normalize in
many bond ETFs following the Federal Reserve’s
announcement of the Secondary Market
Corporate Credit Facility (SMCCF) on March
23. Following this announcement, the discount
on bond ETF prices relative to NAV improved
in a matter of days, and many bond ETFs traded
close to NAV at the end of March. As part of
the SMCCF, which was established to support
credit to employers by providing liquidity to the
market for outstanding corporate bonds, the
Federal Reserve began to purchase bond ETFs
on May 12. Purchases under the SMCCF in May
totaled $3.7 billion, and as of September 30,
2020, the market value of ETF holdings under
the SMCCF totaled $8.6 billion.
Inflows to leveraged and inverse ETFs spiked
in March and April amid heightened market
volatility associated with the onset of the
COVID-19 pandemic (Chart 3.5.2.21).
The ETF industry remains concentrated, as
the three largest managers account for over 80
percent of ETF assets, and the top ten managers
account for over 95 percent of ETF assets. Over
the first nine months of 2020, the number of
available ETFs increased 1.0 percent in addition
to the 5.3 percent increase in 2019.

3.5.2.5 Alternative Funds
Hedge Funds

The aggregate NAV of qualifying hedge funds,
which are large hedge funds with enhanced
reporting requirements on the SEC’s Form PF,
in the United States was $2.9 trillion in the
first quarter of 2020, a 6.7 percent decrease
from the prior year. The gross asset value
(GAV) of qualifying hedge funds—which
reflects the effect of leverage obtained through
cash and securities borrowing—totaled $6.3
trillion, a 3.0 percent decrease year-over-year
(Chart 3.5.2.22). These figures cover the
approximately 1,800 hedge funds and 550
hedge fund advisers that have enhanced Form
PF reporting requirements with the SEC.

3.5.2.22 Hedge Fund Gross and Net Assets
3.5.2.22 Hedge Fund Gross and Net Assets
Trillions of US$
10

As Of: 2020 Q1

Gross Assets (left axis)
Net Assets (left axis)

Leverage
2.4

Leverage: GAV/NAV
(right axis)

2.2

6
2.0
4
1.8

2
0
2013

2014

2015

Source: SEC Form PF, OFR

2016

2017

2018

2019

1.6
2020

Note: QHF gross and net assets as
reported on Form PF Questions 8 and 9.

Various measures of leverage for hedge funds
overall, including measures of off-balance sheet
exposures, show increasing or flat patterns
over the course of the past year. GAV divided
by NAV showed aggregate qualifying hedge
fund leverage of 2.2 as of the first quarter of
2020, up from 2.1 in the first quarter of 2019.
The aggregate qualifying hedge fund leverage
ratio as measured by gross notional exposure
(GNE), which includes the notional amount of
derivatives but excludes repurchase agreement
exposures, divided by NAV was 6.3 in the
first quarter of 2020, unchanged from the
previous year. When interest rate derivatives are
excluded, the aggregate qualifying hedge fund
GNE/NAV leverage ratio was 4.4, up from 4.2 in
the first quarter of 2019.

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107

3.5.2.23 Hedge Fund Secured Financing
3.5.2.23 Hedge Fund Secured Financing
Trillions of US$
4

As Of: Mar-2020

Trillions of US$
4

Other Secured Financing
Prime Broker
Repo

0
2013

2014

2015

2016

2017

2018

2019

2020

Note: QHF secured borrowing as
reported on Form PF Question 43.

Source: SEC Form PF, OFR

3.5.2.24 Hedge Fund Borrowing: Composition of Creditors

3.5.2.24 Hedge Fund Borrowing: Composition of Creditors
Trillions of US$
4

As Of: 2020 Q1

Trillions of US$
4

Other
Foreign G-SIB
U.S. G-SIB

0
2013

2014

2015

2016

2017

2018

0
2020

2019

Note: QHF creditors as reported Form
PF Question 47.

Source: SEC Form PF, OFR

3.5.2.25 Hedge Fund Financing Liquidity
3.5.2.25 Hedge Fund Financing Liquidity
Percent
100

As Of: 2020 Q1

2013

2014

2015

0-7 Days
Source: SEC Form PF, OFR

108

Percent
100

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2016

2017

8-30 Days

2018

2019

2020

30+ Days

Note: QHF financing liquidity as
reported on Form PF Question 46.

The aggregate level of hedge fund borrowing
has increased significantly in recent years. As of
year-end 2019, hedge fund borrowing totaled
$3.2 trillion, up from $2.1 trillion at year-end
2016 (Chart 3.5.2.23). The recent growth in
borrowing has been driven primarily by repo
borrowing, which grew from $0.7 trillion in
December 2016 to $1.3 trillion in December
2019. Over this same time period, prime broker
borrowing grew from $1.1 trillion to $1.4
trillion. In March 2020, aggregate hedge fund
borrowing contracted by the most in over seven
years, with month-over-month repo and prime
broker borrowing declining by $90 billion and
$275 billion, respectively.
Hedge funds obtain the majority of financing
from G-SIBs, with U.S. G-SIBs accounting
for approximately 50 percent of funding and
foreign G-SIBs accounting for an additional 35
percent of funding (Chart 3.5.2.24). While the
percent of financing that is subject to significant
rollover risk has declined in recent years, over
50 percent of financing is reported on Form PF
as being secured for only seven days or fewer
(Chart 3.5.2.25). Since filers may default to
selecting the “1-days or less” bucket on Form PF
in certain situations, such as when a creditor
is allowed to demand more collateral, the data
may be overstating the amount of financing that
is truly secured for seven days or fewer.

Hedge funds deploy a wide range of strategies
and are invested in a various products and asset
classes (Chart 3.5.2.26). As of the first quarter
of 2020, qualifying hedge funds’ GNE totaled
$18 trillion, of which $12 trillion, or 65 percent,
were attributed to rates products (interest rate
derivatives, U.S. government debt, and other
sovereign debt) or FX products. Equity and
credit products accounted for less than 25
percent of GNE.
According to eVestment data, which covers a
smaller percentage of the hedge fund industry
when compared to Form PF, the hedge fund
industry experienced net outflows of $102
billion, or roughly 3 percent of AUM, in 2019
and net outflows of $48 billion, or 1.5 percent
of AUM, over the first nine months of 2020.
Outflows were concentrated in hedge funds that
focus on macro, directional credit, managed
futures, and long-short equity strategies. These
categories of funds saw roughly $86 billion
in outflows during 2019 and $50 billion in
outflows during the first nine months of 2020.
Event-driven funds and convertible arbitrage
funds were the only strategy types to see
inflows during the first nine months of 2020.
2020 hedge fund returns, as provided by the
Hedge Fund Research’s HFRI Fund Weighted
Composite Index, stood at 0.5 percent through
September 30, 2020.

3.5.2.26 Hedge Fund Gross Exposures by Asset Class
3.5.2.26 Hedge Fund Gross Exposures by Asset Class
As Of: 2020 Q1
$2.1T
$1.1T
$5.5T

$3.2T

Interest Rate Derivatives
Foreign Exchange
Equities
Other
U.S. Government
Sovereign Ex U.S.
Credit

$3.3T

$1.1T

Source: SEC Form PF, OFR

$1.9T
Note: QHF gross notional exposures as reported
on Form PF Questions 26 and 30. Excludes
repurchase agreements. Options reported as
delta adjusted notional value. Interest rate
derivatives reported as 10-year bond-equivalents.

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Hedge Fund U.S. Treasury Exposures

3.5.2.27 Hedge Fund Treasury Exposures
3.5.2.27 Hedge Fund Treasury Exposures
Billions of US$
1500

As Of: Mar-2020

Billions of US$
1500

1000

500

-500
-1000

-1500
2013

-500
Net
Long
Short
2014

2015

Source: SEC Form PF, OFR

-1000

2016

2017

2018

2019

2020

-1500

Note: QHF Treasury exposures as reported
on Form PF Questions 26 and 30.

Over the past several years, hedge funds have
increased their exposures to U.S. Treasuries. A
significant proportion of this growth has been
concentrated in relative value hedge funds that
seek to exploit pricing discrepancies between
similar products or securities. A popular relative
value strategy has been the “cash-futures basis
trade,” whereby funds try to capture the spread
between the implied repo rate and general
repo rates over the term of the trade. Entering
into this trade involves selling a Treasury
futures contract, buying a Treasury security
deliverable into that contract with repo funding
from dealer intermediaries, and delivering the
security at contract expiry.
Funds often leverage the basis trade several
times through overnight or term repo
borrowing, leaving those reliant on overnight
financing vulnerable to disruptions in repo
markets. Without the ability to rollover shortterm financing at similar rates, funds can
rapidly incur heavy losses, as reportedly
occurred during September 2019, when
overnight repo rates spiked from less than
2.5 percent to over 6 percent. Similarly, funds
are vulnerable to volatility in cash or futures
markets and may face unsustainable margin
calls in the event of large mark-to-market losses.
Hedge funds’ GNE to Treasuries totaled $2.3
trillion in February 2020, up from $1.3 trillion
two years earlier (Chart 3.5.2.27). During this
period, long and short Treasury exposures
increased in tandem, resulting in little change
in funds’ net exposure to Treasuries. As evident
through the CFTC’s Commitment of Traders
Report, the increase in funds’ short Treasury
exposure has primarily been through futures
contracts, consistent with the growth of the
basis trade (see Section 3.4.3.1). The growth
in funds’ exposures to Treasuries has coincided
with a significant increase in hedge fund repo
borrowing. Total repo borrowing peaked at
$1.5 trillion in February 2020, a $660 billion
increase from two years prior.

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During the month of March, hedge funds’
gross Treasury exposures declined by over
$400 billion, which can be partly attributed to
leveraged funds unwinding the basis trade. This
unwinding may have exacerbated illiquidity in
the Treasury markets (see Box B).

Private Equity

According to the SEC’s year-end 2019 Private
Funds Statistics Report, the GAV of private
equity funds in the United States totaled $3.7
trillion in the fourth quarter of 2019, a 17
percent increase from the fourth quarter of
2018. The funds’ NAV totaled $3.3 trillion, a 17
percent increase over that same period. These
figures cover over 14,000 private equity funds,
for which approximately 1,350 private equity
advisers filed information on Form PF.

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

Billions of US$
250
Non-LBO
LBO
200

As Of: 30-Sep-2020

Billions of US$
250
200

150

100

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
YTD

Source: S&P LCD

The private equity industry remains
concentrated. Large private equity advisers
filing Form PF—which are defined as those
with $2 billion or more in AUM—made up 24
percent of all private equity advisers filing Form
PF in the fourth quarter of 2019 and managed
74 percent of gross assets. Pension funds are
the largest beneficial owners of funds managed
by large private equity advisers, accounting for
29 percent of net assets; other private funds
account for 19 percent, foreign official sector
investors account for 11 percent, and insurance
companies account for 6.2 percent.
Acquisition-related activity backed by private
equity trended upwards from 2015 to 2018,
hitting a record $230 billion in 2018, before
slowing in 2019 to $150 billion (Chart 3.5.2.28).
Private equity merger and acquisition (M&A)
activity fell dramatically as the coronavirus
pandemic manifested, totaling $72 billion
through the end of September 2020. Leveraged
buyout (LBO) activity accounted for 71 percent
of total private equity M&A activity in the first
nine months of 2020, compared to 61 percent
for the preceding five years.
While private equity firms have raised 40
percent less in the first half of 2020 than they
did for the same period in 2019, these firms are
Fina nc ia l De v el opment s

111

holding a record amount of uncommitted capital
earmarked for buyouts with over $800 billion at the
end of 2019, which is up more than $250 billion
since 2016. This increase suggests that deal-making
activity could pick up once the uncertainty of the
current crisis passes. Moreover, despite declines
in overall deal-making, COVID-19 has accelerated
the growth of buyout firms focused on technology
companies, which in general have performed
well through the crisis. According to Preqin Ltd.,
through July 6, 2020, approximately $30 billion, or
roughly one-third of private equity fundraising, has
gone towards technology company buyouts, up from
just more than 10 percent during 2016.

3.5.2.6 Pension Funds
Defined benefit pension plans are significant holders
of financial assets. As of the second quarter of 2020,
the total pension fund entitlements funded by assets
of U.S. private and public defined benefit pensions
were $9.9 trillion, 5.5 percent higher than one year
earlier. At the same time, defined benefit pension
fund entitlements rose to $16 trillion, a 2.2 percent
increase compared to the second quarter of 2019.
Sponsors of pension plans strive to keep pace with
the benefits owed to beneficiaries. As noted in Box
G, the low-for-long interest rate environment may
therefore result in sponsors needing to increase
contributions or act in ways that increase a plan’s risk
profile. For example, sponsors may use plan assets
to assume greater levels of investment risk, such as
employing high amounts of leverage or increasing
exposure to higher-risk or illiquid asset classes, such
as hedge funds, private equity funds, and real estate,
in an effort to meet longer-term funding targets. If
a pension plan needs to sell assets to raise the cash
needed to meet benefit obligations, a plan with
significant exposure to illiquid asset classes may
be forced to sell its more liquid assets at depressed
prices, further stressing its financial position.
It is difficult to analyze the impact of the COVID-19
pandemic on defined benefit pension plans in the
aggregate because the disclosure requirements
differ between the single-employer private plans,
multiemployer plans, and public plans. For example,
disclosures concerning a defined benefit pension
plan’s return assumptions and investment strategies
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may have a different level of granularity, be in a
different format, and cover a different time period
than disclosures concerning similarly situated
funds. There are, however, anecdotal reports
showing that, while some plans made substantial
investment gains in the second quarter of 2020,
annual returns have fallen short of longer-term
targets.

Single-Employer Private Plans

According to the Milliman Corporate Pension
Funding Study, the funded ratio of the 100 largest
single-employer private defined benefit plans rose
to 88 percent as of year-end 2019 compared to 87
percent as of year-end 2018. The funded percentage
of a plan is its assets relative to the estimated value
of plan liabilities. Milliman estimates that the
funded ratio for the 100 largest corporate defined
benefit pension plans in the United States had an
aggregate funded ratio of 84 percent at the end of
September 2020.

Multiemployer Plans

Milliman estimates that the aggregated funded
percentage of multiemployer private defined benefit
plans as of June 2020 was 82 percent, down from 85
percent at year-end 2019. While the Pension Benefit
Guaranty Corporation (PBGC) projects that the
majority of multiemployer plans will remain solvent,
some plans appear unable to raise contributions
sufficiently to avoid insolvency. According to the
PBGC 2019 Projections Report, 124 plans have
declared that they will likely face insolvency over the
next 20 years.
The PBGC projects that its Multiemployer
Insurance Program will have insufficient funds
to cover the projected future demands from
multiemployer plans requiring financial assistance,
that there is a very high likelihood that the program
will become insolvent by 2026, and that insolvency is
a near certainty by the end of fiscal year 2027. The
PBGC will be unable to provide financial assistance
to pay the full level of guaranteed benefits when
the Multiemployer Insurance Program becomes
insolvent.

Public Plans

According to Milliman, the aggregate funded
status of the 100 largest U.S. public defined
benefit plans in June 2020 was 71 percent, up
from 66 percent at the end of March 2020,
but down from 75 percent at the end of 2019.
In addition, public pension fund sponsors are
permitted to assume investment returns based
on their own long-run expectations by the
relevant accounting rules. Accordingly, pension
funds that do not meet their assumed return
may be overstating their current funded status.
These return assumptions may be higher than
recent average investment returns, and, in recent
years, several large public pension funds have
revised long-term investment return expectations
downward.

3.5.2.29 Public Plan Allocation to Alternative Assets
3.5.2.29 Public Plan Allocation to Alternative Assets
Percent
35

As Of: 2018

Percent
35

Other Alternative
Real Estate
Private Equity
Hedge Fund

30
25

2001

2004

2007

Source: publicplansdata.org

2010

2013

2016

Note: Includes public plans that reported investment
allocations from 2001-2018. Simple average.

According to the Center for Retirement Research
at Boston College, most public pension plans will
close the 12-month period ended June 2020 with
an annual return that is less than their expected
investment returns. On average, annual returns
for state and local plans were higher than their
assumed returns for the same period a year
earlier, with a return of 8.9 percent compared to
the assumed return of 7.2 percent.
As noted in Box C, underfunded public pension
funds are a significant source of fiscal pressure on
several U.S. states, territories, and municipalities.
Sixteen pension funds in seven states were less
than 50 percent funded as of 2018. To increase
expected returns and meet benefit obligations,
public pension funds have steadily increased their
exposure to alternative assets for years (Chart
3.5.2.29). In reaction to the COVID-19 pandemic,
some state and local governments deferred or
reduced scheduled pension contributions in 2020
to cover operating budget shortfalls pressuring
the sustainability of the impacted plans.

3.5.2.7 Insurance Companies
According to S&P Global, there were 4,537
licensed insurance companies operating in the
United States during 2019, of which 2,626 were
licensed as property and casualty (P&C) carriers,
1,223 were health insurers, and 688 were licensed

Fina nc ia l De v el opment s

113

as life insurance companies. Many of these
are affiliated through common ownership by
a holding corporation or parent insurance
company.
Taken together, the largest ten P&C insurance
groups have a large share of the subsector’s
profit, premiums, assets, and capital. Measured
as a percentage of the aggregate net income,
the ten groups with the highest net incomes
account for 58 percent of the subsector total.
Similarly calculated, those ten groups writing
the largest amount of direct premiums make up
47 percent of the market. The top ten holding
the largest amount of assets account for 51
percent of all P&C assets, and the ten with the
largest amounts of capital (surplus) account for
57 percent of the P&C total.
In addition, the ten largest life insurance
groups comprise a large share of that subsector.
Measured as a percentage of the subsector’s net
income, the ten life groups with the highest net
incomes make up 63 percent of the total. The
ten groups with the greatest amount account
for 45 percent of the subsector’s aggregate
revenue from premiums, considerations, and
deposits. The ten life groups with the most
capital account for 43 percent of the subsector’s
aggregate amount.
Measured as a percentage of the subsector’s
net income, the ten largest health insurance
groups with the highest net incomes make up
78 percent of the total. The ten largest groups
writing the most direct premiums account
for 58 percent of the subsector’s aggregate.
Additionally, the ten health insurance groups
with the greatest amount of capital make up
58 percent of the subsector’s total. While the
market share of the largest ten firms in the
subsectors is substantial in comparison to the
remainder, the markets remain competitive
with many active carriers.
The insurance industry is the largest, or one of
the largest, investors in several key asset classes.
According to the Financial Accounts of the
United States, insurance companies were the
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largest investors in corporate and foreign bonds
as of the second quarter of 2020 with $4,074
billion or 28 percent of outstanding. Insurance
companies were also major investors in mutual
funds ($1,522 billion), equities ($1,036 billion),
agency securities ($539 billion), municipal
securities ($504 billion), and Treasury
securities ($420 billion).
The insurance industry experienced growth in
profit, capital, total assets, and revenue from
premiums in 2019. Health insurers reported net
income growth of 19 percent, capital growth of
9.2 percent, total assets growth of 7.8 percent,
and direct written premium growth of 6.4
percent. However, 176 out of the 434 health
insurers reported a decrease in income in 2019,
and 100 reported a decrease in the amount of
capital. The P&C carriers reported that net
income grew by 3.8 percent, capital grew by
14 percent, total assets grew by 8.9 percent,
and direct written premiums increased by 5.1
percent. As these are 2019 end of year figures,
they do not reflect any effects of the COVID-19
pandemic (Charts 3.5.2.30, 3.5.2.31).
Notwithstanding overall performance
measures, some insurers did not perform as
well as the aggregate figures would suggest;
534 out of a total of 1,127 P&C insurers
reported a decrease in net income for 2019,
and 226 reported a decrease in the amount
of capital supporting their financial activities.
Similarly, the life subsector reported 18 percent
growth in net income, 5.5 percent increase
in capitalization, 13 percent rise in revenue
from premiums, considerations, and deposits,
and an 8.4 percent increase in total assets in
2019. However, 184 out of a total of 336 life
insurers reported a decline in reported net
income and 105 reported a decrease in capital
in 2019. The sector as a whole continues to face
challenges from the persistently low interest
rate environment.

3.5.2.30 Insurance Industry Net Income
3.5.2.30 Insurance Industry Net Income
Billions of US$
100
Health
Life
80
P&C

As Of: 2019

Billions of US$
100
80

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: NAIC

Note: Life includes accident and health.

3.5.2.31 Insurance Industry Capital and Surplus
3.5.2.31 Insurance Industry Capital and Surplus
Billions of US$
1250
1000
750

Percent of Total Assets
80

As Of: 2019

Health Capital and Surplus
(left axis)
Life Capital and Surplus (left
axis)
P&C Capital and Surplus
(left axis)

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

70
60
50
40

500

30
20

250
0

10
2010

Source: NAIC

2012

2014

2016

2018

Note: C&S/Assets is calculated as capital and surplus as a
percent of net admitted assets less net admitted separate
account assets. Life includes accident and health.

Fina nc ia l De v el opment s

115

Impact Thus Far from the COVID-19 Pandemic
The COVID-19 pandemic has had wide-ranging
effects on the insurance industry. Insurance
underwriting has been confronted with potentially
greater losses from trade credit guarantees,
event cancellations, litigation liability, workers’
compensation, higher mortality and morbidity
rates, and substantial uncertainty from business
interruption claims and questions about potential
changes in demand. In addition, the financial
markets within which insurers operate experienced
price volatility, credit rating downgrades, and
unreliable trading liquidity. While many portions
of financial markets have recovered, insurance
company investments will likely face uncertainty
in regard to real estate valuations, the effects of
mortgage forbearance, and the impact of escalating
business bankruptcies.
Based on forecasts of insured losses and insurers’
financial reports through the first half of 2020,
insured COVID-19 pandemic-related losses do not
appear to threaten the financial stability of the
insurance sector. However, the full and actual extent
of the impact of the pandemic and the economic
downturn are unknown and may exceed current
expectations. Over the longer term, the pandemic
may have a broad-based impact on industry metrics,
stemming from COVID-19-related insurance claims,
macroeconomic effects, and financial market trends.
While health insurers have faced increasing claims
related to COVID-19, the financial impact has been
offset by individuals delaying medical care and
procedures, though those delayed claims could
impact the sector in 2021. According to S&P Global,
through the second quarter of 2020, the health
insurance industry reported an increase of only
1.3 percent in benefits paid and cost containment
expenses compared to the prior year. The net claim
and claim adjustment expense ratio declined to 80
percent from 89 percent for the second quarter.
General expenses incurred increased 47 percent
through June 30 impacted by the Affordable
Care Act health insurance industry tax that was
suspended in 2019 and resumed in 2020.
The life insurance subsector faces challenges for
both its investments and hedging and underwriting
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activities. On the asset side, life insurers have felt
the effects of the financial markets and credit
trends in corporate bonds, commercial real estate,
and less conventional investments such as CLOs,
though some of the effects of the pandemic on
financial markets were alleviated by policy actions,
such as the facilities established by the Federal
Reserve under section 13(3) of the Federal Reserve
Act. Life insurers also face potential reductions
in cash inflows and increased derivative collateral
requirements in response to higher market volatility.
On the liability side, meaningful increases in
mortality and morbidity claims from the virus,
should they occur among covered individuals, would
result in greater underwriting losses. In addition,
the low interest rate environment poses a long-term
challenge to some insurers by lowering investment
yields while increasing reserves held against future
claims payments (see Box G). The COVID-19
pandemic could also reduce sales across a wide
range of insurance products, due to repricing.
The pandemic’s impact on the P&C subsector will
likely lead to higher-than-expected insured losses in
some lines of insurance. This impact may be offset
to some extent by social distancing measures and a
decline in economic activity, such as transportation
and miles driven. The insurance lines most likely
to be adversely affected by the pandemic include
those providing coverage for business interruption,
workers’ compensation, professional liability,
travel, and credit insurance. Numerous legal
filings seeking to resolve disputes over claims for
business interruption losses has created additional
uncertainty. The drop in government and corporate
bond yields could also impact P&C insurers’ future
investment income.

3.5.2.8 Specialty Finance
Specialty finance companies are non-depository
institutions that provide loans to consumers and
businesses. The amount of financing activity by
specialty finance companies decreased modestly
over the past year. Specialty finance companies
held approximately $727 billion of consumer
loans and leases and $365 billion of business
loans and leases as of September 2020 (Charts
3.5.2.32, 3.5.2.33).
While specialty finance companies account
for a relatively small share of overall consumer
lending, they have a significant footprint in certain types of consumer lending activities such as
auto lending. Compared to banks, which generally have more stable sources of funding such as
deposits, specialty finance companies are more
reliant on wholesale funding and the securitization market.

Asset-Backed Securities

The COVID-19 pandemic disrupted the ABS
market, halting the issuance of most ABS asset
classes and resulting in higher interest rate
spreads on ABS products at its onset. Issuance
declined significantly between February and
April, and the interest rate spreads on the
securities spiked, reflecting heightened credit
risk and liquidity risk. Between February 20 and
March 19, spreads on AAA-rated tranches of
CMBS of 5-year maturity increased by almost
250 basis points to 307 basis points, and spreads
on AAA-rated tranches of 3-year maturity
prime auto loan ABS widened by almost 180
basis points to 200 basis points. Although yield
spreads on ABS spiked in mid-March, they did
not quite reach the high levels observed during
the 2008 financial crisis.

3.5.2.32 Consumer Loans and Leases Outstanding

Trillions of US$
2.0

As Of: Sep-2020

Trillions of US$
2.0

1.5

1.5
Commercial Banks

1.0

0.5

Finance Companies
0.0
2001

2004

2007

Source: Federal Reserve,
Haver Analytics

2010

2013

2016

2019

0.0

Note: Loans and leases owned and securitized. Series breaks
in December 2010 and December 2015 due to change in data
collection methodology. Gray bars signify NBER recessions.

3.5.2.33 Business Loans and Leases Outstanding

Trillions of US$
4.0

As Of: Sep-2020

Trillions of US$
4.0

3.0

3.0
Commercial Banks

2.0

1.0

0.0
2001

Finance Companies

2004

2007

Source: Federal Reserve,
Haver Analytics

2010

2013

2016

2019

1.0

0.0

Note: Loans and leases owned and securitized. Series
break in December 2010 due to change in data collection
methodology. Gray bars signify NBER recessions.

The Federal Reserve’s establishment of
the Term Asset-Backed Securities Loan
Facility (TALF) appears to have supported
securitization market activity and helped
normalize ABS spreads. Spreads on ABS
categories affected by TALF stopped rising
shortly after the facility was announced on
March 23 and subsequently fell substantially.
Issuance, which halted for all TALF-eligible
asset classes in late March, gradually resumed
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117

3.5.2.34 ABS Issuance
3.5.2.34 ABS Issuance
Billions of US$
350
300
250

200

As Of: Sep-2020

Billions of US$
350

Other
Student Loans
Equipment
Credit Card
Auto

300
250

200

150

100

2006

2008

2010

2012

Source: Thomson Reuters, SIFMA

2014

2016

2018

2020
YTD

Note: Figures are as of year end through 2019.
2020 figures are through September.

in April. That said, ABS issuance through
September 2020 remained significantly lower
than the pace of 2019, totaling $148 billion,
excluding CDOs and CLOs (Chart 3.5.2.34).
Finally, issuance under the support of TALF
has been very limited since the facility became
operational in mid-June, as almost all ABS
spreads of eligible asset classes were already
lower than TALF funding costs at that time.

Special Purpose Acquisition Companies

Special purpose acquisition companies (SPACs)
are companies that are formed through an
initial public offering (IPO) to raise funds to
purchase businesses or assets to be acquired
after the IPO. The IPO funds are placed into
an escrow or trust account where they are held
until released for predetermined reasons, most
commonly when the SPAC identifies a company
or assets to purchase. Through the first three
quarters of 2020, SPACs completed 118 IPOs,
raising $44 billion, which represents more than
three times the amount raised by SPACs in
2019.

3.6

Financial Market Structure,
Operational Challenges, and
Financial Innovation

3.6.1 3.6.1 Market Structure
3.6.1.1 Central Counterparty Clearing
Cash Securities Clearing

In the United States, the Depository Trust &
Clearing Corporation (DTCC) is the dominant
provider of clearing services for cash securities
through its subsidiaries Fixed Income Clearing
Corporation (FICC) and National Securities
Clearing Corporation (NSCC). FICC consists
of two divisions, the Government Securities
Division (GSD) and the Mortgage-Backed
Securities Division (MBSD). GSD provides CCP
services for its customers with respect to the
U.S. government securities market, and MBSD
provides CCP services to the U.S. mortgagebacked securities market. NSCC serves as a
CCP for virtually all broker-to-broker trades
involving equities, corporate and municipal
debt, ADRs, ETFs, and UITs.

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During the COVID-19 crisis, DTCC performed
without interruption despite facing increased
operational challenges and extreme market
volatility. Despite the significant increase
in initial margin requirements at DTCC’s
clearinghouses, members generally satisfied
intraday margin calls and settlement obligations
(Chart 3.6.1.1). On March 20, GSD suspended
one clearing member, Ronin Capital LLC, after
it was unable to meet capital requirements at
CME. In conjunction with their cross-margining
agreement, FICC and CME jointly liquidated
Ronin’s portfolio. On March 25, 2020, FICC
announced that it completed the liquidation
of Ronin’s portfolio without allocating losses
to other GSD member firms. While FICC and
NSCC performed without interruption during
the heightened market volatility associated
with COVID-19, the clearinghouses reported
large margin breaches that could have led to
significant losses in the event of a large clearing
member default.
In March, the disruptions in fixed income
markets led to a breakdown in the historical
relationship between TBAs and Treasuries,
which materially impacted the performance
of FICC’s MBSD margin model. The extreme
volatility and breakdown in correlations during
this time period was beyond the MBSD’s Value
at Risk (VaR) model calibration. On March 19,
2020, MBSD recorded a maximum backtesting
deficiency (i.e., margin below required
minimum) of $1.5 billion, which was incurred
by a portfolio with a market value greater
than $100 billion whose value was sensitive to
changes in interest rates. According to PFMI
quantitative disclosures, this $1.5 billion margin
breach was approximately four times larger
than any other breach recorded between 2015
and 2019 (Chart 3.6.1.2). MBSD took a number
of steps to address backtesting deficiencies,
including: (i) lowering the intraday surveillance
thresholds; (ii) issuing intraday margin calls
for almost $37 billion during the month of
March; (iii) applying charges to members with
backtesting coverage below 99 percent; and (iv)
developing a plan to re-introduce a VaR floor at
MBSD.

3.6.1.1 Initial Margin Requirements: DTCC
3.6.1.1 Initial Margin Requirements: DTCC
Billions of US$
60
NSCC
FICC: MBSD
50
FICC: GSD

Billions of US$
60

As Of: 2020 Q2

2016

2017

Source: ClarusFT, PFMI
Quantitative Disclosures

2018

2019

2020

Note: Total initial margin required as reported
in PFMI quantitative disclosures; includes
house and client accounts.

3.6.1.2 Maximum Uncovered Exposure for DTCC
3.6.1.2 Maximum Uncovered Exposure for DTCC
Billions of US$
2.0

As Of: 2020 Q1

Billions of US$
2.0

2020 Q1
2015 - 2019

1.5

1.0

0.5

0.0

DTCC GSD

Source: DTCC PFMI
Quantitative Disclosures

DTCC MBSD

DTCC NSCC

0.0

Note: Peak uncovered exposure between Q3 2015 and Q4 2019
and Q1 2020 as reported on question 6.5.4.

Fina nc ia l De v el opment s

119

Similar to MBSD, DTCC’s GSD clearing service
also recorded large backtesting deficiencies and
on March 9, 2020, GSD recorded a maximum
backtesting deficiency of $797 million, which
was incurred by a large dealer portfolio.
According to DTCC, GSD’s backtesting
deficiencies were primarily attributable to the
volatility in rates markets along with changes
in portfolio size or composition. Given these
deficiencies, GSD applied additional margin
charges to those members with backtesting
coverage below 99 percent. Additionally, GSD
supplemented its formal intraday margin
collection with additional intraday calls.
NSCC’s VaR margin model is constructed
to address dynamic changes in equity risk
premiums and idiosyncratic risks that could
impact equity prices. As a result, volatility
charges at NSCC increased 146 percent between
February and March 2020. On March 16,
2020, NSCC incurred a maximum backtesting
deficiency of $318 million. To address
backtesting deficiencies, NSCC made intraday
margin calls totaling almost $50 billion in
March and applied additional margin charges
to members with backtesting coverage below 99
percent.

Derivatives CCPs

The vast majority of U.S. exchange traded
derivatives are cleared through CME, ICE Clear
US, and the OCC. CME and ICE Clear US
provide clearing services for futures and options
on futures while the OCC provides clearing
services for exchange-traded equity options.
Within the OTC derivatives space, most USD
interest rate swaps are cleared through LCH
Ltd. or CME, while most credit default swaps
are cleared through ICE Clear Credit, ICE
Clear Europe, or LCH SA.
Derivatives CCPs generally performed as
expected during the COVID-19 market stress
despite the backdrop of price volatility, record
volumes, and the significant operational
challenges of working from home. Initial
margin requirements increased significantly
at derivatives CCPs beginning at the end of
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February, with daily increases peaking at $35
billion on March 9. Over the same period, there
was also a significant increase in daily variation
margin payments, which peaked at $54 billion
on March 9, as well (Chart 3.6.1.3).
The increases in initial margin requirements
were more pronounced for CCPs clearing
exchange-traded derivatives, with CME (futures
and options), ICE Clear US, and the OCC
reporting a combined $131 billion increase in
required initial margin, a 72 percent increase
between the fourth quarter of 2019 and the first
quarter of 2020 (Chart 3.6.1.4). Over this same
period, initial margin requirements for interest
rate swaps at CME and LCH Ltd. increased by
a combined $39 billion, or 20 percent, while
initial margin requirements for credit default
swaps at ICE Clear Credit, ICE Clear Europe,
and LCH SA increased by $21 billion, or 46
percent (Chart 3.6.1.5). The increase in initial
margin requirements can be attributed to both
the increase in derivatives activity and the
extreme volatility during this period. Initial
margin requirements for exchange-traded
and OTC derivatives fell slightly in the second
quarter but remain elevated compared to
historical levels.
In the June 2020 FIA survey, respondents
generally believed the industry fared well
through the COVID-19 market stress, and a
majority believed that post-crisis reforms helped
derivatives markets cope with the pandemic.
However, 76 percent of respondents identified
margin volatility and unpredictability and 40
percent highlighted clearing operations and
systems as challenges needing review.

Clearing Rates for OTC Derivatives

Over the past year, the share of outstanding
OTC interest rate derivatives that were
centrally cleared remained stable. Measured
by gross notional outstanding, approximately
78 percent of outstanding global interest rate
derivatives were centrally cleared as of June
2020, unchanged from June 2019. In contrast,
the share of outstanding single- and multinamed credit default swaps that were centrally

3.6.1.3 Liquidity Demand at Derivatives Clearing Organizations

Billions of US$
As Of: 30-Apr-2020
70
Variation Margin Payments
60
Incremental Initial Margin Payments

Billions of US$
70
60

0
Feb:2020

Mar:2020

Apr:2020

Note: Light blue represents aggregate variation margin payments
and dark blue represents net initial margin payments. Series
covers February 3, 2020 through April 30, 2020. Excludes OCC.

Source: CFTC

3.6.1.4 Initial Margin: U.S. Exchange Traded Derivatives
3.6.1.4 Initial Margin: U.S. Exchange Traded Derivatives
Billions of US$
350
OCC
ICE Clear US
300
CME

Billions of US$
350

As Of: 2020 Q2

300

250

200

150

100

2016

2017

Source: ClarusFT, PFMI
Quantitative Disclosures

2018

2019

2020

Note: Total initial margin required as reported in PFMI
quantitative disclosures; includes house and client accounts.

3.6.1.5 Initial Margin: OTC Derivatives

Billions of US$
350

As Of: 2020 Q2

Credit Default Swaps
Interest Rate Swaps

300

250

300

250

200

150

100

2016

2017

Source: ClarusFT, PFMI
Quantitative Disclosures

2018

2019

2020

Note: Total initial margin required as reported in PFMI quantitative
disclosures; includes house and client accounts. Interest rate swaps margin
includes LCH Ltd. and CME. Credit default swaps margin include CME, ICC,
ICEU, and LCH SA). CME ceased clearing credit default swaps in Mar. 2018.

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121

3.6.1.6 Global OTC Central Clearing Market Share
3.6.1.6 Global OTC Central Clearing Market Share
Percent
100

As Of: 2020 Q2

Trillions of US$ (Log)
1000

100

60
40

20
0

Interest Rate

Credit

Not Cleared (left axis)
Cleared (left axis)

Source: BIS

Equity

Total Notional
Outstanding (right axis)

3.6.1.7 Average Clearing Rates for OTC Trading
3.6.1.7 Average Clearing Rates for OTC Trading
Percent
100

Percent
100

As Of: 2020 Q3
Interest Rate Swaps

Credit Default Swaps

60
2015

2016

2017

Source: CFTC

2018

2019

2020

Note: Gross notional of new transactions.
Excludes security-based swaps.

cleared increased markedly, from 54 percent
as of June 2019, to 60 percent as of June 2020.
This increase can be attributed largely to an
increase in the amount of multi-named CDS
that were centrally cleared. As of June 2020, 65
percent of multi-named CDS outstanding were
centrally cleared, up from 60 percent in June
2019. OTC equity and FX derivatives continue
to have lower clearing rates. As of June 2020,
4.1 percent of outstanding OTC FX derivatives
and 0.4 percent of OTC equity derivatives were
centrally cleared globally (Chart 3.6.1.6).
Clearing rates in the United States were
broadly similar to global clearing rates, and
as of September 25, 2020, over 80 percent of
outstanding OTC interest rate derivatives were
centrally cleared, while 65 percent of credit
index swaps were centrally cleared. Clearing
rates on new U.S. interest rate swap transactions
peaked in the second quarter of 2020, when
over 90 percent of new U.S. interest rate swap
volumes were centrally cleared (Chart 3.6.1.7).
Clearing rates on new credit index swap
transactions fell below 75 percent in the third
quarter of 2020. This decline can primarily
be attributed to an increase in the volume of
credit swaptions, credit total return swaps, and
other exotic credit products for which clearing
is not widely available, resulting in low clearing
rates. New index CDS products that are offered
for clearing continue to report higher clearing
rates, often above 95 percent.
Central clearing has become more prevalent
throughout the world as clearing mandates have
been introduced in a number of jurisdictions
for the most standardized products, including
fixed-float rate swaps and index-based CDS.
In addition, and more recently, margin
requirements for uncleared swaps have led
some market participants to centrally clear
swaps voluntarily in cases where central clearing
is more cost-efficient. As a result, clearing rates
and the amount of margin posted for centrally
clearable, but not mandated, products like
inflation swaps and non-deliverable forwards
are significantly higher than they were a few
years ago, prior to the uncleared margin

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requirements; in some cases, these rates continued
to rise in 2020.

Over the same time period, the transaction volume
underlying SOFR increased.

Central Clearing & Brexit

In response to disruptions related to the pandemic,
the UK FCA, which regulates LIBOR’s administrator
and maintains the agreements with LIBOR panel
banks for continued submissions, released a
statement reiterating the year-end 2021 target date
for transition from LIBOR. Given that voluntary
agreements to continue panel bank submissions
through 2021 were arranged by the UK FCA, U.S.
regulators cannot extend or modify the timeline for
the transition.

While lawmakers in the EU and UK have made
progress in mitigating the impact that Brexit
will have on the derivatives markets and market
participants, the cliff-effect of the current
Brexit transition period increases uncertainty
concerning how certain transactions will be
handled. Specifically, both UK-based entities and
third-country-based entities relying on UK-based
personnel to support existing transactions that
novate derivative contracts to EU-based affiliates
would be subject to EU regulations on clearing
and margin requirements. Such transactions
would otherwise avoid these requirements due to
grandfathering provisions.
Currently, the relief provided by the EU does not
apply to novations that occur before the end of the
Brexit transition period. Many EU counterparties
with UK-based counterparties or operations have
been unwilling to novate those contracts because
the novation would trigger clearing or margin
requirements for the EU counterparty under
European law. Given the global nature of derivative
markets, such dislocations may impact U.S.-based
entities and markets. Derivatives markets could
experience dislocations if neither UK nor EU
authorities provide permanent relief.

3.6.1.2 Alternative Reference Rates
In 2020, the transition from USD LIBOR continued
to advance in preparation for LIBOR’s anticipated
cessation after year-end 2021. Market participants,
index providers, vendors, the ARRC, and U.S.
and foreign regulators all took significant steps to
address known transition issues.
In March, COVID-19-related market dislocations
caused few transactions to occur in the wholesale
unsecured funding markets that LIBOR is designed
to measure. The lack of transactions forced LIBOR’s
publication to increase reliance on expert judgment
from LIBOR panel banks, further highlighting
LIBOR’s vulnerabilities and the need to move
forward with the LIBOR transition by year-end 2021.

On June 23, 2020, the UK Chancellor of the
Exchequer made a statement that the UK
government intends to propose legislation. In
particular, the UK government intends to amend the
UK’s existing regulatory framework for benchmarks
to ensure it can be used to manage different
scenarios prior to a critical benchmark’s eventual
cessation, to withstand circumstances in which the
FCA may require an administrator to change the
methodology of a critical benchmark, and to clarify
the purpose for which the FCA may exercise this
power. New regulatory powers would enable the
FCA to direct a methodology change for a critical
benchmark, in circumstances where the regulator
has found that the benchmark’s representativeness
will not be restored and where action is necessary
to protect consumers and/or to ensure market
integrity.

Work of the ARRC

In the U.S., the Federal Reserve and FRBNY
convened the ARRC to identify alternative reference
rates to USD LIBOR and implement an orderly
transition plan to its recommended rate, SOFR. In
the last year, the ARRC made significant progress in
developing contract fallback language, conventions
for SOFR’s use in a variety of financial instruments,
and best practices to facilitate the adoption of
SOFR.
The ARRC continued to address contract robustness
through the publication of recommended contract
fallback language for use in new issuance of
variable rate private student loans and updated
its recommended language for bilateral business
Fina nc ia l De vel opment s

123

loans and syndicated loans. Previously, the ARRC
published recommended fallback language for other
asset classes, including adjustable-rate mortgages,
floating-rate notes, and securitizations. The ARRC
also identified best practices and recommended
timelines for transitioning away from USD LIBOR
across asset classes.
In a significant step, the ARRC published its
spread adjustment methodology for cash products
following a consultation process and began the
process of acquiring a vendor for the publication
of the spread adjustment. It also began a separate
acquisition process for a vendor for the potential
publication of a SOFR term rate. Notwithstanding
these industry-wide transition efforts, the market
acceptance of SOFR is progressing at various paces
due to challenges such as structural differences
of SOFR vs USD LIBOR, lower liquidity in SOFR
derivatives markets and cash markets, as well as
various operational challenges. With respect to
a challenge associated with the lack of a credit
spread, the FRBNY, FDIC, Federal Reserve, OCC,
and Treasury met with representatives of a number
of U.S. regional banks to discuss ways to support
the transition of loan products away from LIBOR,
including by holding a series of working sessions to
explore the development of a credit risk sensitive
spread. The agencies involved determined the
official sector is not well positioned to develop a
credit-sensitive spread to SOFR, and shared a letter
with industry participants expressing the official
sector’s support for the continued innovation
in, and development of, suitable reference rates,
including those that may have credit sensitive
elements. Separately, in October 2020, the Financial
Stability Board (FSB) published a “global transition
roadmap” that sets out a timetable of actions for
financial and non-financial sector firms to take in
order to ensure a smooth LIBOR transition by end2021.

Regulatory Actions to Facilitate Transition

Council member agencies continued to monitor and
facilitate the transition through discussions with
stakeholders and the provision of broad regulatory
relief. The CFPB released a notice of proposed
rulemaking (NPRM) concerning the anticipated
discontinuation of LIBOR, including, among other
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things, proposed examples of replacement indices
that meet Regulation Z standards. The CFTC issued
relief from certain rules related to margin, business
conduct, trade execution, and clearing for legacy
swaps referencing LIBOR that are amended as a
result of the transition. The prudential regulators
finalized regulations for margin and capital that
permitted non-cleared legacy swaps and securitybased swaps to retain their legacy status if amended
to replace an interbank offered rate. State insurance
regulators, through the NAIC, are monitoring the
effect of the transition from LIBOR on insurer
derivatives positions, life insurance reserving, and
accounting standards. Insurers will receive basis
swaps for some of their derivative positions as a
result of the transition from LIBOR that may not
be permissible under most state investment laws.
The NAIC issued letter guidance to state insurance
departments recommending that any basis swaps
received as part of the LIBOR transition be deemed
permissible investments under state investment laws
for up to one year past the transition.
In July 2020, the FFIEC published a “Joint Statement
on Managing the LIBOR Transition.” The joint
statement highlighted the risks of the transition
away from LIBOR and encouraged supervised
institutions to prepare for the transition in order to
mitigate these risks. In addition to communicating
the FFIEC statement, the OCC provided additional
guidance to OCC-regulated institutions for
identifying applicable risks, planning, and
successfully transitioning from LIBOR within OCC
Bulletin 2020-68, “FFIEC Statement on Managing
the Libor Transition and Guidance for Banks.”
In October 2020, the Federal Reserve issued a
supervision and regulation letter that encourages
supervised institutions that are active in the derivatives
market—particularly those with large LIBOR
denominated derivatives exposures—to give strong
consideration to adhering to ISDA’s fallback protocol.
In October, Treasury and the Internal Revenue Service
issued guidance to provide clarification for taxpayers
that modifying certain contracts to incorporate the
ARRC’s and ISDA’s recommended fallback language
will not result in a tax realization event.

On November 6, 2020, the Federal Reserve, FDIC,
and OCC issued a statement on reference rates for
loans. The statement reiterated that agencies are
not endorsing a specific replacement rate for LIBOR
for loans. The statement also indicated that a bank
may use any reference rate for its loans that the bank
determines to be appropriate for its funding model
and customer needs, and should include fallback
language in its lending contracts that provides for
use of a robust fallback rate if the initial reference
rate is discontinued.

Derivatives Markets

The derivatives markets achieved some of the most
significant milestones toward the transition. In
October, two major derivative CCPs, CME and LCH,
modified the rates used in their discounting and
price alignment interest methodology to replace the
effective federal funds rate with SOFR. The change
in methodology affected approximately $120 trillion
notional of contracts at LCH alone, increasing
exposure to SOFR and liquidity in SOFR derivatives
markets. Immediately following the transition,
SOFR swap volumes tripled in longer-dated tenors
and experienced their highest rate of daily turnover.
Continued liquidity across the SOFR curve will be
essential for a smooth transition from USD LIBOR.
Separately, on October 23, 2020, the International
Swaps and Derivatives Association (ISDA) published
an updated protocol that would allow market
participants to incorporate contract fallbacks
into legacy derivatives in the event that LIBOR
is found by the UK FCA to be non-representative
of underlying market conditions or LIBOR’s
publication ceases. Voluntary adherence to the
protocol is an important step for the smooth
transition of legacy instruments in the derivatives
markets. ISDA also modified its definitions to
incorporate the same contract fallbacks into

new instruments. Both the protocol and revised
definitions will go into effect on January 23, 2021.

3.6.2 Operational Challenges Related to COVID-19
Financial institutions performed business functions
relatively seamlessly during the COVID-19
pandemic, in part due to investments in operational
and technology capabilities that were made prior to
March. The industry also benefited from shifting
customer support from in-person to online or
automated processes. Banks have taken steps to
protect customers and employees by consolidating
branch operations and limiting walk-in traffic,
leveraging multiple production sites to separate
operational staff, and employing staggered
work schedules. Financial institutions have also
adopted safety measures for their employees,
including transitioning to a mostly remote working
environment and implementing similar protection
measures for the critical staff who remained onsite.
These processes have allowed financial institutions
to maintain operations while adhering to social
distancing guidelines, but also have the potential
to introduce new sources of risk. For example, the
implementation of teleworking strategies using
virtual private networks, virtual conferencing
services, and other remote telecommunication
technologies can increase cybersecurity
vulnerabilities, insider risks, and other operational
exposures. Cyber attackers are taking advantage
of the pandemic to create campaigns designed
to leverage individuals’ fear and uncertainty,
potentially increasing their rate of success
under these circumstances. Ransomware is also
proliferating and harming financial institutions and
their third-party service providers.
Similarly, the use of online and mobile systems
by customers, bank staff, and third-party
service providers may stress or adversely affect
telecommunications capacity and management
processes. Sensitive processes performed outside
of institution-owned or authorized properties and
devices can increase the potential for exposure of
customer sensitive information.

Fina nc ia l De vel opment s

125

3.6.3.1 Market Capitalization of Blockchain-Based Digital Assets
3.6.3.1 Market Capitalization of Certain Blockchain-Based Digital Assets

Billions of US$
350

300
250
200

As Of: 30-Sep-2020

Billions of US$
350

Bitcoin
Etherum
Ripple
Litecoin
Tether

300
250
200

150

100

0
2014
2015
2016
2017
Source: Coinmarketcap.com; OFR

2018

2019

2020

3.6.3 Financial Innovation
3.6.3.1 Digital Assets and Distributed Ledger
Technology
The market capitalization of digital assets,
such as Bitcoin, Ethereum, XRP, and Litecoin,
has increased greatly in recent years though it
has also been highly volatile (Chart 3.6.3.1).
Data regarding the trading of digital assets is
sparse and may be unreliable. CoinMarketCap.
com estimated that after reaching $800
billion in early 2018, the market capitalization
of the digital assets that it tracks declined
precipitously to $100 billion in late 2018
before rising to $342 billion as of September
30, 2020. Stablecoins—digital assets designed
to maintain a stable value, usually relative to
another asset (typically a unit of fiat currency or
commodity) or a basket of assets—continued to
grow in market capitalization in 2020 following
robust growth in 2019, with some experiencing
a five-fold increase during that period. While
the growth rate of stablecoins in 2020 has
eclipsed that of other digital assets, the total
market capitalizations of other types of digital
assets remains substantially larger.
Digital assets are generally enabled by
blockchains or other distributed ledger
technologies. Such systems share data across
a network, creating identical copies of their
ledger that are then often stored at and
synchronized across multiple locations.
Distributed ledger technology has applications
that extend well beyond the simple transfer of
value. In recent years, an increasing number
of financial institutions have initiated proof
of concept or pilot projects to evaluate the
potential for applications of distributed ledger
technology in areas such as interbank and
intrabank settlement, derivatives processing,
repo clearing, and trade finance. While the
ultimate value of a new technology is not always
clear when it is first introduced, interest in
distributed ledger technologies remains high.

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3.6.3.2 Peer-to-Peer Payments
Consumers continue to embrace peer-to-peer
payment services, and the COVID-19 pandemic
has further highlighted the potential benefits of
mobile contactless payment options. Peer-to-peer
payment services allow for the transfer of funds
between two parties using mobile apps. Some peerto-peer payment services have expanded capabilities
beyond simply facilitating transactions between
peers, which has allowed them to, for example,
help facilitate government assistance payments.
The apps are typically linked to debit or credit card
accounts and other types of bank accounts, thereby
allowing the funding transfers to proceed through
bank-maintained payment networks. Although
some service providers are relatively new companies,
banks and other financial service providers are also
entering the market and have reported significant
consumer participation and transaction volume.

3.6.3.3 Marketplace Lending
Marketplace lending involves the provision of loans
through online, electronic platforms. Initially,
marketplace lending focused on retail investors
providing funding to individual borrowers and
was called peer-to-peer lending. This model has
evolved into one that uses significant capital from
institutional investors to finance primarily consumer
and small business loans. Some of the largest
marketplace lenders in the consumer finance area
concentrate on providing debt consolidation loans
and refinancing existing student loans. During the
COVID-19 pandemic, marketplace lenders played a
role in government assistance to small businesses.
For example, their lending platforms enabled some
small business owners’ participation in the PPP by
providing a means to apply for PPP loans.

3.6.3.4 Large Technology Firms in Financial Services
Prior to the pandemic, several large technology and
e-commerce firms entered, or explored entering,
financial services markets. These firms offer
financial products or services, such as the provision
of loans to small businesses or individuals. Some
of these technology and e-commerce companies
have characteristics that could allow them to grow
quickly in the financial services space, including
large customer networks, broad name recognition,
and access to client data. Additionally, while these

firms are subject to regulations that may limit the
activities in which they engage, they are generally
not subject to the same range of regulations and
oversight applicable to financial institutions. These
technology firms can promote the development of
new products and services but could also increase
risks. For example, new technology and systems to
evaluate and determine the creditworthiness of
potential borrowers may create benefits for financial
institutions and customers, but may also add
complexity, limit transparency, and create different
consumer protection risks than those of traditional
credit evaluation methods if lenders do not identify
and address potential issues in a proactive manner.

3.6.3.5 Reliance of Financial Institutions on Third-Party
Service Providers
Financial institutions are increasing their use
of third-party service providers to supplement
or increase their capabilities. This dynamic has
accelerated during the COVID-19 pandemic, as
institutions are utilizing third parties to support
widespread remote work capabilities, increased
technological capacity, and solutions to maintain
operations under elevated operational volumes. The
financial services industry has generally succeeded
in transitioning to a remote working environment
without significant operational problems, to date.
Relationships with external providers often allow
an institution to take advantage of advanced or
proprietary technologies, including recent fintech
innovations. Due to economies of scale or access to
lower-cost labor, external providers are often able to
perform services at a lower cost than institutions can
perform them in-house. In addition, as specialists,
external providers may be able to perform functions
for a financial institution more efficiently, more
accurately, or at a higher quality than if they were
performed internally.
While the use of third-party service providers can
have advantages, it can also introduce risk if not
appropriately managed. The reliance of many
institutions on a single vendor creates concentration
risk, as a service interruption or cyber event at that
vendor could result in widespread disruption in
access to financial data and could impair the flow of
financial transactions. Third-party service providers
Fina nc ia l De vel opment s

127

may further subcontract services to other third
parties, which may make oversight more complex
for both the financial institution and regulatory
agencies. To control for risks associated with
outsourcing to third parties, financial institutions
should conduct appropriate due diligence before
entering the third-party relationship and exercise
effective oversight and controls afterward.
For instance, many institutions have increased their
use of cloud computing services to supplement
existing data storage capacity, to provide
redundancy, and to gain access to additional
computational capacity. While cloud providers may
offer superior cost or technological solutions, there
have also been recent instances of unauthorized
access to client data at cloud providers. As with all
third-party outsourcing relationships, effective risk
control is important when a financial institution
engages third-party cloud providers.

3.7
3.7.1

Global Economic and Financial
Developments
Foreign Exchange Market

As COVID-19 spread in early 2020 and financial
market strains intensified, investors sought the safety
of the dollar, generating a sharp rise in the value
of the nominal trade-weighted dollar. The nominal
trade-weighted dollar appreciated 10 percent from
the beginning of the year to its peak on March
23—with the bulk of this move occurring in March
as countries imposed sweeping restrictions on
their national economies. Among the currencies
weakening sharply against the dollar during this
period, the British pound depreciated 13 percent,
the Australian dollar 18 percent, the Brazilian real
22 percent, and the Mexican peso 25 percent.
At the same time, the premium to obtain dollar
funding increased to levels not seen since the
2008 financial crisis. The dollar funding strains
could be primarily attributed to lenders reducing
intermediation activities as a precaution amid the
heightened uncertainty, increased demand for
dollars as some foreign banks faced significant
drawdowns of corporate credit lines, and increased
dollar hedging demand given the significant market
volatility. Dollar funding strains were particularly
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evident in the steep increase in the premium to
borrow U.S. dollars as reflected in the foreign
exchange (FX) swap basis. The FX swap basis
compares the cost of borrowing a currency in the
money market and the cost of borrowing the same
currency through an FX swap, effectively posting
foreign currency as collateral. When financial
markets are operating smoothly, the FX swap basis
is relatively close to zero for major currency pairs,
as arbitrageurs can trade off gaps between the two.
But during February and March, the FX swap basis
for key U.S. dollar currency pairs spiked toward
levels last observed during 2008. As a result, foreign
banks and corporations, which were experiencing
a surge in funding costs given the stress in CP
markets, found it more expensive to borrow against
their currencies for dollars. The dollar shortage
threatened to exacerbate liquidity strains on
corporates, contribute to widening defaults, and
deepen the economic downturn stemming from the
pandemic.
Beginning in mid-March, the Federal Reserve
took several actions to help address the strains in
dollar funding markets. First, it eased the terms
of the swap lines with standing counterparties
(the Bank of Canada, Bank of England, Bank of
Japan, European Central Bank, and Swiss National
Bank), reducing the cost of swap pricing to OIS +
25 basis points, extending the maturity of the swaps
through the introduction of 84-day operations,
and increasing the frequency of auctions from
weekly to daily. Additionally, the Federal Reserve
re-established temporary swap lines with nine other
central banks, including some emerging market
central banks. Finally, in late March, the Federal
Reserve introduced a new temporary Foreign and
International Monetary Authority (FIMA) repo
facility, which allowed a broader range of foreign
official entities to obtain dollars against U.S.
Treasury collateral. Central banks immediately
availed themselves of the swap lines to make
dollars available to financial institutions in their
jurisdictions. Swaps outstanding went from under
$50 million in early March to a peak of $449 billion
in late May (Chart 3.7.1.1). While notable, this was

lower than during the 2008 financial crisis,
where the peak reached $583 billion.
In combination with the extraordinary actions
by central banks and governments to support
the global economy, the expansion of Federal
Reserve facilities helped calm dollar funding
markets. Dollar appreciation pressures eased,
and the FX swap basis decreased for many
dollar currency pairs, returning to normal
historical ranges by May. As strains in dollar
funding markets dissipated, outstanding
drawings on the swap lines gradually declined,
falling to less than $25 billion as of September
30, 2020.
As financial market strains eased, the sharp
moves in FX rates seen in the first three months
of the year generally reversed, particularly
across advanced economies. Between March 23
and September 30, 2020, the dollar depreciated
7.2 percent on a nominal, trade-weighted basis.
The euro appreciated 8.9 percent against
the dollar, the pound 12 percent, and the
Australian dollar 24 percent. By September,
advanced economy currencies had appreciated
on net against the dollar year-to-date or had
made up nearly all of the decline from earlier
in the year (Chart 3.7.1.2). Emerging market
currencies, on the other hand, had seen
more limited recovery or had even continued
to depreciate against the dollar. As of the
end of September, this left many emerging
market currencies still substantially weaker
against the dollar on net year-to-date (Chart
3.7.1.3). Continued pressures on emerging
market currencies have reflected in part
large COVID-19 outbreaks across some major
emerging markets, combined with pre-existing
macroeconomic strains in a few specific
instances.
While the real broad dollar index is only 0.8
percent stronger on net in 2020 through the
end of September, it remains relatively strong
from a historical perspective. Notably, the real
trade-weighted dollar stands 8.2 percent above
its 20-year average as of the end of September,
having recently peaked at its strongest level

3.7.1.1 Federal Reserve Swap Lines
3.7.1.1 Federal Reserve Swap Lines
As Of: 30-Sep-2020

Billions of US$
500

400

300

200

100

0
Jan:20

Mar:20

May:20

Jul:20

Source: Federal Reserve

Sep:20

Note: Wednesday levels.

3.7.1.2 Change in USD Exchange Rates, Advanced Economies

3.7.1.2 Change in USD Exchange Rates, Advanced Economies
Percent
30

As Of: 30-Sep-2020
3/23/20 – 9/30/20
12/31/19 – 3/23/20

Percent
30

Total

-10

-20

-30

Source: Federal Reserve,
Haver Analytics

Note: Percent change relative to end-2019. Positive indicates appreciation
of listed currency. Swiss Franc (CHF), Euro (EUR), Swedish Krona (SEK),
Japanese Yen (JPY), Australian Dollar, (AUD) New Zealand Dollar (NZD),
British Pound (GBP), Canadian Dollar (CAD), and Norwegian Krone (NOK).

3.7.1.3 Change in USD Exchange Rates, Emerging Markets
3.7.1.3 Change in USD Exchange Rates, EMEs
Percent
20

As Of: 30-Sep-2020

Percent
20

-10

-20
-30

-20
3/23/20 – 9/30/20
12/31/19 – 3/23/20

-40

Source: Federal
Reserve, Wall Street
Journal, Haver Analytics

Total

-30
-40

Note: Percent change relative to end-2019. Chinese renminbi (RMB), Korean
won (KRW), Indian rupee (INR), Indonesian rupiah (IDR), Mexican peso (MXN),
South African rand (ZAR), Russian ruble (RUB), Argentine peso (ARS), Turkish
lira (TRY), Brazilian real (BRL). Positive indicates appreciation of listed currency.

Fina nc ia l De v el opment s

129

since 2002 (Chart 3.7.1.4).

3.7.1.4 Real U.S. Dollar Trade-Weighted Index
3.7.1.4 Real U.S. Dollar Trade-Weighted Index
Index
120

As Of: Sep-2020

Index
120

110

100

80
2000

2003

2006

2009

2012

2015

2018

Note: Index shown as a share of its 20-year average. Real USD
Trade-Weighted Index is a weighted average of the FX value of
the USD against the currencies of a broad group of major U.S.
trading partners. Gray bars signify NBER recessions.

Source: Federal Reserve,
Haver Analytics

3.7.2.1 Advanced Economies Real GDP Growth

3.7.2.1 Advanced Economies Real GDP Growth
Percent
8

As Of: Oct-2020

Percent
8

-4
-8

-4

United States
United Kingdom
Euro Area
Japan

-12
2005

2007

2009

Source: IMF WEO,
Haver Analytics

-8

2011

2013

2015

2017

2019

2021

-12

Note: Annual change in GDP, constant prices. Dotted lines
represent the IMF’s most recent projections for 2020 and 2021.

3.7.2.2 General Government Gross Debt to GDP

3.7.2.2 General Government Gross Debt to GDP
Percent
300

Percent
300
2020 (October 2020 Projection)
2019

250

200

150

100

United
States

Germany

France

Source: IMF WEO

130

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Italy

Spain

Japan

United
Kingdom

3.7.2

Advanced Economies

The COVID-19 pandemic has led to a dramatic
decline in global economic activity. According
to the International Monetary Fund (IMF)
October 2020 World Economic Outlook
(WEO), advanced economies are projected to
contract by 5.8 percent in 2020. Despite the
steep decline in U.S. economic activity, the
U.S. is projected to outperform other advanced
economies, with real GDP projected to decline
by 4.3 percent in 2020. In comparison, real GDP
in the euro area, the United Kingdom (UK),
and Japan is projected to decline by 8.3 percent,
9.8 percent, and 5.3 percent, respectively (Chart
3.7.2.1). Real GDP for advanced economies is
projected to rebound sharply in 2021, but remain
below its 2019 level. The rapidly evolving nature
of the pandemic, however, introduces significant
uncertainty into any forecast, and the depth and
duration of the contraction is dependent on
a number of factors, most notably authorities’
ability to limit the spread of COVID-19 without
imposing lockdown measures, the development
of a vaccine and therapeutics, and fiscal and
monetary economic support.
Advanced economies have taken significant
fiscal measures to help mitigate the impact of
COVID-19 and support long-term economic
recovery. They have relied on a combination
of direct fiscal stimulus programs, such as
wage subsidies and cash payments, along
with liquidity support in the form of loans,
asset purchases, and guarantees. Direct fiscal
spending programs have increased headline
government debt levels meaningfully in 2020
(Chart 3.7.2.2). In contrast, liquidity support
is largely off-balance sheet and could lead to
significant growth in government debt if these
public interventions incur losses.
In 2019, negative interest rate policies, coupled
with increased economic uncertainty, pushed
the amount of negative-yielding debt in the
Bloomberg Barclays Global Aggregate Negative
Yielding Debt Index up significantly, hitting
a record $17 trillion in August 2019 (Chart

3.7.2.3). While the amount outstanding in the
index declined in the months following, the
value of negative-yielding debt represented by
the index remained well above historical levels.
During the March 2020 market stress, however,
the index value of negative-yielding debt fell
sharply to less than $8 trillion. Since then,
the index value of negative-yielding debt has
steadily risen, and by the end of September, the
amount outstanding again reached $16 trillion,
slightly below the August 2019 record.

Euro Area

Even prior to the COVID-19 pandemic,
the economic outlook in the euro area was
deteriorating. In the fourth quarter of 2019,
euro area real GDP growth was flat, industrial
confidence had fallen to its lowest level since
2013, and inflation expectations were at record
lows. While economic data improved somewhat
in January and February 2020, economic
activity collapsed in March as COVID-19
spread through Europe, and major European
Union (EU) member states imposed national
lockdown policies. Euro area GDP growth fell by
a cumulative rate of 15 percent in the first half
of 2020 (Chart 3.7.2.4). The decline in GDP
was particularly pronounced in economies that
imposed severe measures to control widespread
outbreaks, with Spanish, French, and Italian
GDP falling by 22 percent, 19 percent, and 18
percent, respectively.
Euro area economic activity rebounded
considerably in the summer, and in the third
quarter of 2020, euro area real GDP increased
by nearly 13 percent compared to the previous
quarter. Despite this rebound, economic
sentiment remained below pre-pandemic
levels through September 2020, and the recent
resurgence of COVID-19 cases and partial
reimposition of national lockdowns will likely
weigh on the economic recovery going forward
(Chart 3.7.2.5).

3.7.2.3 Outstanding Negative Yielding Debt
3.7.2.3 Outstanding Negative Yielding Debt
As Of: 30-Sep-2020
Trillions of US$
20
Corporates
Government Related
Securitized
Sovereigns
15

0
2017

2018

Source: Bloomberg, L.P.

2019

2020

Note: Market value of Bloomberg Barclays Global Aggregate Negative
Yielding Debt Index, which is a sub-index of the Bloomberg Barclays
Aggregate Index. In 2017, SIFMA estimated that the aggregate index
covers approximately half of the value of global bonds outstanding.

3.7.2.4 Euro Area H1 2020 Real GDP
3.7.2.4 Euro Area H1 2020 Real GDP
Percent
10

As Of: 2020 Q2

Percent
10

-10

-20

-30

Source: Eurostat, Haver Analytics

Note: Percentage change in real GDP Q2 2020
compared with Q4 2019. Seasonally adjusted.

3.7.2.5 Euro Area Business and Consumer Surveys
3.7.2.5 Euro Area Business and Consumer Surveys
Percent
20

As Of: Sep-2020

Index
120

110

100

-10

-20

Economic Sentiment (right axis)
Industrial Confidence (left axis)
Consumer Confidence (left axis)

-30

To help limit the economic impact of
COVID-19, the ECB deployed a range
of unconventional monetary tools while
maintaining its deposit rate at -0.5 percent.

Trillions of US$
20

-40
2006

2009

2012

Source: European Commission,
Haver Analytics

2015

2018

80
70

Note: Confidence surveys calculated by subtracting
the percentage of negative responses from the
percentage of favorable responses. For economic
sentiment index, 100 = long-term average.

Fina nc ia l De v el opment s

131

Among other programs, the ECB launched a
further round of asset purchases under its Pandemic
Emergency Purchase Programme (PEPP). The
PEPP supplements the ECB’s Asset Purchase
Programme (APP) and allows the ECB to purchase
assets currently eligible under the APP along with
Greek government debt and nonfinancial CP. As of
September 30, 2020, the ECB had purchased €567
billion of securities under PEPP and is expected to
purchase a further €783 billion through June 2021.
Additionally, the ECB eased conditions for its third
series of targeted long-term refinancing operations
(TLTRO III) and new series of pandemic emergency
longer-term refinancing operations. Participation
in TLTRO III has been robust, and the amount of
funds allotted in June and September 2020 totaled
a combined €1.5 trillion, up from €0.2 trillion in
March 2020.

and digital transitions. While the plan has yet to be
ratified by national parliaments, it is expected that
the majority of resources will be allocated between
2021 and 2023 and that the maximum volume of
the loans for each member state will not exceed 6.8
percent of its gross national income.

In addition, the ECB has introduced a range of
supervisory measures in response to COVID-19.
First, the ECB provided capital relief measures,
which are estimated to temporarily free up
roughly €120 billion of CET1 capital. The ECB
has also provided supervisory flexibility regarding
the treatment of non-performing loans (NPLs),
provided guidance to limit the procyclical effects
of loss provisioning under International Financial
Reporting Standards (IFRS) 9, and recommended
that banks refrain from making dividends payments
until 2021. In combination, these countercyclical
measures could act as shock absorbers and
mitigate the tightening of financing conditions for
households and businesses.

As of the end of the second quarter of 2020, the
euro area general government debt totaled €11
trillion, up from €10 as of the second quarter of
2019. Within the euro area, Italian, French, and
German debt outstanding totaled €2.5 trillion,
€2.6 trillion, and €2.3 trillion, respectively, or 149
percent, 114 percent, and 67 percent of GDP. Debt
outstanding for all euro area economies is projected
to rise in the coming quarters as fiscal relief efforts
to tackle COVID-19 take hold.

On the fiscal front, the EU announced a historic
plan to help aid member states’ economic recovery
from COVID-19. The recovery plan, which was
agreed upon by EU leaders on July 21, 2020, permits
the European Commission to borrow up to €750
billion on behalf of member states. Of this amount,
€390 billion would be dispersed as grants, while
the remaining €360 billion would be dispersed as
loans. The plan should provide heavily indebted
member states additional fiscal space to support
economic recovery from the COVID-19 pandemic.
To participate, member states must prepare national
recovery and resilience plans, and a large portion of
the funds is expected to support investment in green
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At the national level, euro area member states have
also instituted a broad set of fiscal measures to
help mitigate the direct economic impact of the
COVID-19 pandemic. Importantly, several euro
area economies have implemented job retention
schemes in order to limit households’ loss of income
and firms’ wage costs during the pandemic. In
addition, euro area member states have supported
businesses through loan guarantee programs and
have introduced active tax and spending measures
to support the recovery.

Yields on European sovereign bonds, which fell
to record lows in mid-2019, rose slightly in late
2019 and early 2020 (Chart 3.7.2.6). However,
during the March 2020 market stress, yields
on highly-rated European sovereign bonds
plunged again, and by mid-March, the 10year German bond (Bund) fell to a record -84
basis points. At the same time, spreads across
European sovereigns widened. Beginning in
late February, the spread between Italian (BTP)
and Bund yields widened as investors grew
concerned about the outbreak in northern Italy
(Chart 3.7.2.7). The spread between BTPs and
Bunds topped out at around 2.8 percent in
mid-March and has since more than retraced its
gains following the ECB’s launch of PEPP and
the announcement of the EU-wide fiscal relief
package.

United Kingdom

On January 31, 2020, the UK officially exited
the EU under the Withdrawal Agreement. As
part of the Withdrawal Agreement, the UK
and EU agreed to a transition period until
December 31, 2020, during which the UK is
not in the EU but retains all of the rights and
obligations of an EU member. While the focus
has since shifted to handling the COVID-19
pandemic, the post-Brexit transition period has
not been extended and, absent any agreement,
UK-EU trade will revert to World Trade
Organization rules at year-end.

3.7.2.6 Euro Area 10-Year Sovereign Yields
3.7.2.6 Euro Area 10-Year Sovereign Yields
Percent
5
Italy
Spain
4
France
Germany
3

As Of: 30-Sep-2020

Percent
5
4
3

-1
Jan:2015 Jan:2016

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

-1

Source: Reuters, Haver Analytics

3.7.2.7 Euro Area 10-Year Spreads
3.7.2.7 Euro Area 10-Year Spreads
Percent
5

As Of: 30-Sep-2020

Italy (left axis)
Spain (left axis)
France (left axis)

Percent
20
Greece (right axis)
Ireland (left axis)
Portugal (left axis) 16

0
2015

2016

2017

Source: Reuters, Haver Analytics

2018

2019

2020

Note: Calculated as the weekly average
spread between local 10Y and German 10Y.

Similar to other European countries, the UK
was severely impacted by COVID-19. UK GDP
fell by a cumulative 21 percent in the first half
of 2020, rivaling Spain as the economy most
negatively impacted by the pandemic. To help
keep workers employed during the COVID-19
related lockdowns, the UK government
instituted a policy to cover 80 percent of
furloughed workers’ monthly salaries up to
a ceiling. Given that furloughed workers are
considered employed, the UK unemployment
rate has remained relatively stable and was
reported at 4.8 percent between July and
September 2020.

Fina nc ia l De v el opment s

133

3.7.2.8 UK COVID-19 Business Loan Schemes
3.7.2.8 UK COVID-19 Business Loan Schemes
Billions of GBP
70

60
50

As Of: 18-Oct-2020

Billions of GBP
70

CLBILS
CBILS
BBLS

60
50

0
May:2020

Jun:2020

Jul:2020

Aug:2020

Sep:2020

Oct:2020

Note: Bounce Back Loan Scheme (BBLS), Coronavirus Large
Business Interruption Loan Scheme (CLBILS), Coronavirus
Business Interruption Loan Scheme (CBILS). Data reported
monthly instead of weekly after August 16, 2020.

Source: HM Treasury

3.7.2.9 Japanese Consumer Price Inflation
3.7.2.9 Japanese Consumer Price Inflation
Percent
3

As Of: Sep-2020

Percent
3

-1

-2

-3
2005

2008

Source: Bank of Japan,
Haver Analytics

2011

2014

2017

2020

-3

Note: Data represents year-over-year percentage
change. CPI excludes fresh food and is adjusted for the
consumption tax increase that took effect in April 2014.

At the same time, the UK government has
launched three separate loan schemes to
facilitate businesses’ access to credit (Chart
3.7.2.8). The Bounce Back Loan Scheme is
aimed at micro businesses and includes a
100 percent government guarantee, while
the Coronavirus Business Interruption Loan
Scheme and Coronavirus Large Business
Interruption Loan Scheme, which are aimed
at small and medium-sized enterprises (SMEs)
and larger businesses, are backed by an 80
percent government guarantee. As of October
18, aggregate lending under these three
schemes totaled £62 billion.
The Bank of England (BOE) has also
introduced a range of measures to respond to
the economic shock from COVID-19. On March
10, the BoE Monetary Policy Committee voted
to reduce its bank rate from 75 basis points to
25 basis points and to introduce a new Term
Funding Scheme with additional incentives for
SMEs, financed by the issuance of central bank
reserves. In addition, the BOE Financial Policy
Committee reduced the UK countercyclical
capital buffer rate to 0 percent and the BOE
Prudential Regulation Authority set out its
supervisory expectation that banks should not
increase dividends or other distributions, such
as bonuses.

Japan

Japanese economic activity fell significantly
due to COVID-19 related lockdowns. In the
third quarter of 2020, Japanese real GDP fell by
5.9 percent compared to the third quarter of
2019. Between 2017 and 2019, inflation in Japan
remained positive but has since turned negative
and stood at -0.7 percent as of September 30,
2020 (Chart 3.7.2.9).
Prior to the pandemic, the Bank of Japan (BOJ)
eased its monetary stance by switching from
an outcome-based forward guidance policy to
an open-ended policy, noting that it expected
to keep policy rates at current levels or to
reduce them so long as uncertainties remained
regarding reaching the 2 percent inflation
target. The BOJ has maintained its policy rate
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at -0.1 percent since January 2016. In addition,
the BOJ continued to follow its policy of yield
curve control whereby the BOJ will purchase
JGBs so that the 10-year JGB yield remains at
around zero percent. Since the introduction of
the BOJ’s yield curve control policy in 2016, the
yield on 10-year JGBs has been little changed
(Chart 3.7.2.10).
On March 26, 2020, the BOJ announced that
it would enhance monetary easing through
a number of policy measures, including
increasing purchases of Japanese government
bonds (JGBs), easing access to U.S. dollar
funds, purchasing CP and corporate bonds,
establishing a new operation to provide
loans against corporate debt, and by actively
purchasing exchange-traded funds and
Japanese REITs.

3.7.2.10 Japan 10-Year Government Bond Yield
3.7.2.10 Japan 10-Year Government Bond Yield
Basis Points
160

As Of: 30-Sep-2020

Basis Points
160

120

-40
2010

2012

2014

2016

2018

2020

-40

Source: Bloomberg, L.P.

At subsequent meetings, the BOJ announced
the expansion of its CP and corporate bond
purchase programs along with the introduction
of a new operation to support bank lending
to SMEs. In total, the BOJ’s COVID-19
support programs amount to ¥110 trillion, or
approximately $1 trillion. Of this amount, ¥20
trillion is in the form of CP and corporate bond
buying programs while the remaining ¥90
trillion is in the form of lending programs.
In addition to the BOJ’s monetary response,
the Japanese Financial Services Agency (JFSA)
has provided guidance with regard to bank
capital requirements in light of the COVID-19
pandemic. Specifically, the JFSA confirmed that
banks can use capital buffers when necessary
to maintain lending volume. The JFSA has
also confirmed that certain rescue lending
activity would be risk weighted at 0 percent,
that it would take a flexible approach to banks
breaching the liquidity coverage ratio, and
that the JFSA and BOJ would temporarily
exclude central bank deposits from the leverage
ratio exposure measure. Finally, the Japanese
government announced a series of fiscal
packages to support its economy, including cash
handouts to individuals, subsidies to affected

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135

3.7.3.1 2020 Real GDP Revisions for Developing Economies

3.7.3.1 2020 Real GDP Revisions for Developing Economies
Percent
12

Percent
12
October 2020 IMF Forecast
October 2019 IMF Forecast

-4

-8

-12

Aggregate

EM Asia

EM Europe

Latin
America

Middle East
Sub& Central Saharan
Asia
Africa

Source: IMF WEO

-12

3.7.3.2 COVID-19 Impact on 2020 Current Account Balances

3.7.3.2 COVID-19 Impact on 2020 Current Account Balances
Percent of GDP
8

Percent of GDP
8

Net Impact
Oil Effect
Tourism & Remittances

Source: IMF July 2020
External Sector Report

CHN

KOR

PAK

ARG

BRA

TUR

ZAF

PER

POL

MEX

COL

-8

RUS

-8

MYS

-4

THA

-4

EGY

Note: Estimated net direct impact of specific factors
on current account balances for select EMEs.

3.7.3.3 Emerging Market Sovereign Bond Spreads
3.7.3.3 Emerging Market Sovereign Bond Spreads
Basis Points
1000
800

As Of: 30-Sep-2020
Latin America
Europe
Asia

800

600

400

200

0
2013

2014

2015

2016

2017

Source: JP Morgan, Haver Analytics

136

Basis Points
1000

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2018

2019

2020

Note: JP Morgan EMBI+ Sovereign
Spreads indices for each region.

firms, and the introduction of loan guarantee
programs.

3.7.3

Emerging Market and Developing
Economies

Similar to advanced economies, EMEs
experienced a sharp contraction in economic
output in the first half of 2020. According
to the IMF’s October 2020 WEO update,
emerging and developing economies, which
were projected to grow by approximately 4.6
percent in 2020, are now projected to contract
by 3.3 percent (Chart 3.7.3.1). Latin American
economies, which are sensitive to commodity
price fluctuations and have been hard hit by the
COVID-19 pandemic, are projected to contract
by 8.1 percent in 2020. In aggregate, emerging
Asian economies have had more success in
containing the spread of COVID-19, permitting
authorities to lift lockdowns relatively quickly.
Comparatively, emerging Asian economies are
projected to contract by 1.7 percent in 2020.
In the years following the 2013 Taper Tantrum,
most EMEs narrowed current account deficits
and built up reserves. Nevertheless, certain
EMEs remained vulnerable to external shocks,
and those reliant on remittances, tourism, or
higher commodity prices are likely to see a
deterioration in their external balances (Chart
3.7.3.2). Additionally, EMEs typically have less
fiscal capacity relative to advanced economies to
respond to the economic fallout associated with
the COVID-19 pandemic, complicating both the
health response and the economic recovery.

Spreads on USD-denominated sovereign bonds
in all emerging market regions spiked sharply
in March 2020 as investors repriced risk assets
given the dimming global economic outlook
(Chart 3.7.3.3). Latin American spreads
surged to 800 basis points, while spreads
for emerging Asia and emerging Europe
roughly doubled to 340 basis points and 580
basis points, respectively. Spreads on USDdenominated bonds have since compressed
as foreign investor capital outflows subsided
amid improved investor sentiment, in part due

to aggressive policy responses and optimism
around the development of a COVID-19 vaccine
and treatment methods, as well as expectations
that full-scale lockdowns may be avoided. At
the same time, local currency bond spreads
have also compressed amid the launch of
local currency bond purchase programs by
some emerging market central banks aimed at
providing liquidity and supporting local bond
markets. Despite this compression in spreads,
the outlook for emerging market credit has
deteriorated over the past year, and Fitch
downgraded a record number of sovereigns in
the first half of 2020.
While net capital flows to EMEs remained
positive in the first quarter of 2020, portfolio
flows turned negative for the first time since
2015 (Chart 3.7.3.4). During this period, EMEs
witnessed over $50 billion of equity portfolio
outflows, the largest recorded quarterly
outflow in over 15 years, with China and Korea
accounting for nearly half (Chart 3.7.3.5). In
aggregate, equity flows stabilized in the second
quarter of 2020, which can largely be attributed
to sizable inflows into China. Foreign direct
investment (FDI) and bank flows, which tend
to be less volatile, remained positive in the
first quarter of 2020 at $116 billion and $84
billion, respectively. While EMEs continued to
see robust FDI inflows in the second quarter of
2020, bank inflows fell to $5 billion, as Brazil
reported large bank outflows.

3.7.3.4 Foreign Investor Capital Inflows to EMEs
3.7.3.4 Foreign Investor Capital Inflows to EMEs
Billions of US$

As Of: 2020 Q2

Billions of US$

500

375

250

125

-125

-250

Portfolio Inflows
Foreign Direct Investment
2010

2012

2014

2016

-125

Net Flows
Bank Inflows
2018

2020

-250

Source: IMF, Haver Analytics

3.7.3.5 Foreign Investor Portfolio Inflows to EMEs
3.7.3.5 Foreign Investor Portfolio Inflows to EMEs
Billions of US$

As Of: 2020 Q2

Billions of US$

200

200
Debt Inflows
Equity Inflows

150

Net Portfolio Flows

150

100

-50

-100

-50

2010

2012

2014

2016

2018

2020

-100

Source: IMF, Haver Analytics

Low-Income Countries

The G20 and other organizations took action
to relieve credit stress on low-income countries
in response to the COVID-19 crisis. In May
2020, the G20 and Paris Club initiated the Debt
Service Suspension Initiative (DSSI), whereby
official bilateral creditors were encouraged
to postpone debt service payments to eligible
low-income countries through the end of
2020. In October, the G20 and Paris Club
extended the DSSI through June 2021, with
possible extensions through the end of 2021.
As of September 30, 2020, 43 countries have
requested forbearance under the DSSI, freeing
up $5 billion in fiscal space to fund social,
Fina nc ia l De v el opment s

137

3.7.3.6 Chinese Overseas Lending
3.7.3.6 Chinese Overseas Lending
Billions of US$
1750
1500

As Of: 2019

Billions of US$
1750

FDI (Debt)
Trade Credit
Loans

1500

1250

1000

750

500

250

2004

2007

2010

Source: State Administration of
Foreign Exchange, Haver Analytics

2013

2016

2019

Note: FDI (Debt) reported
from 2011 onwards.

health, and economic measures to respond
to the pandemic. Additionally, the IMF has
doubled access to its emergency financing
facilities, allowing it to meet increased demand
for financial assistance during the pandemic.
These measures should help support lowincome countries that do not have access to
the same monetary and fiscal policy tools as
advanced economies. Nevertheless, additional
debt relief measures may be necessary, and any
restructuring could be complicated due to the
increasing reliance on non-Paris Club creditors.
Over the past decade, non-Paris Club creditors
have become a significant source of external
financing for low-income countries. In
particular, China has significantly increased
overseas lending as part of its Belt and Road
Initiative. According to the People’s Bank of
China (PBOC), Chinese overseas lending in
the form of direct loans, trade credit, and
FDI debt exceeded $1.5 trillion as of year-end
2019 (Chart 3.7.3.6). However, there is limited
transparency regarding the destination and
terms of Chinese overseas lending, and the
actual amount of lending may significantly
exceed what is reported. While China has
agreed to participate in the G20’s temporary
DSSI, the full scope of participation in unclear.
For example, China has not suspended debt
payments due to China Development Bank
(CDB) as part of the official sector DSSI,
instead classifying CDB as a commercial
creditor. The lack of transparency on Chinese
overseas lending and on its participation in the
current DSSI potentially complicates any future
debt relief initiatives.
At the same time, low-income countries have
increasingly relied on commercial creditors as
a source of financing via the Eurobond market.
According to the IMF, the issuance of foreign
currency-denominated bonds by low-income
countries has almost tripled from an average of
$6 billion between 2012 and 2016 to an average
of $16 billion between 2017 and 2018. While
the G20 has called upon private creditors to
participate in debt relief efforts, private sector
participation has been limited.

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China

In response to the COVID-19 outbreak,
Chinese authorities imposed strict containment
measures, which led to a sharp drop in
economic activity. Chinese economic growth,
which has been slowing in recent years,
contracted by 6.8 percent year-over-year in the
first quarter of 2020 (Chart 3.7.3.7). To support
the Chinese economy through the COVID-19
pandemic, the Chinese government announced
RMB 4.6 trillion of discretionary fiscal
spending, worth roughly 5 percent of GDP.
Concurrently, the PBOC provided moderate
stimulus and acted to safeguard financial
market stability.
In mid-February, Chinese authorities began
to lift strict lockdown measures outside of
Hubei Province, and by the third quarter
of 2020, real GDP growth rebounded to 4.9
percent year-over-year. Despite the robust
rebound in Chinese manufacturing, the
domestic consumption recovery was muted, and
household consumption remained below prepandemic levels.
Prior to the COVID-19 pandemic, Chinese
authorities were taking steps to encourage
financial deleveraging, leading to a
stabilization in the level of credit provided to
the nonfinancial private sector as a percent of
GDP. Nevertheless, the stock of nonfinancial
private sector debt continued to increase and
nonfinancial debt remained above 200 percent
of GDP as of the fourth quarter of 2019 (Chart
3.7.3.8). In 2020, Chinese regulators paused
their deleveraging campaign as authorities try
to balance COVID-19 related credit support
with longer-term financial stability goals. As a
result, Chinese credit growth, which had been
trending downward in recent years, accelerated
considerably between March and September
2020 (Chart 3.7.3.9). A significant portion
of recent credit growth may be attributed to
authorities calling on commercial banks to
forgo upwards of RMB 1.5 trillion in profits in
2020 to support firms and the real economy
by offering lower lending rates, cutting fees,
deferring loan repayments, and granting more

3.7.3.7 Chinese Real GDP Growth and its Components

3.7.3.7 Chinese Real GDP Growth and its Components
Percent
20

As Of: 2020 Q3

Percent
20

Manufacturing

Services
Total

Agriculture

-5

-10
2005

2008

2011

Source: China National Bureau
of Statistics, Haver Analytics

2014

2017

2020

-10

Note: Year-over-year percentage change.

3.7.3.8 Credit to the Chinese Nonfinancial Private Sector

3.7.3.8 Credit to the Chinese Nonfinancial Private Sector
Percent of GDP
240

As Of: 2020 Q1

Percent of GDP

Nonbank Lending
Bank Lending

200
160
120

80
40

0
0
2008
2010
2012
2014
2016
2018
2020
Source: China National Bureau of
Statistics, BIS, Haver Analytics
Note: Rolling 4-quarter sum of GDP.

3.7.3.9 Chinese Credit Growth
3.7.3.9 Chinese Credit Growth
Percent
25

As Of: Sep-2020

Percent
25

Total Social Financing (New Definition)

Total Social Financing (Old Definition)

5
2013

2014

2015

Source: PBOC, CCDC,
Haver Analytics, Staff
Calculations

2016

2017

2018

2019

2020

Note: Calculated as the year-over-year percentage change in total
social financing (TSF) flows since 2002. TSF refers to the total volume
of financing provided by the financial system to the real economy. TSF
(old definition) excludes loan write-offs, ABS of depository institutions,
and local government special bonds.

Fina nc ia l De v el opment s

139

unsecured loans. Additionally, the cut in reserve
requirements and a seeming commitment by the
PBOC to provide liquidity may be helping banks to
boost lending. At the same time, the government
is supporting small and midsize banks to replenish
their capital through various channels, including
issuing ordinary shares, preferred shares, and
perpetual bonds, in addition to the new special local
government bonds.
Prior to the COVID-19 pandemic, the official NPL
ratio at Chinese commercial banks stood at 1.9
percent, although many market observers believe
that the true NPL ratio was materially higher. Relief
efforts to help support SMEs during the COVID-19
pandemic may have further exacerbated any
underreporting of NPLs as current rules allow banks
to book interest payments even though the loans
were in forbearance. Consequently, the aggregate
NPL ratio for Chinese commercial banks is little
changed through the second quarter of 2020.
In June 2020, Chinese authorities stated that they
will accelerate the settlement of NPLs in the second
half of 2020, urging banks to make a bona fide
classification of their assets. At the same time, China
Banking and Insurance Regulatory Commission
authorities stated that some small- and mediumsized financial institutions are facing deteriorating
asset quality and NPLs are estimated to increase
by approximately 50 percent by year-end. Chinese
central authorities will also allow local governments
to recapitalize small and medium banks by issuing
new special local government bonds.
On January 15, 2020, the United States and China
signed the Phase One trade agreement, whereby
China agreed to increase purchases of American
products and services in 2020 and 2021 by at least
$200 billion above 2017 levels, and the United States
agreed to lower some tariffs on Chinese goods. In
addition, China committed to provide improved
access to China’s financial services market for U.S.
companies and provide stronger legal protections
for U.S. companies operating in China, particularly
concerning intellectual property rights and
technology transfer.

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In May 2020, Chinese authorities introduced a
national security law for Hong Kong in an attempt
to quell anti-government protests. The law, which
was passed by the National People’s Congress in
June, bypasses Hong Kong’s Legislative Council
and criminalizes any act of secession, subversion,
terrorism, or collusion with foreign or external
forces. The broad nature of the National Security
Law gives Beijing additional control over Hong
Kong’s judicial system, eroding the city’s rule of law,
and threatens the city’s status as a global financial
center.
While the Hong Kong dollar initially came under
pressure in the forward markets, fears of significant
capital outflows have not materialized, as investors
are still assessing the impact of the National Security
Law. Instead, possibly at the direction of Chinese
authorities, inflows from mainland investors into
Hong Kong equity markets have supported financial
markets, and the Hong Kong dollar has been
trading at the strong end of its trading band in
recent months.

4
4.1

ouncil Activities and
C
Regulatory Developments

Select Policy Responses to Support
the Economy

As parts of the economy shut down and stress
spread through financial markets, policymakers
acted to minimize the health and economic
effects of the pandemic.

CARES Act
On March 27, the CARES Act was signed
into law. The CARES Act authorized over $2
trillion to address COVID-19 and to support
the economy, households, businesses, and other
entities. The CARES Act supported businesses
through programs such as the PPP, which
provides a direct incentive for small businesses
to keep their workers on the payroll, along
with significant additional funding for existing
loan programs. The CARES Act also supported
households and businesses through expanded
unemployment benefits, cash payments to
certain eligible households, several types of tax
relief, forbearance for certain homeowners,
and foreclosure and evictions moratoria for
certain households. The statute also provided
financial assistance to airlines and related
firms and businesses critical to maintaining
national security; financial regulatory relief for
community banks and certain other financial
institutions; and appropriated $454 billion
to Treasury to support certain facilities and
programs established by the Federal Reserve. In
addition, the CARES Act provided significant
funding for state and local governments and
health care providers.

Monetary Policy
The FOMC lowered rates on March 3 and again
on March 15 to the current level close to zero.
The FOMC stated that it would keep rates low
until it was confident that the economy had
weathered recent events and was on track to
achieve its maximum employment and price
stability goals. It also stated that it was prepared

to use its full range of tools to support the flow of credit
to households and businesses in support of its policy
mandates. In addition, the FOMC engaged in Treasury
and agency MBS purchases to support smooth market
functioning.

Liquidity Facilities and Programs
To address the liquidity squeeze associated with
investors’ shift to cash and liquid assets, the Federal
Reserve established liquidity facilities and programs
under section 13(3) of the Federal Reserve Act, with
Treasury’s approval.
On March 17, the Federal Reserve announced the
establishment of the Commercial Paper Funding Facility
(CPFF) to ensure the functioning of the commercial
paper market so that a broad range of companies
would have access to credit and funding to meet their
operational needs. Treasury provided $10 billion of
credit protection to the Federal Reserve. The CPFF is
scheduled to expire on March 17, 2021.
Also on March 17, the Federal Reserve announced the
establishment of the Primary Dealer Credit Facility
(PDCF) to offer overnight and term funding to primary
dealers so that they may support market functioning and
facilitate credit availability. The PDCF is scheduled to
expire on December 31, 2020.
On March 18, the Federal Reserve announced the
establishment of the MMLF to support market
functioning and credit provision to the economy by
helping money market funds meet redemption demands
by investors. The Treasury Department provided $10
billion of credit protection to the Federal Reserve. The
MMLF is scheduled to expire on December 31, 2020.
On April 9, the Federal Reserve announced the
establishment of the Municipal Liquidity Facility (MLF)
to assist eligible state and local governments manage
cash flow issues by offering up to $500 billion in lending.
Treasury provided $35 billion of credit protection to
the Federal Reserve. The MLF is scheduled to expire on
December 31, 2020.
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Credit Market Facilities and Programs
The Federal Reserve also established several
facilities and programs under section 13(3) of the
Federal Reserve Act to ensure the flow of credit to
households, nonprofits, and businesses.
On March 23, the Federal Reserve announced the
establishment of the Term Asset-Backed Securities
Loan Facility (TALF) to support the flow of credit
by enabling the issuance of asset-backed securities
backed by certain types of loans. Treasury provided
$10 billion of credit protection to the Federal
Reserve. The TALF is scheduled to expire on
December 31, 2020.
On March 23, the Federal Reserve also announced
the establishment of the Primary Market Corporate
Credit Facility (PMCCF) and the Secondary Market
Corporate Credit Facility (SMCCF). The PMCCF
supports credit to larger employers for bond
and syndicated loan issuance, and the SMCCF
supports credit to large employers by supporting
liquidity for outstanding corporate bonds. Both
facilities were initially open to investment grade
companies and, on April 9, extended to include
certain high-yield, rated companies that were
investment grade as of March 22, 2020. Treasury
provided $50 billion of credit protection to the
Federal Reserve for the PMCCF and $25 billion for
the SMCCF. Both facilities are scheduled to expire
on December 31, 2020.
On April 9, the Federal Reserve announced
the establishment of the Paycheck Protection
Program Lending Facility (PPPLF) to increase the
effectiveness of the SBA’s PPP by supplying liquidity
to financial institutions participating in PPP. The
PPPLF extends credit to eligible financial institutions
that pledge PPP loans as collateral. The PPPLF is
scheduled to expire on December 31, 2020.
On April 9, the Federal Reserve also announced the
establishment of the Main Street Lending Program
(MSLP) to support lending to small and mediumsized businesses. The Federal Reserve expanded
the MSLP to include nonprofits in July. The MSLP
operates through five facilities. Treasury provided
$75 billion in credit protection to the Federal

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Reserve for the MSLP. The facilities are scheduled to
expire on December 31, 2020.

Offshore Dollar Funding Markets
The Federal Reserve also acted to provide liquidity
to offshore dollar funding markets that were under
stress.
On March 15, the Federal Reserve, in coordination
with the Bank of Canada, Bank of England, Bank
of Japan, the European Central Bank, and the Swiss
National Bank, announced two changes to enhance
standing U.S. dollar swap arrangements: pricing was
lowered to OIS +25 basis points and 84-day maturity
auctions commenced.
On March 19, the Federal Reserve announced the
establishment of temporary U.S. dollar liquidity
arrangements with the Reserve Bank of Australia,
the Banco Central do Brasil, the Danmarks
Nationalbank (Denmark), the Bank of Korea, the
Banco de Mexico, the Norges Bank (Norway),
the Reserve Bank of New Zealand, the Monetary
Authority of Singapore, and the Sveriges Riksbank
(Sweden). Like the existing arrangements with
other central banks, the facilities help address
strains in global U.S. dollar funding markets.
On March 20, the Federal Reserve, again in
coordination with the Bank of Canada, Bank of
England, Bank of Japan, the European Central
Bank, and the Swiss National Bank, announced that
one-week swaps would be offered daily.
On March 31, the Federal Reserve announced the
establishment of the temporary FIMA Repo Facility.
The FIMA Repo Facility allows certain central banks
and other international monetary authorities to
enter into repurchase agreements with the Federal
Reserve. In addition to supporting global U.S. dollar
funding markets, the facility is intended to support
the smooth functioning of the U.S. Treasury market
by offering an alternative source of U.S. dollars to
sales of Treasury securities in the open market.

Federal Reserve Balance Sheet
As a result of its policy actions, the Federal Reserve’s
balance sheet has increased significantly, totaling
over $7 trillion in assets as of September 30, 2020

(Chart 4.1.1). Most of the increase in 2020
is due to its Treasury and MBS purchases.
After peaking at approximately $130 billion
early in the crisis, the Federal Reserve’s
purchases in support of its liquidity and credit
facilities were approximately $100 billion
as of September 1, 2020 (Chart 4.1.2). The
peak amount outstanding for the current
facilities is significantly below the peak amount
outstanding for similar facilities that were
created during the 2008 financial crisis; many
of the credit facilities, however, were not created
in the 2008 financial crisis.

4.2

Council Activities

4.2.1 Risk Monitoring and Regulatory
Coordination
The Dodd-Frank Act charges the Council
with the responsibility to identify risks to
U.S. financial stability, promote market
discipline, and respond to emerging threats
to the stability of the U.S. financial system.
The Council also has a duty to facilitate
information sharing and coordination among
member agencies and other federal and state
agencies regarding financial services policy
and other developments. The Council regularly
examines significant market developments and
structural issues within the financial system.
This risk monitoring process is facilitated by
the Council’s Systemic Risk Committee (SRC),
whose participants are primarily member
agency staff in supervisory, monitoring,
examination, and policy roles. The SRC serves
as a forum for member agency staff to identify
and analyze potential risks, which may extend
beyond the jurisdiction of any one agency.
The Council’s Regulation and Resolution
Committee (RRC) also supports the Council in
its duties to identify potential gaps in regulation
that could pose risks to U.S. financial stability.

4.1.1 Total Assets of the Federal Reserve
4.1.1 Total Assets of the Federal Reserve
Trillions of US$
8

As Of: 30-Sep-2020

Trillions of US$
8

0
2008

2010

2012

2014

2016

2018

2020

Note: Wednesday level.

Source: Federal Reserve, FRED

4.1.2 Net Portfolio Holdings of 13(3) Facilities
4.1.2 Net Portfolio Holdings of 13(3) Facilities
Billions of US$
300
250

As Of: 30-Sep-2020

PMCCF & SMCCF
PPP
MMLF

CPFF
PDCF
MSLF

Billions of US$
300
MLF
TALF

250

200

150

100

0
Mar:2020

May:2020

Jul:2020

Source: Federal Reserve, Haver Analytics

Sep:2020

Note: Wednesday level.

The Council leveraged this infrastructure to
respond to the COVID-19 pandemic. With
the onset of the market stresses in March, the
frequency of SRC meetings was increased from
monthly to weekly or bi-weekly for the next

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

Act or are under review in Stage 1 or Stage 2 of the
Council’s designation process.

On March 30, 2020, the Council also convened a
principals-level task force on nonbank mortgage
liquidity to assess potential liquidity strains on
nonbank originators and servicers. Following up
on the task force discussion, the Council formed a
staff-level working group that included non-Council
agencies to facilitate interagency coordination,
additional market monitoring, and enhanced
default planning for the possible failure and
resolution of nonbank mortgage companies.

On December 4, 2019, the Council issued final
interpretive guidance replacing the Council’s
prior interpretive guidance on nonbank financial
company determinations, which was issued in
2012. The new interpretive guidance describes the
approach the Council intends to take in prioritizing
its work to identify and address potential risks to
U.S. financial stability using an activities-based
approach and enhances the analytical rigor and
transparency in the processes the Council intends to
follow if it were to consider making a determination
to subject a nonbank financial company to
supervision by Federal Reserve.

In July 2020, the Council established a working
group composed of staff from Treasury, the Federal
Reserve, and FHFA to assess potential risks related
to the provision of secondary mortgage market
liquidity. The working group focused in particular
on the activities of Fannie Mae and Freddie Mac as
the dominant private secondary market providers
of liquidity through their purchase of mortgages
for securitization and sale as guaranteed MBS. The
working group assessed potential financial stability
risks in the secondary market, as well as whether
those risks are appropriately addressed by regulatory
mitigants. The working group’s analysis informed
the September 25, 2020 Council statement discussed
below.

4.2.2 Determinations Regarding Nonbank Financial
Companies and Activities-Based Approach
One of the Council’s statutory authorities is to
subject a nonbank financial company to supervision
by the Federal Reserve and enhanced prudential
standards if the company’s material financial
distress—or nature, scope, size, scale, concentration,
interconnectedness, or mix of its activities—could
pose a threat to U.S. financial stability. The DoddFrank Act sets forth the standard for the Council’s
determinations regarding nonbank financial
companies and requires the Council to take
into account ten specific considerations and any
other risk-related factors that the Council deems
appropriate when evaluating those companies.
As of the date of this report, no nonbank financial
companies are subject to a final determination by
the Council under Section 113 of the Dodd-Frank
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On September 25, 2020, the Council approved a
statement summarizing its review of the secondary
mortgage market and presenting its key findings.
As noted above, the Council’s review focused in
particular on the activities of the Enterprises.
In conducting the review, the Council applied
the framework for an activities-based approach
described in the December 2019 final interpretive
guidance.
The Council’s review noted the central role the
Enterprises continue to play in the national housing
finance markets, and found that any distress at the
Enterprises that affected their secondary mortgage
market activities, including their ability to perform
their guarantee and other obligations on their MBS
and other liabilities, could pose a risk to financial
stability, if risks are not properly mitigated. The
Council’s review also considered whether the
regulatory framework of the FHFA would adequately
mitigate this potential risk posed by the Enterprises.
FHFA’s recent capital proposal was central to the
Council’s analysis. The Council considered whether
the proposed capital rule is appropriately sized and
structured, given the Enterprises’ risks and their key
role in the housing finance system, and also whether
the proposed capital rule promotes stability in the
broader housing finance system (see Box F).

4.2.3 Operations of the Council
The Dodd-Frank Act requires the Council to
convene no less than quarterly. The Council
held [five] meetings in 2020, including at least
one each quarter. The meetings bring Council
members together to discuss and analyze market
developments, potential threats to financial stability,
and financial regulatory issues. Although the
Council’s work frequently involves confidential
supervisory and sensitive information, the Council
is committed to conducting its business as openly
and transparently as practicable. Consistent with
the Council’s transparency policy, the Council
opens its meetings to the public whenever possible.
The Council held a public session at [three] of
its meetings in 2020. Approximately every two
weeks, the Council’s Deputies Committee, which
is composed of senior representatives of Council
members, convenes to discuss the Council’s
agenda and to coordinate and oversee the work
of the Council’s five other committees. The other
committees are the Data Committee; the Financial
Market Utilities and Payment, Clearing, and
Settlement Activities Committee; the Nonbank
Financial Companies Designations Committee;
the RRC; and the SRC. The Council adopted its
eleventh budget in 2020.

4.3

Safety and Soundness

4.3.1

Enhanced Capital and Prudential Standards
and Supervision

On January 24, 2020, the OCC, Federal Reserve,
and FDIC issued a final rule implementing a
new approach—the standardized approach for
counterparty credit risk (SA-CCR)—for calculating
the exposure amount of derivative contracts under
these agencies’ regulatory capital rule. Under
the final rule, an advanced approaches banking
organization may use SA-CCR or the internal
models methodology to calculate its advanced
approaches total risk-weighted assets, and must
use SA-CCR, instead of the current exposure
methodology, to calculate its standardized total
risk-weighted assets. A non-advanced approaches
banking organization may use the current
exposure methodology or SA-CCR to calculate its
standardized total risk-weighted assets. The final
rule also implements SA-CCR in other aspects of

the capital rule. The final rule requires an advanced
approaches banking organization to use SA-CCR
to determine the exposure amount of derivative
contracts included in the banking organization’s
total leverage exposure, the denominator of
the supplementary leverage ratio. In addition,
the final rule incorporates SA-CCR into the
cleared transactions framework and makes other
amendments, generally with respect to cleared
transactions. The final rule requires advanced
approaches banking organizations to use SA-CCR
beginning January 1, 2022 and permits the option of
using SA-CCR as early as March 31, 2020.
On January 27, 2020, the OCC, Federal Reserve,
and FDIC issued a final rule to implement section
402 of the Economic Growth, Regulatory Relief,
and Consumer Protection Act (EGRRCPA). Section
402 directs these agencies to amend the regulatory
capital rule to exclude from the supplementary
leverage ratio certain funds of banking
organizations deposited with central banks if the
banking organization is predominantly engaged in
custody, safekeeping, and asset servicing activities.

Actions Relating to CARES Act and Federal
Reserve Facilities

Agencies issued a number of regulations pertaining
to the CARES Act and facilities that were established
by the Federal Reserve pursuant to section 13(3) of
the Federal Reserve Act, in response to economic
disruptions caused by COVID-19 and volatility in
U.S. financial markets.
On March 23, 2020, the Federal Reserve, OCC, and
FDIC issued an interim final rule to allow banking
organizations to neutralize the regulatory capital
effects of participating in the MMLF. The MMLF,
established on March 18, 2020, authorized the
Federal Reserve Bank of Boston to extend nonrecourse loans to eligible financial institutions
to purchase certain types of assets from money
market mutual funds in order to provide liquidity
to the money market sector to help stabilize the
financial system. This treatment would extend to the
community bank leverage ratio.
On April 13, 2020, the OCC, Federal Reserve, and
FDIC issued an interim final rule to allow banking
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organizations to neutralize the regulatory capital
effects of participating in the PPPLF. Under the
PPPLF, established on April 9, 2020, each of the
Federal Reserve Banks would extend non-recourse
loans to eligible financial institutions to fund
loans guaranteed by the SBA under the PPP. This
treatment is similar to the treatment extended
previously by the agencies in connection with the
MMLF. In addition, as mandated by section 1102
of the CARES Act, loans originated under the
PPP will receive a zero percent risk weight under
the agencies’ regulatory capital rule, regardless of
whether the lender participates in the PPPLF.
Beginning on April 2, 2020, the SBA issued a
number of interim final rules and guidance
documents to implement the PPP, a new forgivable
loan program created by the CARES Act. The
CARES Act provides for forgiveness of up to the
full principal amount of PPP loans, which are also
guaranteed by the SBA. The PPP provided economic
relief to small businesses nationwide adversely
impacted by the economic effects of COVID-19.
On April 23, 2020, the OCC, Federal Reserve, and
FDIC issued an interim final rule making temporary
changes to the community bank leverage ratio
framework, pursuant to section 4012 of the CARES
Act. Under the temporary change, a banking
organization with a leverage ratio of 8 percent or
greater (and that meets other qualifying criteria)
may elect to use the community bank leverage
ratio framework. The statutory interim final rule
also established a two-quarter grace period for a
qualifying community banking organization whose
leverage ratio falls below the 8-percent community
bank leverage ratio requirement, so long as the
banking organization maintains a leverage ratio of
7 percent or greater. The temporary changes to the
community bank leverage ratio framework would
cease to be effective as of the earlier of December
31, 2020, or the termination date of the national
emergency concerning COVID-19.
Also on April 23, 2020, the OCC, Federal Reserve,
and FDIC issued an interim final rule that provides
a graduated transition to a community bank
leverage ratio requirement of 9 percent from the
temporary 8-percent community bank leverage
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ratio requirement (transition interim final rule).
The transition interim final rule provides that
the community bank leverage ratio will be 8
percent through December 31, 2020, in the event
the statutory interim final rule terminates before
December 31, 2020, 8.5 percent through calendar
year 2021, and 9 percent thereafter. The transition
interim final rule also maintains a two-quarter
grace period for a qualifying community banking
organization whose leverage ratio falls no more than
1 percentage point below the applicable community
bank leverage ratio requirement. The agencies
issued the transition interim final rule to provide
community banking organizations with sufficient
time and clarity to meet the 9 percent leverage ratio
requirement under the community bank leverage
ratio framework while they also focus on supporting
lending to creditworthy households and businesses
given the recent strains on the U.S. economy caused
by COVID-19.
On April 27, 2020, the NCUA issued an interim final
rule to make a conforming amendment to its capital
adequacy regulation following the enactment of
the CARES Act. The CARES Act requires that PPP
loans receive a zero percent risk weighting under the
NCUA’s risk-based capital requirements. To reflect
the statutory requirement, the interim final rule
amends the NCUA’s capital adequacy regulation
to provide that covered PPP loans receive a zero
percent risk weight. The rule provides that if the
covered loan is pledged as collateral for a nonrecourse loan that is provided as part of the PPPLF,
the covered loan can be excluded from a credit
union’s calculation of total assets for the purposes
of calculating its net worth ratio. The rule also
makes a conforming amendment to the definition
of commercial loan in the NCUA’s member business
loans and commercial lending rule. In an additional
interim final rule issued on April 29, the NCUA
made further amendments conforming to the
CARES Act, and introduced changes intended to
make it easier for credit unions to join the NCUA’s
Central Liquidity Facility.
On May 6, 2020, the OCC, Federal Reserve, and
FDIC issued an interim final rule to require banking
organizations to neutralize the effect under the LCR
rule of participating in the MMLF and PPPLF. The

rule was issued to facilitate the use of these Federal
Reserve facilities, and to ensure that the effects of
their use are consistent and predictable under the
LCR rule.
On June 26, 2020, the FDIC issued a final rule
that mitigates the deposit insurance assessment
effects of participating in the PPPLF, MMLF, and
PPP. Specifically, the rule removes the effect of
participation in the PPP and borrowings under the
PPPLF on various risk measures used to calculate
the assessment rate of an insured depository
institution; removes the effect of participation in the
PPP and MMLF program on certain adjustments
to an insured depository institution’s assessment
rate; provides an offset to an insured depository
institution’s assessment for the increase to its
assessment base attributable to participation in
the PPP and MMLF; and removes the effect of
participation in the PPP and MMLF when classifying
insured depository institutions as small, large, or
highly complex for assessment purposes.

Additional Guidance and Regulatory Actions in
Response to COVID-19
Finally, agencies issued numerous additional
guidance statements and regulatory changes in
response to the economic and financial impact
of COVID-19, including temporary relaxations of
prudential standards and supervisory requirements
and modifications of compliance deadlines.
In the second week of March 2020, the Federal
Reserve encouraged financial institutions to
review its SR letter 13-6 / CA letter 13-3, published
in March 2013, entitled “Supervisory Practices
Regarding Banking Organizations and their
Borrowers and Other Customers Affected by a
Major Disaster or Emergency.” On March 13, the
FDIC issued Financial Institution Letter 17-2020,
encouraging financial institutions supervised by
the FDIC to take prudent steps to assist customers
and communities affected by COVID-19. Agencies
encouraged banking organizations to use the
Federal Reserve discount window and the capital
and liquidity buffers designed to enable banking
organizations to continue to serve households and
businesses and support the economy in adverse
situations.

On March 20, 2020, the Federal Reserve, OCC,
and FDIC issued an interim final rule revising
the definition of eligible retained income for all
depository institutions, BHCs, and savings and
loan holding companies subject to the agencies’
capital rule. The revised definition would make any
automatic limitations on capital distributions that
could apply under the agencies’ capital rules more
gradual. The definition was revised again by an
interim final rule issued the following week to make
any automatic limitations on capital distributions
that could apply under the total loss-absorbing
capacity (TLAC) rule more gradually.
On March 22, 2020, the Federal Reserve, CSBS,
CFPB, FDIC, NCUA, and OCC issued an interagency
statement encouraging financial institutions to offer
prudent loan modification programs to mitigate
adverse impacts of COVID-19 on borrowers, improve
loan performance, and reduce credit risk. Agencies
noted that banks may presume that borrowers are
not experiencing financial difficulty when shortterm loan modifications (for example, six months)
are made on a good faith basis in response to
COVID-19. If those borrowers were current prior to
any relief provided, the loan modifications are not
considered troubled debt restructurings (TDRs).
Such modifications include payment deferrals, fee
waivers, extensions of repayment terms, or other
insignificant delays in payment. Agencies said
examiners would not automatically adversely risk
rate credits that are affected by loan modifications,
and regardless of whether or not modifications
are considered TDRs, or are adversely classified,
examiners would not criticize prudent loan
modification efforts. In the same week, the Federal
Reserve outlined adjustments to its supervisory
approach that would prioritize outreach and
monitoring while temporarily reducing examination
activities, particularly for smaller banks. Large
banks were instructed to submit their capital analysis
plans, while additional time would be granted to
resolve non-critical, existing supervisory findings.
On March 25, 2020, the OCC issued an interim final
rule revising the agency’s short-term investment
fund (STIF) rule for national banks acting in a
fiduciary capacity. The rule allowed the OCC to
authorize banks to temporarily extend the maturity
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limits of STIFs in light of a period of significant
stress negatively affecting the ability of banks to
operate in compliance with the maturity limits
identified in the rule. The OCC simultaneously
announced an order temporarily extending the
maturity limits for STIFs affected by the market
effects of COVID-19 upon certain conditions,
including a determination by the bank that it would
be acting in the best interests of the STIF under
applicable law. The order extended the weighted
average maturity and weighted average life of STIF
investment portfolios to allow national banks to
operate affected STIFs on a limited-time basis with
increased maturity limits until July 20, 2020.
On March 27, 2020, the Federal Reserve, OCC, and
FDIC announced that institutions were permitted
to adopt early the SA-CCR rule for the reporting
period ending March 31, on a best-efforts basis,
to help improve market liquidity. SA-CCR was
previously set to go into effect on April 1, 2020. On
April 7, the Federal Reserve, FDIC, NCUA, OCC,
and CFPB issued the “Interagency Statement on
Loan Modifications and Reporting for Financial
Institutions Working with Customers Affected by
the Coronavirus (Revised)” to clarify the interaction
between the March 22, 2020, interagency statement
and section 4013 of the CARES Act. Section 4013
created a forbearance program for federally backed
mortgage loans, protected borrowers from negative
credit reporting due to loan accommodations
related to the National Emergency, and provided
financial institutions the option to temporarily
suspend certain requirements under the U.S.
generally accepted accounting principles (GAAP)
related to TDR for a limited period of time to
account for the effects of COVID-19.
On April 14, 2020, the Federal Reserve issued an
interim final rule that revises, on a temporary basis
for BHCs, savings and loan holding companies,
and U.S. intermediate holding companies of
foreign banking organizations, the calculation
of total leverage exposure, the denominator of
the supplementary leverage ratio in the Federal
Reserve’s capital rule, to exclude the on-balance
sheet amounts of U.S. Treasury securities and
deposits at Federal Reserve Banks. This exclusion
has immediate effect and will remain in effect
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through March 31, 2021. The rule was adopted to
allow BHCs, savings and loan holding companies,
and intermediate holding companies subject to the
supplementary leverage ratio increased flexibility to
continue to act as financial intermediaries. The tier
1 leverage ratio is not affected by this rulemaking.
On April 17, 2020, the FDIC, OCC, and Federal
Reserve issued an interim final rule that allows
institutions supervised by the agencies to defer
obtaining an appraisal or evaluation for up to 120
days after the closing of certain residential and
commercial real estate loans.
On April 21, 2020, the NCUA issued a temporary
final rule temporarily raising the maximum
aggregate amount of loan participations that a
federally insured credit union (FICU) may purchase
from a single originating lender to the greater of
$5,000,000 or 200 percent of the FICU’s net worth.
The NCUA also temporarily suspended limitations
on the eligible obligations that a federal credit
union (FCU) may purchase and hold. In addition,
given physical distancing policies implemented in
response to the crisis, the agency tolled the required
timeframes for the occupancy or disposition of
properties not being used for FCU business or
that have been abandoned. These temporary
modifications were set in place until December 31,
2020, unless extended.
On May 28, 2020, the Federal Reserve issued a
final rule that amends compliance dates related to
Single-Counterparty Credit Limits for BHCs and
Foreign Banking Organizations (final SCCL rule),
regarding the SCCL applicable to a foreign banking
organization’s combined U.S. operations only. The
rule changed initial compliance dates of January 1,
2020, for a foreign banking organization that has
the characteristics of a global systemically important
banking organization (G-SIB), and July 1, 2020, for
any other foreign banking organization subject to
the final SCCL rule, to July 1, 2021 and January 1,
2022, respectively.
Also on May 28, 2020, the NCUA issued an
interim final rule that temporarily modifies its
prompt corrective action (PCA) regulations to
help ensure that FICUs would remain operational

and liquid during the COVID-19 crisis. The first
temporary change enables the agency to issue
an order applicable to all FICUs to waive the
earnings retention requirement for any FICU that
is classified as adequately capitalized. The second
modifies its regulations with respect to the specific
documentation required for net worth restoration
plans for FICUs that become undercapitalized.
These temporary modifications were set in place
until December 31, 2020.
On June 1, 2020, the OCC, Federal Reserve, and
FDIC issued an interim final rule temporarily
revising the supplementary leverage ratio calculation
for depository institutions. Under the interim
final rule, any depository institution subsidiary of
a U.S. global systemically important BHC or any
depository institution subject to Category II or
Category III capital standards may elect to exclude
temporarily U.S. Treasury securities and deposits
at Federal Reserve Banks from the supplementary
leverage ratio denominator. Additionally, under
this interim final rule, any depository institution
making this election must request approval from
its primary federal banking regulator prior to
making certain capital distributions so long as the
exclusion is in effect. The interim final rule, like
the related rule issued on April 14, was adopted
to allow depository institutions that elect to opt
into this treatment additional flexibility to act as
financial intermediaries during this period of
financial disruption. The rule will remain in effect
through March 31, 2021 and does not affect the tier
1 leverage ratio.
Also on June 1, 2020, the OCC, Federal Reserve,
FDIC, and NCUA issued final guidance for
credit risk review. This guidance is relevant to
all institutions supervised by the agencies and
replaces Attachment 1 of the 2006 Interagency
Policy Statement on the Allowance for Loan and
Lease Losses. The final guidance discusses sound
management of credit risk, a system of independent,
ongoing credit review, and appropriate
communication regarding the performance of the
institution’s loan portfolio to its management and
board of directors.

On June 5, 2020, the OCC issued a final rule
to strengthen and modernize the Community
Reinvestment Act (CRA) by clarifying and
expanding the activities that qualify for CRA credit;
updating where activities count for CRA credit;
creating a more consistent and objective method
for evaluating CRA performance; and providing
for more timely and transparent CRA-related
data collection, recordkeeping, and reporting. In
addition, the OCC, Federal Reserve, and FDIC
released a statement in March noting that the
agencies would favorably consider retail banking
services and retail lending activities that meet the
needs of low- and moderate-income individuals,
small businesses, and small farms affected by
COVID-19 and that are consistent with safe and
sound banking practices and applicable laws,
including consumer protection laws. Such activities
could include offering short-term, unsecured credit
products for creditworthy borrowers.
On June 15, 2020, the Federal Reserve announced
that it would resume examination activities for
all banks, after having reduced examination
activity in March. Also in June, the Federal
Reserve, FDIC, NCUA, OCC, and state regulators
published examiner guidance to promote
consistency and flexibility in the supervision and
examination of financial institutions affected
by the COVID-19 pandemic. Examiners will
continue to assess institutions in accordance with
existing agency policies and procedures and may
provide supervisory feedback or downgrade an
institution’s composite or component ratings, when
conditions have deteriorated. In conducting their
supervisory assessment, examiners will consider
whether institution management has managed risk
appropriately, including taking appropriate actions
in response to stresses caused by COVID-19 impacts.
The agencies have issued numerous statements
related to supervisory policy since the emergence of
the pandemic.
On June 24, 2020, the OCC issued an interim final
rule to lower assessments for most banks under its
jurisdiction. Under the new rule, assessments due
on September 30, 2020 for national banks, federal
savings associations, and federal branches and
agencies of foreign banks will be calculated using
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the December 31, 2019 “Consolidated Reports of
Condition and Income” (Call Report) for each
institution, rather than the June 30, 2020 Call
Report. In the event a bank’s assets as reported on
the June 30, 2020 Call Report are lower than on
the December 31, 2019 Call Report, the OCC would
calculate the assessment due on September 30,
2020 for the institution using the June 30, 2020 Call
Report.
On August 3, 2020, the Federal Financial
Institutions Examination Council on behalf of its
members issued a statement setting forth prudent
risk management and consumer protection
principles for financial institutions to consider while
working with borrowers as initial coronavirus-related
loan accommodation periods come to an end and
they consider additional accommodations.
On August 13, 2020, the OCC published an interim
final rule that revised OCC regulations applicable
to OCC-regulated banks administering collective
investment funds (CIFs) invested primarily in real
estate or other assets that are not readily marketable.
The rule codified the time period generally
available to a bank for withdrawing accounts from
these CIFs and created an exception allowing a bank
to extend the time period for withdrawals with OCC
approval. The exception established by this rule was
intended to enable a bank to preserve the value of
a CIF’s assets for the benefit of fund participants
during unanticipated and severe market conditions,
such as those resulting from COVID-19.

4.3.2 Dodd-Frank Act Stress Tests and
Comprehensive Capital Analysis and Review
Section 165(i)(2) of the Dodd-Frank Act requires
certain financial companies to conduct annual stress
tests.
On February 6, 2020, the Federal Reserve and OCC,
followed by the FDIC on February 14, released
economic and financial market scenarios for use in
upcoming stress tests for covered institutions. The
supervisory scenarios include baseline and severely
adverse scenarios, as described in the agencies’ final
rule that implements stress test requirements of the
Dodd-Frank Act. Rules state that the agencies will
provide scenarios to covered institutions by February
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15 of each year. Covered institutions are required to
use the scenarios to conduct annual stress tests. The
results of the company-run stress tests will assist the
agency in assessing the company’s risk profile and
capital adequacy.
On March 18, 2020, the Federal Reserve issued a
final rule intended to simplify its capital framework
while preserving strong capital requirements
for large firms. The final rule integrates the
regulatory capital rule (capital rule) with CCAR,
as implemented through the capital plan rule. The
final rule makes amendments to the capital rule,
capital plan rule, stress test rules, and Stress Testing
Policy Statement. Under the final rule, the Federal
Reserve will use the results of its supervisory stress
test to establish the size of a firm’s stress capital
buffer requirement, which replaces the static 2.5
percent of risk-weighted assets component of a firm’s
capital conservation buffer requirement. Through
the integration of the capital rule and CCAR,
the final rule removes redundant elements of the
current capital and stress testing frameworks that
currently operate in parallel rather than together,
including the CCAR quantitative objection and the
assumption that a firm makes all capital actions
under stress. The final rule applies to BHCs and U.S.
intermediate holding companies of foreign banking
organizations that have $100 billion or more in total
consolidated assets.
On March 24, 2020, the FHFA issued a final rule
amending its stress testing rule, pursuant to section
401 of EGRRCPA. These amendments adopt the
proposed amendments without change to modify
the minimum threshold for the regulated entities
to conduct stress tests from $10 billion to $250
billion; remove the requirements for Federal Home
Loan Banks subject to stress testing; and remove the
adverse scenario from the list of required scenarios.
These amendments align FHFA’s rule with rules
adopted by other financial institution regulators
that implement the Dodd-Frank Act stress testing
requirements, as amended by EGRRCPA.

4.3.3 Resolution Planning and Orderly Liquidation
Under the framework of the Dodd-Frank Act,
resolution under the U.S. Bankruptcy Code is the
statutory first option in the event of the failure of

a financial company. Section 165(d) of the DoddFrank Act requires nonbank financial companies
designated by the Council for supervision by the
Federal Reserve and certain BHCs—including
certain FBOs with U.S. operations—to periodically
submit plans to the Federal Reserve, the FDIC, and
the Council for their rapid and orderly resolution
under the U.S. Bankruptcy Code in the event
of material financial distress or failure. These
submissions are also referred to as living wills. The
Federal Reserve and FDIC review each plan and
may jointly determine that a plan is not credible
or would not facilitate an orderly resolution of the
company under the U.S. Bankruptcy Code. Since
the resolution planning requirements took effect
in 2012, U.S. G-SIBs and certain other firms have
improved their resolution strategies and governance,
refined their estimates of liquidity and capital needs
in resolution, and simplified their legal structures.
These changes have made these firms more resilient
and resolvable.
On December 17, 2019, the Federal Reserve and
FDIC jointly announced that their review of the
2019 resolution plans of the eight largest and most
complex domestic banking organizations did not
find any “deficiencies,” which are weaknesses that
could result in additional prudential requirements
if not corrected. However, plans from six of the
eight banking organizations had “shortcomings,”
which are weaknesses that raise questions about the
feasibility of a firm’s plan but are not as severe as a
deficiency. The shortcomings related to the ability of
the firms to reliably produce, in stressed conditions,
data needed to execute their resolution strategy.
Action plans to address the shortcomings were due
to the agencies by April 30, 2020. The action plans
demonstrated progress towards addressing the
shortcomings. The agencies will review whether the
shortcomings have been addressed adequately, in
connection with their review of the 2021 targeted
resolution plans for these firms.
On March 18, 2020, the FDIC and Federal Reserve
invited comments on proposed guidance for the
2021 and subsequent resolution plan submissions
by certain foreign banking organizations (FBOs).
The proposed guidance is meant to assist these

firms in developing their resolution plans. It would
impact FBOs that are triennial filers and whose
intermediate holding companies have a score of
250 or more under the second methodology of
the G-SIB surcharge framework. The proposed
guidance, which is largely based on prior guidance,
describes the agencies’ expectations regarding
a number of key vulnerabilities in plans for a
rapid and orderly resolution under the U.S.
Bankruptcy Code (i.e., capital, liquidity, governance
mechanisms, operational, legal entity rationalization
and separability, and derivatives and trading
activities). The proposed guidance also updates
certain aspects of prior guidance based, in part, on
the agencies’ review of certain FBOs’ most recent
resolution plan submissions and changes to the
resolution planning rule.
On May 6, 2020, in light of the challenges arising
from the coronavirus response, the FDIC and the
Federal Reserve extended the 2020 resolution plan
submission deadline by 90 days to September 29,
2020 for four foreign banks, and the 2021 targeted
resolution plan submission deadline by 90 days
to September 29, 2021 for the large foreign and
domestic banks in Category II and Category III of
the agencies’ large bank regulatory framework.
On July 1, 2020, the FDIC and the Federal Reserve
provided information to the eight largest and most
complex domestic banking organizations that will
guide their next resolution plans, which are due
by July 1, 2021. The 2021 plans will be required
to include core elements of a firm’s resolution
plan—such as capital, liquidity, and recapitalization
strategies—as well as how each firm has integrated
changes to, and lessons learned from, its response
to COVID-19 into its resolution planning process.
The July 2021 submission will be the first targeted
resolution plan, a type of plan introduced in
the revisions to the agencies’ resolution plan
rule finalized last year.
Additionally, on July 1, 2020, the FDIC and the
Federal Reserve announced that they recently
completed a review of “critical operations,” which
are operations at certain firms whose failure or
discontinuance would threaten U.S. financial
stability, and informed the firms of their findings.
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The agencies also announced their plan to complete
another such review by July 2022, which will include
a further, broader evaluation of the framework used
to identify critical operations.
Furthermore, in 2020, the Federal Reserve and
FDIC hosted Crisis Management Group (CMG)
meetings for U.S. G-SIBs to discuss home and host
resolvability assessments for the firms to facilitate
cross-border resolution planning.
On August 31, 2020, the FDIC and SEC issued a
final rule required by the Dodd-Frank Act, which
clarifies and implements provisions relating to the
orderly liquidation of certain brokers or dealers
(covered broker-dealers) in the event the FDIC is
appointed receiver under Title II of the Dodd-Frank
Act. The FDIC and SEC developed the final rule in
consultation with the Securities Investor Protection
Corporation (SIPC).
Among other things, the final rule clarifies that,
upon the appointment of the FDIC as receiver, the
FDIC would appoint SIPC to act as trustee for the
broker-dealer. SIPC, as trustee, would determine
and satisfy customer claims in the same manner as it
would in a proceeding under the Securities Investor
Protection Act of 1970. The treatment of the covered
broker-dealer’s qualified financial contracts would
be governed in accordance with Title II. In addition,
the final rule describes the claims process applicable
to customers and other creditors of a covered
broker-dealer and clarifies the FDIC’s powers as
receiver with respect to the transfer of assets of a
covered broker-dealer to a bridge broker-dealer.

4.3.4 Volcker Rule
On July 31, 2020, the OCC, Federal Reserve, FDIC,
SEC, and CFTC issued a final rule that amends
the regulations implementing section 13 of the
BHC Act. Section 13 (commonly known as the
Volcker Rule) contains certain restrictions on the
ability of a banking entity or nonbank financial
company supervised by the Board to engage in
proprietary trading and have certain interests in, or
relationships with, a hedge fund or private equity
fund. Like the proposal published in February,
the final rule modifies three areas of the rule by
streamlining the covered funds portion of the rule;
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addressing the extraterritorial treatment of certain
foreign funds; and permitting banking entities to
offer financial services and engage in other activities
that do not raise concerns that the Volcker Rule was
intended to address.

4.3.5 Insurance
NAIC / State Developments

In response to the COVID-19 pandemic, state
insurance regulators and the NAIC provided
guidance to insurers in several areas and sought
information to better understand the pandemic’s
scope and potential coverage issues. States removed
consumer cost-sharing for COVID-19 testing in most
health insurance policies and continue to work with
federal officials to implement additional measures
enacted by Congress. States also issued bulletins that
provided guidance to health insurers on
prescription drug refills, prior authorization, grace
periods, and coverage of telemedicine. Regulators
also took steps to ease administrative burdens on
carriers and agents and expand the pool of health
providers in some states by relaxing licensing or
credentialing requirements.
Some states have required or encouraged insurers
to defer premium payments for consumers
experiencing financial hardship due to COVID-19.
Regulators in several states also issued directives
on policy cancellations and non-renewals in several
lines of insurance including health insurance,
life insurance, auto insurance, and homeowners’
insurance. Several states have mandated or
encouraged auto insurance companies to
institute premium rebates to drivers, who have
significantly reduced miles driven during the
pandemic, and several major auto insurers also
provided rebates voluntarily.
The NAIC and state insurance regulators took
several actions to identify the potential risks
that COVID-19 might present to the insurance
sector. Earlier this year, state insurance regulators
through the NAIC issued an industry data call
to assess the potential impacts of COVID-19 on
insurance company solvency as well as a data call
for information specifically relating to business
interruption insurance. An initial set of this data was
shared with FIO to assist it in exercising its statutory

authorities, including monitoring all aspects of the
insurance industry and advising the Secretary of the
Treasury on major domestic insurance policy issues.
The NAIC also issued accounting and reporting
guidance to temporarily help mitigate the balance
sheet impacts of COVID-19, including guidance
relating to troubled debt restructuring, mortgage
loan impairments, and nonpayment of premiums.
Following up on stress tests that the NAIC
conducted in late 2019 relating to the insurance
industry’s $158 billion in CLO holdings, the NAIC
ran additional stress tests in spring 2020 that found
senior tranches might be protected from widespread
losses in a deep recession.
In addition to work relating to the COVID-19
response, state insurance regulators continued
work on their Group Capital Calculation (GCC),
which began in 2015. The GCC is designed to
be an analytical tool that will give regulators
information relating to the capital across certain
insurance groups. Adoption of a model, including
proposed legislative language for states that would
protect GCC confidentiality, is expected in late
2020. Adoption by U.S. insurance supervisory
authorities of a GCC is also necessary for purposes
of implementation of the covered agreements
described below.
The NAIC has continued to make progress on
its Macroprudential Initiative, including the
development of a liquidity stress test for large life
insurers. Work on this initiative was placed on
hold due to COVID-19 and, in its place, COVID-19
liquidity data calls were conducted on the largest life
insurers to gauge the liquidity and capital impact of
the pandemic on such insurers.

Covered Agreements

The Bilateral Agreement between the United States
of America and the European Union on Prudential
Measures Regarding Insurance and Reinsurance,
generally known in the United States as the U.S.EU Covered Agreement, was signed by the parties
in September 2017. It entered into force on April 4,
2018. In anticipation of the withdrawal of the United
Kingdom (UK) from the EU, in 2018 the United
States and the UK entered into a substantively

similar agreement, known as the U.S.-UK Covered
Agreement, which is expected to enter into force
shortly. Both agreements were negotiated by
Treasury in coordination with the Office of the
United States Trade Representative, pursuant to the
Federal Insurance Office Act of 2010 (FIO Act).
In June 2019, in response to the covered agreements
with the EU and the UK, the NAIC adopted
changes to the Credit for Reinsurance Model Law
and Credit for Reinsurance Model Regulation.
The changes are intended to provide states with
a model law and regulation that, upon adoption,
aligns state law with the U.S. obligations under the
agreements. In August 2020, the NAIC designated
these revisions under its accreditation program, to
take effect September 1, 2022. Pursuant to the terms
of the covered agreements, this is the date by which
the United States must complete any necessary
preemption determination in accordance with
the FIO Act. Some states have already completed
the adoption of necessary amendments. Not later
than March of 2021, as required under the covered
agreements, FIO will begin reviewing the progress
of each of the states and evaluating a potential
preemption determination.

Cybersecurity

In July 2020, the New York Department of Financial
Services (NYDFS) filed its first-ever enforcement
action under its 2017 cybersecurity regulation
against a title insurer for alleged exposure of
hundreds of millions of documents, many of which
were said to contain sensitive personal information.
As of June 30, 2020, eleven states—Alabama,
Connecticut, Delaware, Indiana, Louisiana,
Michigan, Mississippi, New Hampshire, Ohio, South
Carolina, and Virginia—had adopted the NAIC’s
Insurance Data Security Model Law or similar law.

Terrorism Risk Insurance Program

The Federal Insurance Office assists the Secretary
of the Treasury in administering the Terrorism
Risk Insurance Program (TRIP) created under the
Terrorism Risk Insurance Act of 2002, as amended
(TRIA). Under the Terrorism Risk Insurance
Program Reauthorization Act of 2019, TRIP has
been reauthorized for an additional seven-year
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period, ending December 31, 2027. Since 2016,
Treasury has been required under TRIA to collect
terrorism risk insurance information from insurers.
In June 2020, Treasury published a Report on
the Effectiveness of the Terrorism Risk Insurance
Program. In the report, Treasury concluded that
TRIP has remained effective in making terrorism
risk insurance available and affordable in the
insurance marketplace and that the market for
terrorism risk insurance has been relatively stable,
with few observable changes over time in the
relevant benchmarks.

IAIS Update

In November 2019, the International Association
of Insurance Supervisors (IAIS) advanced version
2.0 of the International Capital Standard (ICS)
into a five-year monitoring period from 2020
through 2024. The IAIS agreement consisted of
three parts: (1) the design of the reference ICS
being developed by the IAIS; (2) the parameters
around the operationalization of the ICS
monitoring period; and (3) the IAIS’s approach to
the comparability assessment of the Aggregation
Method. The November 2019 IAIS meetings also
resulted in the adoption of the holistic framework
for the assessment and mitigation of systemic risk
in the insurance sector, leveraging an activitiesbased approach to assessing potential systemic risks
arising from products and activities. In October
2020, FIO published a notice in the Federal Register
seeking public comment on a planned FIO study to
assess the potential effects of the ICS on the U.S.
insurance market, including the implications for
product cost and availability for U.S. consumers, the
global competitiveness of U.S. insurers, and insurer
investment behavior in the capital markets.
In response to the onset of the COVID-19 global
pandemic, the IAIS refocused its activities and
projects on the impact of COVID-19. In addition, the
IAIS issued a data call that focused on the effects
of the COVID-19 global pandemic on the global
insurance sector. The IAIS has also been monitoring
supervisory responses to the pandemic and assessing
the implications on the global insurance sector.

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4.4

Financial Infrastructure, Markets, and
Oversight

4.4.1

Derivatives, Swap Data Repositories,
Regulated Trading Platforms, and Central
Counterparties

On September 19, 2019, the SEC issued a final
rule, in accordance with the Dodd-Frank Act and
pursuant to the Securities Exchange Act of 1934
(Exchange Act) which adopts recordkeeping,
reporting, and notification requirements applicable
to security-based swap dealers (SBSDs) and
major security-based swap participants (MSBSPs),
securities count requirements applicable to certain
SBSDs, and additional recordkeeping requirements
applicable to broker-dealers to account for their
security-based swap and swap activities. The
agency also made substituted compliance available
with respect to recordkeeping, reporting, and
notification requirements under Section 15F of the
Exchange Act and the rules thereunder.
In January 2020, the CFTC finalized amendments
to Part 39 of its regulations as part of its ongoing
review of regulations applicable to CCPs. The
amendments address certain risk management
and reporting obligations, clarify the meaning of
certain provisions, simplify processes for registration
and reporting, and codify existing staff relief and
guidance.
On February 4, 2020, the SEC issued a final rule that
requires the application of specific risk mitigation
techniques to portfolios of uncleared securitybased swaps. In particular, the final rule establishes
requirements for each registered SBSD and each
registered MSBSP regarding, among other things,
reconciling outstanding security-based swaps with
applicable counterparties on a periodic basis,
engaging in certain forms of portfolio compression
exercises, as appropriate, and executing written
security-based swap trading relationship
documentation with each of its counterparties prior
to, or contemporaneously with, executing a securitybased swap transaction. The SEC also issued an
interpretation addressing the application of the
portfolio reconciliation, portfolio compression, and
trading relationship documentation requirements
to cross-border security-based swap activities,

and amended its regulations to address the
potential availability of substituted compliance in
connection with those requirements. Lastly, the
final rule includes corresponding amendments
to the recordkeeping, reporting, and notification
requirements applicable to SBSDs and MSBSPs.
The same day, the SEC issued separate rule
amendments pursuant to a final rule and provided
guidance to address the cross-border application of
certain security-based swap requirements under the
Exchange Act that were added by Title VII of the
Dodd-Frank Act. The SEC also issued a statement
regarding compliance with rules for security-based
swap data repositories and Regulation SBSR, a
regulation that addresses regulatory reporting and
public dissemination of security-based swaps. The
compliance date for the registration and substantive
regulation of SBSDs and MSBSPs is October 6, 2021.
In addition, these entities are required to begin
counting their security-based swap transactions
towards the de minimis thresholds for registration
on August 6, 2021.
On March 18, 2020, the CFTC issued a final
rule that amends its regulations governing the offer
and sale of foreign futures and options to customers
located in the U.S. The amendment codifies
the process by which the agency may terminate
exemptive relief issued pursuant to its regulations.
On March 24, 2020, the SEC proposed to amend 17
CFR 242, Rules 600 and 603 and to adopt new Rule
614 of Regulation National Market System (NMS)
under the Exchange Act to update the national
market system for the collection, consolidation,
and dissemination of information with respect to
quotations for and transactions in NMS stocks (NMS
information). This would expand the content of
NMS information that is required to be collected,
consolidated, and disseminated as part of the NMS
under Regulation NMS and proposes to amend
the method by which such NMS information
is collected, calculated, and disseminated by
introducing a decentralized consolidation model
where competing consolidators replace the exclusive
securities information processors.

The CFTC has adopted several modifications to its
rules imposing margin requirements on uncleared
swap transactions during the past year. On April
9, 2020, the CFTC issued a final rule revising
its margin rules by establishing an additional
compliance phase-in period (phase 6) and setting
a September 1, 2021, compliance date for phase
6 entities. This amendment is intended to help
ensure continued access to the swaps markets for
certain entities with relatively smaller levels of swaps
trading activities that may have difficulty meeting
all of the operational conditions to exchange initial
margin and is consistent with revisions adopted
by the Basel Committee on Banking Supervision
and the International Organization of Securities
Commission (BCBS/IOSCO) to their joint
international framework for margin requirements
for non-centrally cleared derivatives. On May 11,
2020, the CFTC issued a final rule amending its
margin rules to exclude the European Stability
Mechanism from the scope of the rules.
On July 1, 2020, the Federal Reserve, FDIC, FCA,
FHFA, and OCC issued a final rule that amends
the agencies’ regulations requiring swap dealers
(SDs), SBSDs, major swap participants (MSPs), and
MSBSPs under the agencies’ respective jurisdictions
to exchange margin with their counterparties for
swaps that are not centrally cleared (Swap Margin
Rule). The Swap Margin Rule as adopted in 2015
takes effect under a phased compliance schedule
spanning from 2016 through 2020, and the entities
covered by the rule continue to hold swaps in their
portfolios that were entered into before the effective
dates of the rule. Such swaps are grandfathered
from the Swap Margin Rule’s requirements until
they expire according to their terms. The final rule
permits swaps entered into prior to an applicable
compliance date (legacy swaps) to retain their legacy
status in the event that they are amended to replace
an interbank offered rate or other discontinued
rate, modifies initial margin requirements for
non-cleared swaps between affiliates, introduces
an additional compliance date for initial margin
requirements, clarifies the point in time at which
trading documentation must be in place, permits
legacy swaps to retain their legacy status in the
event that they are amended due to technical
amendments, notional reductions, or portfolio
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compression exercises, and makes technical changes
to relocate the provision addressing amendments
to legacy swaps that are made to comply with the
Qualified Financial Contract Rules. In addition,
the final rule addresses comments received in
response to the agencies’ publication of the interim
final rule that would preserve the status of legacy
swaps meeting certain criteria in the case of a
Brexit without a negotiated settlement agreement.
The same day, the agencies issued an interim final
rule, with request for comment, extending the
implementation deadlines of phase 5 and phase 6
by one year, to September 1, 2021, and September 1,
2022, respectively.
On July 10, 2020, the CFTC issued an interim final
rule further amending its initial margin compliance
schedule to address operational challenges as a
result of the coronavirus pandemic. The interim
final rule deferred the compliance date for phase 5
entities to September 1, 2021. The CFTC in October
2020 also extended the phase 6 compliance date
to September 1, 2022. The CFTC’s actions were
consistent with revisions made by the BCBS/IOSCO
to the implementation schedule of the international
framework for margin requirements for noncentrally cleared derivatives.
On July 22, 2020, the CFTC issued a final rule
amending regulation 50.52, which exempts certain
affiliated entities within a corporate group from the
swap clearing requirement under Section 2(h) of
the Commodity Exchange Act. These amendments
concern the anti-evasionary condition to the
inter-affiliate exemption from the swap clearing
requirement. Under this condition, affiliates
electing the exemption must ensure that swaps
subject to the clearing requirement entered into
with unaffiliated counterparties either be cleared
or be eligible for an exception to or exemption
from the clearing requirement. The amendments
make permanent certain temporary alternative
compliance frameworks intended to make this antievasionary condition workable for international
corporate groups in the absence of foreign clearing
regimes determined to be comparable to CFTC
requirements.

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On July 24, 2020, the CFTC issued a final rule to
prohibit post-trade name give-up for swaps executed,
pre-arranged, or pre-negotiated anonymously on
or pursuant to the rules of a swap execution facility
and intended to be cleared. The final rule provides
an exception for package transactions that include
a component transaction that is not a swap intended
to be cleared, including but not limited to U.S.
Treasury swap spreads.
On September 14, 2020, the CFTC issued a final rule
that addresses the cross-border application of the
SD registration threshold and certain requirements
applicable to SDs and MSPs, establishes a formal
process for requesting comparability determinations
for the requirements from the CFTC, and
defines key terms for the purpose of applying the
Commodity Exchange Act’s swaps provisions to
cross-border transactions. This approach considers
international comity principles and the CFTC’s
interest in focusing its authority on potential
significant risks to the U.S. financial system. This
final rule supersedes the CFTC’s 2013 cross-border
guidance with respect to the CFTC requirements
covered by the final rule.
On September 15, 2020, the CFTC issued a final
rule imposing capital and financial reporting
requirements on SDs and MSPs that are not subject
to a banking regulator. The adoption of the capital
requirements completes the CFTC’s obligations
under Title VII of the Dodd-Frank Act to adopt rules
imposing both capital and margin requirements
on SDs and MSPs. The capital rules recognize
the diversity of organizations registered with the
CFTC as SDs, which includes global financial
institutions, small SDs that engage primarily in
swaps with commercial end-users, and agricultural
or energy firms, by permitting the SDs to elect
one of three capital approaches: (1) a bank-based
capital approach that is consistent with the capital
rules of the prudential regulators; (2) a capital
approach that is consistent with the CFTC’s existing
FCM and the SEC’s existing securities brokerdealer capital requirements; and, (3) for SDs
predominantly engaged in nonfinancial activities, a
capital requirement based on the SD’s tangible net
worth. The CFTC’s final capital rules also require
MSPs to maintain positive tangible net worth. The

financial reporting requirements require SDs and
MSPs to file with the CFTC, among other reports,
periodic unaudited financial statements and annual
audited financial statements. The CFTC capital and
financial reporting rules have a compliance date of
October 6, 2021.
On September 22, 2020, the CFTC issued an NPRM
proposing amendments to the CFTC margin rules
to permit the application of a minimum transfer
amount of up to $50,000 for each separately
managed account of a counterparty to a CFTCregulated SD or MSP, and the application of
separate minimum transfer amounts for initial
and variation margin. In addition, on September
23, 2020, the CFTC issued an NPRM proposing
amendments to the definition of the term “material
swaps exposure” by revising the method for
calculating the average aggregate notional amount
of swaps and other financial derivatives products
(AANA). The proposed amendment would change
the period for calculating AANA from June, July,
and August of the prior year to March, April, and
May of the current year, and the data points for
calculating AANA, by utilizing month-end dates
rather than daily figures during the three-month
calculation period. The proposed amendment would
also establish September 1 of each year as the date
for determining material swaps exposure. These
proposed changes would align the CFTC’s approach
with the BCBS/IOSCO’s margin framework. The
proposal would also permit an SD or MSP subject to
the CFTC margin rule to use the risk-based model
calculation of initial margin of a counterparty that
is a CFTC-registered SD or MSP rather than its own
initial margin calculation.
CMGs continued to coordinate resolution planning
for two U.S. CCPs that are considered systemically
important in more than one jurisdiction, consistent
with international standards. The CMGs discussed
how the two U.S. CCPs navigated the operational
and financial challenges posed by the COVID-19
pandemic. Processes for cooperation and sharing
information, both during a crisis and for purposes
of resolution planning, are set forth in cooperation
arrangements finalized in September 2020 that are
specific to the CMG.

4.4.2 Securities and Asset Management
On March 10, 2020, the SEC issued a final rule
amending the definition of the term “venture capital
fund” and the private fund adviser exemption
under the Investment Advisers Act of 1940 (Advisers
Act) to reflect exemptions from registration for
investment advisers who advise rural business
investment companies (RBICs). These exemptions
were enacted as part of the RBIC Advisers Relief
Act, which amended Advisers Act sections 203(l)
and 203(m), among other provisions. Specifically,
the RBIC Advisers Relief Act amended Advisers
Act section 203(l), which exempts from investment
adviser registration any adviser who solely advises
venture capital funds, by stating that RBICs are
venture capital funds for purposes of the exemption.
Accordingly, the new rule amended the definition
of the term “venture capital fund” to include RBICs.
The RBIC Advisers Relief Act also amended Advisers
Act section 203(m), which exempts from investment
adviser registration any adviser who solely advises
private funds and has AUM in the United States of
less than $150 million, by excluding RBIC assets
from counting towards the $150 million threshold.
Accordingly, the final rule amends the definition
of AUM in the private fund adviser exemption to
exclude the assets of RBICs.
On March 26, 2020, the SEC issued a final rule that
amends the accelerated filer and large accelerated
filer definitions to tailor the types of issuers that are
included in the categories of accelerated and large
accelerated filers and promote capital formation,
preserve capital, and reduce unnecessary burdens
for certain smaller issuers while maintaining
investor protections. The amendments exclude
from the accelerated and large accelerated filer
definitions an issuer that is eligible to be a smaller
reporting company and that had annual revenues of
less than $100 million in the most recent fiscal year
for which audited financial statements are available.
The amendments also include a specific provision
excluding business development companies from the
accelerated and large accelerated filer definitions
in analogous circumstances. In addition, the
amendments increase the transition thresholds for
accelerated and large accelerated filers becoming
non-accelerated filers from $50 million to $60

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million, and for exiting large accelerated filer status
from $500 million to $560 million.
On March 31, 2020, the SEC issued temporary
final rules for Form ID filers and for issuers subject
to reporting obligations pursuant to Regulation
Crowdfunding and Regulation A in order to address
the needs of companies directly or indirectly
affected by COVID-19. The temporary final
rules provide temporary relief from the Form ID
notarization process for certain filers and extend
the filing deadlines for specified reports and forms
due pursuant to Regulation Crowdfunding and
Regulation A for certain issuers. On the same day,
the SEC proposed amendments to facilitate capital
formation and increase opportunities for investors
by expanding access to capital for entrepreneurs
across the United States. Specifically, the proposed
amendments are intended to simplify, harmonize,
and improve certain aspects of the exempt offering
framework to promote capital formation while
preserving or enhancing important investor
protections. The proposed amendments seek
to address gaps and complexities in the exempt
offering framework that may impede access to
investment opportunities for investors and access to
capital for issuers.
On April 20, 2020, the SEC issued a final rule that
amends the financial disclosure requirements for
guarantors and issuers of guaranteed securities
registered or being registered, and issuers’ affiliates
whose securities collateralize securities registered or
being registered in Regulation S-X to improve those
requirements for both investors and registrants.
The changes are intended to provide investors with
material information regarding the specific facts
and circumstances, make the disclosures easier to
understand, and reduce the costs and burdens to
registrants. In addition, by reducing the costs and
burdens of compliance, issuers may be encouraged
to offer guaranteed or collateralized securities
on a registered basis, thereby affording investors
protection they may not be provided in offerings
conducted on an unregistered basis. Finally, by
making it less burdensome and less costly for
issuers to include guarantees or pledges of affiliate
securities as collateral when they structure debt
offerings, the revisions may increase the number
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of registered offerings that include these credit
enhancements, which could result in a lower cost of
capital and an increased level of investor protection.
On May 7, 2020, the SEC issued a temporary
final rule to facilitate capital formation for small
businesses impacted by COVID-19. Specifically, the
rule is intended to expedite the offering process for
smaller, previously established companies directly or
indirectly affected by COVID-19 that are seeking to
meet their funding needs through the offer and sale
of securities pursuant to Regulation Crowdfunding.
The temporary final rule is designed to facilitate this
offering process by providing tailored, conditional
relief from certain requirements of Regulation
Crowdfunding relating to the timing of the offering
and the availability of financial statements required
to be included in issuers’ offering materials, while
retaining appropriate investor protections.
On May 13, 2020, the SEC issued a proposed new
rule (rule 2a-5) under the Investment Company
Act of 1940 (Investment Company Act) that would
address valuation practices and the role of the
board of directors with respect to the fair value of
the investments of a registered investment company
or business development company. The proposed
rule would provide requirements for determining
fair value in good faith with respect to a fund for
purposes of section 2(a)(41) of the Investment
Company Act. This determination would involve
assessing and managing material risks associated
with fair value determinations; selecting, applying,
and testing fair value methodologies; overseeing
and evaluating any pricing services used; adopting
and implementing policies and procedures; and
maintaining certain records. The proposed rule
would permit a fund’s board of directors to assign
the fair value determination to an investment
adviser of the fund, who would then carry out these
functions for some or all of the fund’s investments.
This assignment would be subject to board oversight
and certain reporting, recordkeeping, and other
requirements designed to facilitate the board’s
ability to effectively oversee the adviser’s fair value
determinations. The proposed rule would include
a specific provision related to the determination of
the fair value of investments held by unit investment
trusts, which do not have boards of directors. The

proposed rule would also define when market
quotations are readily available under section 2(a)
(41) of the Investment Company Act. If rule 2a-5 is
adopted, the SEC would rescind previously issued
guidance on the role of the board of directors in
determining fair value and the accounting and
auditing of fund investments.
On June 1, 2020, the SEC issued a final rule that
modifies the registration, communications, and
offering processes for business development
companies (BDCs) and other closed-end investment
companies under the Securities Act of 1933. As
directed by Congress, the SEC adopted rules
that allow these investment companies to use the
securities offering rules that are already available
to operating companies. These rules will extend to
closed-end investment companies offering reforms
currently available to operating company issuers by
expanding the definition of “well-known seasoned
issuer” to allow these investment companies to
qualify; streamlining the registration process for
these investment companies, including the process
for shelf registration; permitting these investment
companies to satisfy their final prospectus delivery
requirements by filing the prospectus with the
SEC; and permitting additional communications
by and about these investment companies during
a registered public offering. In addition, the SEC
amended certain rules and forms to tailor the
disclosure and regulatory framework to these
investment companies. These amendments also
modernize the SEC’s approach to securities
registration fee payment by requiring closed-end
investment companies that operate as “interval
funds” to pay securities registration fees using the
same method as mutual funds and exchange-traded
funds and extend the ability to use this payment
method to issuers of certain continuously offered,
exchange-traded products. The final rule expands
the ability of certain registered closed-end funds or
BDCs that conduct continuous offerings to make
changes to their registration statements on an
immediately effective basis or on an automatically
effective basis after a set period of time after filing.
The final rule also sets forth certain structured data
reporting requirements, including for filings on
the form providing annual notice of securities sold
pursuant to the rule under the Investment Company

Act that prescribes the method by which certain
investment companies (including mutual funds)
calculate and pay registration fees.
On October 9, 2020, the SEC issued a final rule
amending the definition of “accredited investor”
in its rules to add new categories of qualifying
natural persons and entities, and to make certain
other modifications to the existing definition. The
amendments are intended to update and improve
the definition to identify more effectively investors
that have sufficient knowledge and expertise to
participate in investment opportunities that do
not have the rigorous disclosure and procedural
requirements, and related investor protections,
provided by registration under the Securities Act
of 1933. The SEC also adopted amendments to the
“qualified institutional buyer” definition in Rule
144A under the Securities Act to expand the list
of entities that are eligible to qualify as qualified
institutional buyers.

4.4.3 Accounting Standards
On June 1, 2020, the OCC, Federal Reserve, FDIC,
and NCUA issued a joint policy statement on
allowances for credit losses (ACLs), in response to
changes to the U.S. generally accepted accounting
principles (GAAP), as promulgated by the Financial
Accounting Standards Board (FASB) Accounting
Standards Update 2016-13 (CECL) and subsequent
amendments issued since June 2016. These changes
are codified in Accounting Standards Codification
(ASC) Topic 326. This interagency policy statement
describes the measurement of expected credit losses
under the CECL methodology and the accounting
for impairment on available-for-sale debt securities
in accordance with ASC Topic 326; the design,
documentation, and validation of expected credit
loss estimation processes, including the internal
controls over these processes; the maintenance of
appropriate ACLs; the responsibilities of boards of
directors and management; and examiner reviews of
ACLs.
On September 15, 2020, Treasury released a study
on the need, if any, for changes to regulatory capital
requirements necessitated by CECL as required
by Congress. The study found that a definitive
assessment of the impact of CECL on regulatory
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capital is not currently feasible, in light of the
state of CECL implementation across financial
institutions and current market dynamics. Treasury
also stated it will continue to actively monitor
CECL implementation and consult with relevant
stakeholders, including the prudential regulators,
FASB, and the SEC.
On September 30, 2020, the OCC, Federal Reserve,
and FDIC issued a final rule delaying the estimated
impact on regulatory capital stemming from the
implementation of CECL. The final rule provides
banking organizations that implement CECL during
the 2020 calendar year the option to delay for two
years an estimate of CECL’s effect on regulatory
capital, relative to the incurred loss methodology’s
effect on regulatory capital, followed by a three-year
transition period. The agencies provided this relief
to allow these banking organizations to better focus
on supporting lending to creditworthy households
and businesses while also maintaining the quality of
regulatory capital.

4.4.4 Bank Secrecy Act/Anti-Money Laundering
Regulatory Reform
On February 21, 2020, the Financial Action Task
Force (FATF), an international intergovernmental
organization that developed international standards
for combating money laundering and the financing
of terrorism and proliferation of weapons of mass
destruction, released guidance on the issue of
digital identity for customer identification and
verification. This guidance explains how digital ID
systems could meet FATF’s customer due diligence
standards and will assist governments and financial
institutions worldwide to apply a risk-based approach
to using digital ID systems. The FATF also discussed
the changes made by the United States to improve
the anti-money laundering (AML)/countering the
financing of terrorism (CFT) system since the 2016
Mutual Evaluation Report, including Treasury’s
Customer Due Diligence rulemaking and beneficial
ownership requirements that went into effect in
2018.
In July 2020, the FATF completed a 12-month
review on the state of implementation of standards
that were revised in June 2019 to explicitly impose
AML/CFT obligations on virtual assets and virtual
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asset service providers. The United States had
joined Switzerland as one of the first countries to
voluntarily submit to an assessment of its compliance
with the new standards. The results of the FATF’s
findings will be published after they go through
the FATF’s quality and consistency process.
FATF announced a second 12-month review for
completion in 2021 and committed to providing
updated guidance on virtual assets, including
AML/CFT and counter-proliferation financing
implications of so-called “stablecoins.” FATF also
called on its members to tackle new threats and
vulnerabilities posed by criminals during the
COVID-19 crisis.

4.5

Mortgages and Consumer Protection

4.5.1

Mortgages and Housing Finance

On April 3, 2020, the CFPB, Federal Reserve,
FDIC, NCUA, OCC, and CSBS issued a joint
policy statement providing regulatory flexibility to
enable mortgage servicers to work with struggling
consumers affected by COVID-19. Under the CARES
Act, borrowers in a federally backed mortgage loan
experiencing financial hardship due, directly or
indirectly, to COVID-19, may submit a forbearance
request to their mortgage servicer. In response,
servicers must provide a CARES Act forbearance
that allows borrowers to defer their mortgage
payments for up to 180 days with the possibility of
an extension of up to another 180 days. The policy
statement states that the agencies do not intend
to take supervisory or enforcement action against
mortgage servicers for delays in sending certain
early intervention and loss mitigation notices,
provided that servicers make good faith efforts to
do so within a reasonable time. The joint statement
clarifies the application of the Regulation X (which
implements the Real Estate Settlement Procedures
Act) mortgage servicing rules to CARES Act
forbearance and describes the agencies’ flexible
approach to supervision and enforcement with
respect to certain Regulation X provisions that
require consumer notices and loss mitigation
provisions. The CFPB released a set of FAQs to
provide additional compliance guidance.
On April 17, 2020, the OCC, Federal Reserve, and
FDIC issued an interim final rule to temporarily

amend the agencies’ regulations requiring
appraisals and evaluations for certain real estate
loan transactions. The interim final rule defers the
requirement to obtain an appraisal or evaluation
for up to 120 days following the closing of a
transaction for certain residential and commercial
real estate transactions, excluding transactions for
acquisition, development, and construction of real
estate. The rule states that regulated institutions
should make best efforts to obtain a credible
valuation of real property collateral before the loan
closing, and otherwise underwrite loans consistent
with the principles in the agencies’ Standards for
Safety and Soundness and Real Estate Lending
Standards. The agencies provided this relief to
allow regulated institutions to expeditiously extend
liquidity to creditworthy households and businesses
in light of recent strains on the U.S. economy due
to COVID-19. The provisions of the interim final
rule expire on December 31, 2020. The agencies
finalized the interim final rule by issuing a final rule
on October 16, 2020. The final rule adopted the
interim final rule without substantive changes. The
final rule became effective on October 16, 2020. The
NCUA issued a substantially similar interim final
rule on April 21, and together the agencies issued
a joint statement outlining additional flexibilities
around appraisal standards.
On May 12, 2020, the CFPB issued a final rule
amending Regulation C, which implemented
the Home Mortgage Disclosure Act (HMDA), to
increase the threshold for reporting data about
closed-end mortgage loans, so that institutions
originating fewer than 100 closed-end mortgage
loans in either of the two preceding calendar years
do not have to report such data effective July 1,
2020. The CFPB also set the threshold for reporting
data about open-end lines of credit at 200 open-end
lines of credit effective January 1, 2022, upon the
expiration of the current temporary threshold of
500 open-end lines of credit.
On June 25, 2020, the FHFA issued a final rule
amending the existing Federal Home Loan Bank
Housing Goals regulation. The final rule replaces
the existing regulation’s four separate retrospective
housing goals with a single prospective mortgage
purchase housing goal with a target level of 20

percent. The final rule also establishes a separate
small member participation housing goal with a
target level of 50 percent. It provides that a bank
may request FHFA approval of alternative target
levels for either or both of the goals. The final rule
also establishes that housing goals apply to each
bank that acquires any Acquired Member Assets
mortgages during a year, eliminating the existing
$2.5 billion volume threshold that previously
triggered the application of housing goals for each
Bank. Enforcement of the final rule will phase in
over three years.
On June 26, 2020, the CFPB published a final
interpretive rule on Regulation Z. The CFPB
produces annually a list of rural and underserved
counties and areas that is used in applying various
Regulation Z provisions, such as the exemption
from the requirement to establish an escrow account
for a higher-priced mortgage loan and the ability
to originate balloon-payment qualified mortgages.
Regulation Z states that an area is “underserved”
during a calendar year if, according to HMDA data
for the preceding calendar year, it is a county in
which no more than two creditors extended covered
transactions, as defined in Regulation Z, secured
by first liens on properties in the county five or
more times. The official commentary provides an
interpretation relating to this standard that refers to
certain data elements from the previous version of
the CFPB’s Regulation C, which implements HMDA,
which were modified or eliminated in the 2015
amendments to Regulation C. The CFPB issued this
interpretive rule to specifically describe the HMDA
data that will instead be used in determining that an
area is “underserved.”
On June 30, 2020, the FHFA issued a revised NPRM
and request for comment on a new regulatory
capital framework for Fannie Mae and Freddie Mac
that would amend definitions in FHFA’s regulations
for assessments and minimum capital. The proposed
rule would also remove the Office of Federal
Housing Enterprise Oversight’s previous regulation
on capital for the Enterprises.
On June 30, 2020, the CFPB issued an interim final
rule amending Regulation X to temporarily permit
mortgage servicers to offer certain loss mitigation
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options based on the evaluation of an incomplete
loss mitigation application. Eligible loss mitigation
options, among other things, must permit
borrowers to delay paying certain amounts until
the mortgage loan is refinanced, the mortgaged
property is sold, the term of the mortgage loan
ends, or, for a mortgage insured by the FHA, the
mortgage insurance terminates. These amounts
include, without limitation, all principal and interest
payments forborne through payment forbearance
programs made available to borrowers experiencing
financial hardships due, directly or indirectly, to
the COVID-19 emergency, including the payment
forbearance program offered pursuant to section
4022 of the CARES Act. These amounts also include
principal and interest payments that are due and
unpaid by these borrowers.
On July 10, 2020, the CFPB issued two NPRMs
that would amend certain definitions of qualified
mortgages (QMs) in Regulation Z. Regulation Z
generally requires creditors to make a reasonable,
good faith determination of a consumer’s ability to
repay any residential mortgage loan, and loans that
meet Regulation Z’s requirements for QMs obtain
certain protections from liability. There are several
different categories of QMs, including Temporary
Government Sponsored Enterprise (GSE) QM
loans and General QM loans. Temporary GSE QM
loans include loans that are eligible for purchase
or guarantee by either of the Enterprises, while
operating under the conservatorship or receivership
of the FHFA. The Enterprises are currently under
Federal conservatorship. The CFPB established
the Temporary GSE QM loan definition as a
temporary measure that is set to expire no later
than January 10, 2021 or when the Enterprises exit
conservatorship, whichever occurs first.
In one NPRM released on July 10, 2020, the CFPB
proposed to extend the Temporary GSE QM loan
definition to expire upon the effective date of final
amendments to the General QM loan definition
(or when the Enterprises cease to operate under
the conservatorship of the FHFA, if that happens
earlier). The final rule extending the Temporary
QM loan definition was issued October 26, 2020.
The other NPRM issued on July 10, 2020 proposed
amendments to the General QM loan definition.
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For General QM loans, the ratio of the consumer’s
total monthly debt to total monthly income (DTI
ratio) must not exceed 43 percent. In the NPRM
related to the General QM loan definition, the
CFPB proposed, among other things, to remove
the General QM loan definition’s 43 percent DTI
limit and replace it with price-based thresholds.
The objective of the NPRMs is to facilitate a smooth
and orderly transition away from the Temporary
GSE QM loan definition and to ensure access to
responsible, affordable mortgage credit upon its
expiration.
On July 22, 2020, the CFPB issued an NPRM that
would amend Regulation Z to exempt certain
insured depository institutions and insured credit
unions from the requirement to establish escrow
accounts for certain higher-priced mortgage loans.
On August 28, 2020, the CFPB issued an NPRM
proposing to create a new category of QMs
(Seasoned QMs) for first-lien, fixed-rate covered
transactions that have met certain performance
requirements over a 36-month seasoning period,
are held in portfolio until the end of the seasoning
period, comply with general restrictions on product
features and points and fees, and meet certain
underwriting requirements. The CFPB’s primary
objective with this NPRM is to ensure access to
responsible, affordable mortgage credit by adding
a Seasoned QM definition to the existing QM
definitions.
In September 2020, CSBS issued for public comment
proposed regulatory prudential standards for
nonbank mortgage servicers subject to licensing
and supervision by state financial regulators. The
proposed standards include baseline prudential
standards that cover eight areas, including capital,
liquidity, risk management, data standards
and integrity, data protection (including cyber
risk), corporate governance, servicing transfer
requirements, and change of control requirements.
The capital and liquidity components of the
baseline standards would be consistent with the
minimum financial eligibility requirements imposed
on nonbank seller/servicers by the Enterprises.
Additionally, the proposed standards include
enhanced prudential standards which would apply

higher capital and liquidity requirements as well
stress testing and resolution planning requirements
on certain, large complex servicers.

will neither cite supervisory violations nor initiate
enforcement actions against insured institutions for
continuing to provide estimates to consumers under
the temporary exception, instead of actual amounts.

4.5.2 Consumer Protection
On May 21, 2020, the CFPB extended the comment
period for a supplemental NPRM regarding timebarred debt. The CFPB proposed to prohibit debt
collectors from using non-litigation means (such
as calls) to collect on time-barred debt unless
collectors disclose to consumers during the initial
contact and on any required validation notice
that the debt is time-barred. Consumer research
conducted by the CFPB found that a time-barred
debt disclosure helps consumers understand that
they cannot be sued if they do not pay, helping
consumers make better informed decisions about
whether to pay the debt.
On May 22, 2020, the CFPB issued a no-action letter
(NAL) template that insured depository institutions
can use to apply for a NAL covering their smalldollar credit products. The NAL template includes
protections for consumers who seek small-dollar
loan products.
On June 5, 2020, the CFPB issued a final
rule amending the remittance rule. The Electronic
Fund Transfer Act, as amended by the DoddFrank Act, establishes certain protections for
consumers sending international money transfers,
or remittance transfers. The CFPB’s remittance
rule in Regulation E implements these protections.
The CFPB amended Regulation E and the official
interpretations of Regulation E to provide tailored
exceptions to address compliance challenges that
insured depository institutions may face in certain
circumstances upon the expiration of a statutory
exception that allows insured depository institutions
to disclose estimates instead of exact amounts to
consumers. The amendments to Regulation E
became effective on July 21, 2020, the same day
the statutory exception expired. The CFPB also
increased a safe harbor threshold related to whether
a person makes remittance transfers in the normal
course of its business. On April 10, 2020, the CFPB
issued a policy statement that for international
remittance transfers that occur on or after July
21, 2020 and before January 1, 2021, the CFPB

On July 21, 2020, the CFPB issued a final rule
amending its regulations governing payday, vehicle
title, and certain high-cost installment loans.
Specifically, the CFPB revoked several provisions
of those regulations, including ones that provide
that it is an unfair and abusive practice for a lender
to make a covered short-term or longer-term
balloon-payment loan, including payday and vehicle
title loans, without reasonably determining that
consumers have the ability to repay those loans
according to their terms; prescribe mandatory
underwriting requirements for making the abilityto-repay determination; and exempt certain loans
from the mandatory underwriting requirements.
The CFPB made these amendments to the
regulations based on its re-evaluation of the legal
and evidentiary bases for these provisions. The final
rule did not amend the provisions of the regulations
that impose certain requirements on providers
that obtain authorization to initiate payment
withdrawals, including prohibiting such withdrawals
after two failed attempts without a new and specific
authorization, and disclosures related to payment
practices.

4.6

Data Scope, Quality, and Accessibility

4.6.1 Data Scope
Expansion of LEI Adoption

During the past year, global adoption of the Legal
Entity Identifier (LEI) of the Global LEI System
continued to expand. As of September 30, 2020,
more than 1.7 million LEIs had been issued by 36
approved operational issuers. Approximately 34
percent of these were issued in the United States,
and approximately 13 percent were issued to U.S.based entities. The total number of LEIs issued
represents a year-to-date increase of 9 percent,
which follows the 9 percent increase in 2019.
This expansion continues to be driven primarily by
the LEI’s use in financial regulation, particularly
in the European Union. Beginning in January
2018, EU regulations under the revised Markets in
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Financial Instruments Directive (MiFID II) required
entities involved in securities and Over-the-Counter
(OTC) derivatives transactions to have an LEI and
to use that LEI when reporting these transactions.
Future expansion could also be supported by the
growing interest of some large financial institutions
in utilizing the LEI for purposes other than
regulatory compliance and reporting. In the future,
such expansion could lead in turn to the LEI being
used (or evaluated for use) more extensively outside
of the financial industry. Further use of the LEI
in financial regulation can be expected to lead to
modest future global increases in the number of
LEIs issued.

Improving LEI Data Quality

Improving the quality of LEI data is important to
building market confidence and the utility of the
LEI. Therefore, considerable attention is directed
to this challenge by the Council members that
are represented on the Legal Entity Identifier
Regulatory Oversight Committee (LEI ROC),
including the OFR, SEC, CFTC, CFPB, FDIC, OCC,
and the Federal Reserve. The LEI ROC is a group
of more than 60 regulatory authorities from around
the world that oversee the Global LEI Foundation
(GLEIF). The GLEIF is a not-for-profit organization
that serves as the Global LEI System’s central
operating unit and ensures the system’s operational
integrity.
One area of particular interest to these Council
members is the ongoing work on “Level 2” LEI
data – i.e., data submitted by legal entities acquiring
an LEI regarding their “direct accounting
consolidating parent” and their “ultimate
accounting consolidating parent.” Level 2 LEI data
allows parties to a financial transaction to use LEIs
to identify not just the counterparties with whom
they are transacting, but also affiliated entities,
thereby improving the ability of such entities
to perform a risk assessment of the transaction
counterparties.
This past year, the LEI ROC continued to focus on
improving the quality of Level 2 LEI data, as well as
other elements of LEI reference data. The Council is
committed to serving on the LEI ROC and working
with the GLEIF to ensure the quality of LEI data
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is sufficient for use by industry participants and
regulators.

Updated LEI Standard

This past year, the International Organization
for Standardization (ISO) completed a five-year
systematic review of ISO 17442 (i.e., the ISO
standard on which the Global LEI System is based)
and published an updated version of this standard.
Council members contributed to this review in a
variety of ways.

Expanded Role of the LEI ROC

This past year, the LEI ROC conducted due
diligence and related work that led to its decision to
take on the role of international governance body
for new regulatory financial data standards for OTC
derivative transaction reporting, which standards
had earlier been promulgated by the Committee on
Payments and Market Infrastructures-International
Organization of Securities Commissions (CPMIIOSCO) and the FSB. These standards are the
Unique Transaction Identifier (UTI), the Unique
Product Identifier (UPI), and the Critical Data
Elements (CDE). The LEI ROC agreed to take
on this new role following the review of the work
of its Working Group on Governance of Unique
Identifiers and Data Elements. That work, in key
parts, was performed in collaboration with the
Working Group on UTI and UPI Governance
(GUUG) of the FSB. On October 1, 2020, after
having obtained the approval of the LEI ROC and
FSB, the LEI ROC assumed the role of international
governance body for the UTI, UPI, and CDE.

4.6.2 Data Quality
Reporting of Standardized Derivatives Data

In 2020, Council members continued to participate
in the development of international regulatory
and industry standards for the reporting of OTC
derivatives transactions. A key milestone reached
during the year was the approval of the UTI as
a new ISO standard (ISO 23897), with support
and input from Council members. This industry
standard is now available for global application.
Because this industry standard is expected to be
used by regulators in multiple jurisdictions in their
respective OTC derivative transaction reporting
regimes, the UTI will improve the abilities of

firms and regulators to monitor these financial
transactions across borders.
Another milestone reached during 2020 was an
agreement by ISO to initiate development work on
a new ISO standard for the UPI. Council members
contributed to the submission to ISO on UPI. This
development work is expected to continue into 2021.
The UPI will allow derivatives regulators and other
government agencies to better monitor emerging
financial risks by categorizing different types of
derivatives transactions. The Derivatives Service
Bureau (DSB), a subsidiary of the Association
of National Numbering Agencies, will act as the
UPI Service Provider (i.e., it will receive and store
product attributes and assign UPI codes to OTC
derivatives products).
In 2020 Council members participated in a Joint
Small Group of FSB GUUG and LEI ROC to refine
DSB governance and to continue refinement of
regulatory technical standards for CDE beyond
those developed by CPMI-IOSCO. Like the UTI and
UPI, the CDE are expected to be used by regulators
in multiple jurisdictions in their respective OTC
derivative transaction reporting regimes. It is
expected these data elements will be submitted to
ISO as business concepts or business elements within
the ‘data dictionary’ of the ISO 20022 standard.
Council members are participating in preparatory
work for this submission, which is being conducted
in partnership with the Society for Worldwide
Interbank Financial Telecommunications (SWIFT),
the Registration Authority for ISO 20022.

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Potential Emerging Threats, Vulnerabilities,
and Council Recommendations

The outbreak of the COVID-19 pandemic is
the biggest external shock to hit the post-war
U.S. economy. As businesses and establishments
shut down in March and April, private-sector
employment declined by almost a fifth. The
implementation of the CARES Act and a series
of policy measures taken by the Federal Reserve
and Treasury helped stabilize financial markets.
Although these policy measures have rejuvenated
credit markets, a protracted outbreak can adversely
affect any recovery and prolong the downturn. This
section presents a general discussion of identified
vulnerabilities in the context of the COVID-19 stress,
highlights key actions taken to mitigate risks, and
makes recommendations for addressing the risks.

bankruptcy filings are approaching cyclical highs
and are likely to increase until a full recovery takes
hold (see Box A).

5.1

Elevated valuations in U.S. equities and corporate
bonds make these markets vulnerable to a major
repricing of risk, increasing volatility, and weakening
balance sheets of financial and nonfinancial
businesses. Sharp reductions in the valuations of
different assets could negatively impact liquidity,
increase borrowing costs, and heighten rollover risk.

Nonfinancial Business: Corporate Credit

Low interest rates after the 2008 financial crisis
fueled a prolonged credit expansion in nonfinancial
business. Since 2011, the rate of growth in corporate
borrowing has exceeded the growth in nominal
GDP, pushing the corporate debt-to-GDP ratio to
historic highs when the pandemic hit the United
States (see Section 3.2.1). As credit conditions
deteriorated in March, market financing dried up
significantly. Bank credit lines became the principal
source of funding for most businesses, especially
those adversely affected by the pandemic (see
Section 3.5.1).
Rapid and decisive intervention by the Federal
Reserve and Treasury in March helped generate
a rebound in debt financing and revived investor
sentiment. Since then, principal equity indices have
broken through to historic highs, while spreads in
commercial paper and bond financing have also
returned to near pre-pandemic lows.
Meanwhile, banks have tightened standards on
new lending. Since March, nearly $2 trillion in
nonfinancial corporate debt has been downgraded
and default rates on leveraged loans and corporate
bonds have increased considerably. Business

A large wave of bankruptcies could stress resources
at courts and make it harder for firms to obtain
critical debtor-in-possession financing, which
could preclude timely debt restructuring for many
firms, potentially forcing them into liquidation.
In comparison to debt restructurings, liquidations
typically lead to greater economic losses from
the ensuing declines in employment and capital
spending. Moreover, creditors may suffer bigger
losses from liquidation, potentially contributing to a
further tightening in overall credit conditions.

Despite the turmoil in credit markets, the policyaided rebound in business financing has been strong
and the ratio of corporate debt-to-GDP has reached
new record highs. The potential risk to financial
stability from nonfinancial business borrowing
depends on the ability of businesses to service their
obligations, the ability of the financial sector to
absorb losses from defaults and downgrades, and
the continued willingness of market participants
to provide intermediation during times of stress.
In the years prior to the pandemic, the increase in
business debt did not fuel increased investments
to strengthen corporations’ earnings potential,
leaving them vulnerable to debt servicing problems.
Moreover, debt overhang problems could lead to
a sluggish recovery. In extreme situations when
debt servicing problems are widespread, credit
markets remain vulnerable to a repricing of risk and
disruptions to financial stability.

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Recommendations

The Council recommends that agencies continue
to monitor levels of nonfinancial business leverage,
trends in asset valuations, and potential implications
for the entities they regulate in order to assess
and reinforce the ability of the financial sector to
manage severe, simultaneous losses. Regulators and
market participants should continue to monitor and
analyze the exposures, loss-absorbing capacity, and
incentives of different types of stakeholders. This
includes the direct and indirect exposures of holders
of U.S. nonfinancial corporate credit, the effects of
potential liquidity risks in certain mutual funds, the
effects of evolving loan covenant and documentation
requirements, and the potential effects of markto-market losses and credit rating downgrades,
among other considerations. Regulators and market
participants should also continue to assess ways in
which leveraged nonfinancial corporate borrowers
and elevated asset prices may amplify stresses in the
broader market in the event of a rapid repricing of
risk or a slowdown in economic activity.

5.2

Financial Markets

5.2.1 Short-Term Wholesale Funding Markets
In normal times, wholesale funding markets provide
essential short-term funding to businesses, local
governments, and other financial intermediaries
(see Sections 3.4.1 and 3.4.2). In addition to
government entities and the Federal Reserve,
domestic participants in these markets include
broker-dealers, banks, money funds, hedge funds,
and securities lenders (see Box D). Developments
in the STFMs can have implications for financial
stability, as well as for the implementation of
monetary policy.

Money Market Mutual Funds

Stresses on prime and tax-exempt MMFs revealed
continued structural vulnerabilities that led to
increased redemptions and, in turn, contributed
to and increased the stress in short-term funding
markets (see Section 3.5.2.3). MMFs offer
shareholders redemptions on a daily basis (and
retail at a stable NAV), while many of the shortterm instruments that the MMFs hold may not be
liquid in times of stress. This liquidity difference
contributes to redemption incentives including a
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so-called “first-mover advantage,” where investors
believe they will be better off if they redeem faster
than other investors.
As prime MMFs experienced heavy redemptions,
their WLAs dropped notably, and some funds’
WLAs (which must be disclosed publicly each
day) approached or fell below the 30 percent
minimum threshold required by SEC rules. When
a fund’s WLA falls below 30 percent, the fund
board can impose fees or gates on redemptions.
Market participants reported concerns that the
imposition of a fee or a gate by one fund could spark
widespread redemptions from others. Preliminary
research indicates that prime fund outflows
accelerated as WLAs fell close to 30 percent.
Among institutional and retail prime MMFs, the
scale of the outflows as a percentage of fund assets
exceeded those that occurred during the September
2008 crisis, while the scale for tax-exempt funds
was similar to that in the 2008 financial crisis (see
Box D). Outflows abated after the Federal Reserve’s
announcement of support for MMFs in mid-to-late
March.

Repo Market

Repo markets have undergone significant structural
changes since the 2008 financial crisis. These
changes helped streamline some repo operations
and reduced exposures to counterparty risk. Repo
markets remain critical not only to financial stability
but also to the implementation of monetary policy,
and these linkages were highlighted by the turmoil
in repo markets in mid-September 2019.
Overnight repo rates spiked in mid-September 2019,
with SOFR increasing by approximately 300 basis
points (see Section 3.4.2). This unexpected high
volatility has been attributed to technical factors (for
example, to finance new Treasury settlements) and a
decline in funds available from banks and MMFs, as
corporations made quarterly tax payments. However,
the repo volatility spilled over to other short-term
rates, including the effective federal funds rate. The
Federal Reserve restored control of the policy rate
by injecting reserves, and the FOMC announced its
intention to maintain an ample supply of reserve

balances to aid the orderly functioning of funding
markets.
Repo rates on Treasuries and agency MBS spiked
once again in mid-March 2020. Selling pressures
in Treasuries likely originated from foreign central
banks and foreign investors seeking dollar funding
during the pandemic. Liquidity demand from
leveraged participants, such as hedge funds using
Treasury collateral (see Section 3.5.2.5 and Box
B), and mREITs using agency MBS collateral (see
Section 3.5.2.2), may have also played a significant
role. These leveraged participants are vulnerable to
funding risks because of their reliance on short-term
repo funding. When these leveraged participants
face margin calls (either because of an external
shock to the repo market or investor concerns about
their profitability), the need to deleverage can
increase selling pressures and lead to more margin
calls. Since the assets on their balance sheet are the
same assets used as collateral in their repo funding,
the pressure to deleverage can create an adverse
feedback loop of increased selling pressures and
more margin calls. The complexity of interactions
involving leveraged participants raises concerns as to
their role in amplifying funding stresses.

Recommendations

Recent market stresses, including the financial
fallout from the pandemic, have confirmed that
there remain potentially significant structural
vulnerabilities in short-term funding markets.
Market participants that rely predominantly on
short-term debt are vulnerable to funding risks.
For banks and other depository institutions, this
risk is mitigated by deposit insurance and liquidity
backstops, such as the Federal Reserve’s discount
window. However, non-depository institutions
are also important participants in these markets.
Leveraged nonbank participants that depend on
short-term funding also can pose a challenge to
financial stability. If their short-term funding is
not rolled over, these entities can be forced to
deleverage, and that can create an adverse feedback
loop of asset sales and margin calls.
The Council recommends that regulators review
these structural vulnerabilities, including the
vulnerability of large-scale redemptions in prime

and tax-exempt MMFs (as well as other shortterm funds with similar characteristics, such as
short-term collective investment funds), and any
role that leveraged nonbank entities may have
played in the repo market, and, if warranted, take
appropriate regulatory measures to mitigate these
vulnerabilities.

5.2.2 Residential Real Estate Market: Nonbank
Mortgage Origination and Servicing
Nonbank mortgage companies play a significant
role in the housing finance system (see Section
3.4.5). Nonbanks originated nearly 60 percent
of new mortgages in 2019 and service nearly
half of all mortgage debt outstanding. They are
particularly important for helping extend credit
to low- and moderate-income borrowers and have
provided competition and liquidity in the market
for mortgage servicing rights. While the business
models of nonbank mortgage companies vary,
many are subject to certain fragilities, such as a
heavy reliance on short-term funding, obligations
to continue to make servicing advances for certain
delinquent borrowers, and limited resources to
absorb adverse economic shocks. Given these
fragilities and their connections to other markets
and market participants, nonbanks could transmit
risk to the broader financial system should they
experience financial stress.
As the shock from the pandemic hit the United
States, federal and state governments enacted
a series of public assistance policies to aid
homeowners, such as suspending foreclosures,
placing a moratorium on evictions, and offering
flexibilities in home purchase and mortgage
acquisition processes. Under the CARES Act,
borrowers with a federally backed mortgage are able
to request mortgage payment forbearance.
An increase in forbearance and default rates has the
potential to impose significant strains on nonbank
servicers, but nonbanks have generally continued
to meet their servicing obligations. Increased
originations, beneficial policy actions, and fiscal
stimulus have mitigated nonbanks’ potential credit
and liquidity pressures. The surge in refinancing
due to low rates has provided servicers with an
additional source of liquidity to help sustain

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operations. In addition, federal agencies have issued
guidance and provided clarification on servicer
advance obligations that, in some cases, limited
the duration of required advances. Ginnie Mae
established a liquidity facility for its servicers that
provides a last resort financing option, though
that facility has seen limited uptake. Government
stimulus programs and expanded unemployment
insurance may have averted additional delinquencies
and limited forbearance requests, relieving some
potential stress on servicers. As the economy
recovers, the Council will continue to monitor
closely the origination and servicing markets and
the condition of nonbank mortgage companies.

Recommendations
The Council recommends that relevant federal and
state regulators continue to coordinate closely to
collect data, identify risks, and strengthen oversight
of nonbank companies involved in the origination
and servicing of residential mortgages. Regulators
and market participants have taken steps to address
the potential risks stemming from nonbanks,
including additional collaboration and the proposed
strengthening of prudential requirements. The
Council encourages regulators to take additional
steps available to them within their jurisdictions to
address the potential risks of nonbank mortgage
companies. While nonbank mortgage originators
have experienced enhanced profitability during
the refinance boom, relevant regulators should
ensure that the largest and most complex nonbank
mortgage companies are prepared should
refinances decrease or forbearance rates increase.
In addition, the Council recommends that relevant
federal and state regulators develop and establish
an information-sharing framework to enable
collaboration and communication in responding to
distress at a mortgage servicer. Regulators should
also develop and implement coordinated resolution
planning requirements for large and complex
nonbank mortgage companies.

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Box F: Council Statement on Activities-Based Review of Secondary Mortgage
Market Activities
On September 25, the Council issued a statement
on its activities-based review of secondary mortgage
market activities. The Council’s review focused in
particular on the activities of Fannie Mae and Freddie
Mac as the dominant private secondary market
providers of liquidity through their purchase of
mortgages for securitization and sale as guaranteed
MBS. In assessing potential risks to financial stability,
the Council applied the framework for an activitiesbased approach described in the interpretive guidance
on nonbank financial company determinations issued
by the Council in December 2019.
The 2008 financial crisis demonstrated that financial
stress at the Enterprises could limit their ability to
provide reliable liquidity to the secondary market
or perform their guarantee and other obligations
on their MBS and other liabilities, with significant
implications for the national housing finance markets,
financial stability, and the broader economy. The
Enterprises continue to play a central role in the
national housing finance markets—acquiring nearly
50 percent of newly originated mortgages in both
single-family and multifamily markets—and are two of
the largest U.S. financial institutions, with significant
interconnectedness with financial markets and other
financial institutions.
If the Enterprises were unable to provide liquidity
to the secondary market, other market participants
may be unable in the near- or medium-term to
provide liquidity at the scale and pricing needed
to ensure smooth market functioning and financial
intermediation. As a result, any distress at the
Enterprises that affected their secondary mortgage
market activities, including their ability to perform their
guarantee and other obligations on their MBS and
other liabilities, could pose a risk to financial stability,
if risks are not properly mitigated.
Capital is a core component of FHFA’s regulatory
framework. Therefore, in assessing potential risk
mitigants, much of the Council’s analysis focused on
a new capital regulation recently proposed by FHFA.
This proposal is intended to enhance the quality and
quantity of required capital, so as to ensure that each

Enterprise is capitalized to remain a viable going
concern both during and after a severe economic
downturn and also to mitigate the potential risk
to national housing finance markets posed by the
Enterprise.
In conducting its review, the Council considered the
following two questions, among others:
1)

Is the proposed capital rule appropriately sized
and structured given the Enterprises’ risks and
their key role in the housing finance system?

Does the proposed capital rule promote stability in
the broader housing finance system?

Based on its assessment of the proposed rule,
the statement issued by the Council contained the
following key findings:
First, with respect to Risk-Based Capital
Requirements: The proposed rule includes a risksensitive capital framework that results in a granular
calibration of credit risk capital requirements. It would
require aggregate credit risk capital on mortgage
exposures that, as of September 2019, would lead to
a substantially lower risk-based capital requirement
than the bank capital framework, and likely be lower
than other credit providers across significant portions
of the risk spectrum during much of the credit cycle.
This would create an advantage that could maintain
significant concentration of risk with the Enterprises.
The Council encouraged FHFA and other regulatory
agencies to coordinate and take other appropriate
action to avoid market distortions that could
increase risks to financial stability by generally taking
consistent approaches to the capital requirements
and other regulation of similar risks across market
participants, consistent with the business models and
missions of their regulated entities.
Second, on Capital Buffers: The proposed rule
includes a stress capital buffer and a stability capital
buffer that would require the Enterprises to hold
capital above their regulatory requirements. The
inclusion of such capital buffers is an important step
to mitigating the risks the Enterprises pose to the

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Box F: Council Statement on Activities-Based Review of Secondary Mortgage
Market Activities
broader system. The calibration of the buffers in the
proposed rule might help achieve certain policy goals,
such as reducing the buffers’ impact on higher risk
exposures, but is based on total adjusted assets, not
risk-weighted assets, and thus may be relatively riskinsensitive.
For that reason, the Council encouraged FHFA to
consider the relative merits of alternative approaches
for more dynamically calibrating the capital buffers.
The capital buffers should be tailored to mitigate
the potential risks to financial stability and otherwise
ensure that the Enterprises have sufficient capital to
absorb losses during periods of severe stress and
remain viable going concerns, while balancing other
policy objectives.
Third, on Total Capital Sufficiency: The proposed rule
would increase the quality and quantity of capital that
the Enterprises would be required to hold. Significant
high-quality capital would mitigate risks to financial
stability by making it more likely that the Enterprises
will be able to perform their countercyclical function
and maintain market confidence as viable going
concerns through the economic cycle. Similarly, a
meaningful leverage ratio requirement that is a credible
backstop to the risk-based requirements would
address potential risks to financial stability.
The proposed rule, by relying on definitions of
regulatory capital that are similar to that of the U.S.
banking framework, would ensure that high-quality
capital is the predominant form of regulatory capital.
With respect to the quantity of regulatory capital, the
Council considered the proposed capital requirements
in light of a number of relevant benchmarks, such
as: (1) losses during the 2008 financial crisis; (2) a
comparison of the proposed capital requirements to
those of other large, complex financial institutions,
taking into account differences in business models
and risk profiles; and, (3) the capital requirements
implied by a conservative mortgage stress test model.
The proposed rule requires a meaningful amount of
capital for the Enterprises, and is a significant step
towards ensuring that the Enterprises would be able
to provide liquidity to the secondary mortgage market
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and satisfy their obligations during and after a period
of severe stress. However, the Council’s analysis using
benchmark comparisons suggested that risk-based
capital requirements and leverage ratio requirements
that are materially less than those contemplated by
the proposed rule would likely not adequately mitigate
the potential stability risk posed by the Enterprises.
Moreover, it is possible that additional capital could be
required for the Enterprises to remain viable concerns
in the event of a severely adverse stress, particularly if
the Enterprises’ asset quality were ever to deteriorate
to levels comparable to the experience leading up to
the 2008 financial crisis.
The Council thus encouraged FHFA to ensure highquality capital by implementing regulatory capital
definitions that are similar to those in the U.S. banking
framework. The Council also encouraged FHFA to
require the Enterprises to be sufficiently capitalized to
remain viable as going concerns during and after a
severe economic downturn.
In addition to a capital framework, FHFA is also
implementing significant additional enhancements to
the Enterprises’ regulatory framework that would help
mitigate the potential risk to financial stability, thereby
enabling the Enterprises to provide secondary
market liquidity throughout the economic cycle.
These enhancements include efforts to strengthen
Enterprise liquidity regulation, stress testing,
supervision, and resolution planning.
The Council supported FHFA’s commitment
to developing its broader prudential regulatory
framework for the Enterprises, and will continue to
monitor the secondary mortgage market activities
of the Enterprises and FHFA’s implementation of
the regulatory framework to ensure potential risks
to financial stability are adequately addressed. If
the Council determines that such risks to financial
stability are not adequately addressed by FHFA’s
capital and other regulatory requirements or other
risk mitigants, the Council may consider more formal
recommendations or other actions, consistent with
the December 2019 guidance.

5.2.3 Commercial Real Estate Market
The COVID-19 pandemic led to the closure of
many business establishments. While some of these
closures have been temporary (such as restaurants),
others have been more long-lasting (such as
entertainment parks and movie theaters). Although
the intensity and impact of closures depends on the
duration and strength of the pandemic, it raises
concerns about the viability of several types of
business establishments and their ability to pay rent
or generate income from commercial properties.
A prolonged downturn leaves the commercial real
estate (CRE) sector vulnerable to mortgage default
and decline in valuations, with spillovers to the
broader economy (see Section 3.4.6).
There are two reasons why CRE is important to
financial stability in the United States (see Box
E). First, asset sales from financially distressed
individual properties can lower valuations, spilling
over into adjoining property values, leading to more
distress and a general downward spiral on CRE
valuations. Second, a significant proportion of CRE
loans is currently held on balance sheets of banks,
with small and mid-size banks more likely to be
concentrated in CRE. Distress in CRE properties
makes these creditor banks vulnerable to losses and
write-downs, with the potential to tighten credit and
dampen the economic recovery. If these valuation
pressures and asset sales do not remain localized, a
widespread decline in the valuation of underlying
CRE properties could lead to sluggish economic
growth.

Recommendations

The Council recommends that regulators continue
to monitor volatility in CRE asset valuations, the
level of CRE concentration at banks, and the
performance of CRE loans. Regulators should also
monitor exposures, loss-absorbing capacity, and the
incentives of banks and other entities that hold CRE
loans, including REITs and insurance companies.
The Council recommends that regulators continue
to encourage banks and other entities to bolster,
as needed, their loss absorption capacity by
strengthening their capital and liquidity buffers
commensurate with the levels of CRE concentration
on their balance sheets.

5.3

Financial Institutions

5.3.1

Large Bank Holding Companies

Large BHCs are critical to the U.S. financial
system, performing essential banking functions
such as the provision of credit to commercial and
retail borrowers. As the shock from the pandemic
has shown, bank credit lines provide a lifeline to
business, especially in times when nonbanks and
other market sources of finance tighten credit (see
Section 3.5.1.1).
The central role that large BHCs play in retail and
wholesale payment systems ensure that operational
failures do not disrupt commercial activity even
in times of market stress. Large BHCs also help
financial and nonfinancial firms to hedge their risk
exposures in the derivatives markets. Lastly, several
specialized financial services, such as tri-party
repo and custody services for asset managers, are
concentrated in the largest BHCs.
The onset of the pandemic dried up funding
from market and nonbank sources. Bank credit
lines became the principal source of funding for
corporations adversely affected by the pandemic.
The strengthened capital positions following
the 2008 financial crisis helped banks withstand
large emergency credit drawdowns. Liquidity
pressures were also eased when the Federal Reserve
lowered the discount rate by 150 basis points,
encouraged discount borrowing, and announced
facility programs to aid banks and markets. Most
corporations drew on their bank credit lines as a
precautionary measure and deposited the proceeds
with banks. Bank deposits grew sharply not just from
credit line withdrawals and payments from fiscal
programs, but also because investors fleeing risky
assets sought the safety of insured deposits. These
events underlined the critical role that the banking
system plays in the provision of credit during
episodes of financial distress.
The pandemic has significantly impaired the
ability of some households and businesses to repay
debt. However, mortgage forbearance, interagency
guidance on troubled debt restructurings, and
various liquidity support programs have helped
mitigate some of these pressures. As a result,

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delinquency rates on bank loans for the first half of
2020 remain low and have yet to reveal a significant
deterioration in loan performance. Meanwhile,
large BHCs have significantly increased loan
loss provisions in anticipation of the impending
deterioration in asset quality. Loan loss provisions
were also affected by the adoption of the CECL
framework, though regulators have allowed a
delayed capital phase-in to reduce the burden
during the pandemic.
The credit line withdrawals and the increase in loan
loss provisions have put downward pressure on both
leverage and risk-based capital ratios. As credit and
equity markets rebounded from their March lows,
broker-dealers and trust banks have also benefited
from significant increases in trading revenues and
underwriting income. However, for banks with
larger credit footprints, the impending declines in
credit quality have led to voluntary and involuntary
restrictions on their capital distributions.
In light of the financial fallout from the COVID-19
pandemic, regulatory authorities have provided
temporary capital relief as many large banks
voluntarily suspended share repurchases in midMarch. Following the release of the 2020 stress test
results conducted by the Federal Reserve, large
banks are required to preserve capital by suspending
stock repurchases, capping dividend payments, and
limiting dividends according to a formula tied to
recent income. In spite of these policy measures,
the largest banks remain vulnerable to a protracted
downturn that is more severe than currently
envisaged. These outcomes have been discussed
under the 2020 Stress Test Results conducted by
the Federal Reserve in their Assessment of Bank
Capital during the Recent Coronavirus Event (see Chart
3.5.1.27).

Recommendations

Large and complex U.S. financial institutions were
more resilient prior to the pandemic than they were
prior to the 2008 financial crisis. This resilience
has been achieved, in part, by raising more capital;
holding higher levels of liquid assets to meet peak
demands for funding withdrawals; improving
loan portfolio quality for residential real estate;
implementing better risk management practices;
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and developing plans for recovery and orderly
resolution.
The Council recommends that financial regulators
ensure that the largest financial institutions
maintain sufficient capital and liquidity to ensure
their resiliency against economic and financial
shocks. The Council recommends that regulators
continue to monitor the capital adequacy for
these banks and, when appropriate, phase out the
temporary capital relief currently provided.
The Council also recommends that regulators
continue to monitor and assess the impact of rules
on financial institutions and financial markets—
including, for example, on market liquidity and
capital—and ensure that BHCs are appropriately
monitored based on their size, risk, concentration
of activities, and offerings of new products and
services.
The Council further recommends that the
appropriate regulatory agencies continue to review
resolution plans submitted by large financial
institutions; provide feedback and guidance to
such institutions; and ensure there is an effective
mechanism for resolving large, complex institutions.

5.3.2 Investment Funds
Investment funds play a critical intermediary
role in the U.S. economy, promoting economic
growth through efficient capital formation. While
recognizing these benefits, the Council has also
identified a potential vulnerability relating to
redemption risk in certain open-end funds. The
level of this risk is a function of, among other
things, the liquidity of the underlying assets, the
effectiveness of the fund’s management of its
liquidity, and the potential for an investor to enjoy
a first-mover advantage. For example, although
both equity and fixed income-oriented open-end
funds offer daily redemptions to investors, some
fixed-income markets are less liquid than equity
markets and thus funds holding mostly fixed-income
instruments may face greater vulnerability to run
risks than funds holding mostly equities. During
periods of significant financial stress, as investor
sentiment about overall economic and market
conditions changes, these funds – not unlike other

investors such as insurance companies, pension
funds, and individual investors – may be inclined
to directly sell these fixed-income instruments for
cash. The Council has focused in particular on the
question of whether the structure of open-end funds
results in greater selling pressure than if investors
held the fixed-income instruments directly. The
SEC has taken several steps to address this potential
vulnerability, including the adoption in October
2016 of rules intended to enhance liquidity risk
management by mutual funds and ETFs.
During the mid-March financial turmoil, credit
spreads increased to levels not seen since the 2008
financial crisis, and corporate bond issuance came
to a near halt. As discussed in Section 3.5.2.4,
bond funds experienced historically high levels
of outflows that some research has suggested
contributed to stress in corporate and municipal
bond markets. Interventions by the Federal Reserve
and Treasury, including a commitment to purchase
up to $250 billion of bonds, ultimately restored
orderly functioning in the primary and secondary
markets. Nonetheless, these events demonstrate the
need for additional analysis to assess broader market
structure dynamics that may have contributed to the
stress, including whether investors redeeming shares
from bond funds may have affected the extent of
selling pressure in the bond market differently than
if those investors had held and sold bonds directly.
In addition to the potential vulnerability associated
with redemption risk in mutual funds, the Council
has also previously highlighted the use of leverage
by investment funds. The use of leverage is
most widespread among hedge funds but varies
significantly among hedge funds of different sizes
and investment strategies (see Section 3.5.2.5).
Leverage can allow investment funds to hedge risk
or increase exposures, depending on the activities
and strategies of the fund. However, leverage
introduces counterparty risk, and in a period of
stress, if leveraged investment funds are forced to
sell assets on a significant scale, it could exacerbate
asset price movements. As discussed in Box B, hedge
funds may have also contributed to Treasury market
volatility.

Recommendations

The Council supports initiatives by the SEC and
other agencies to address risks in investment funds.
The Council also supports data collection and
analytical work by member agencies aimed at the
identification of potential emerging risks. The SEC
implemented several data collection efforts and
has established additional reporting requirements
for investment funds. As a result, there is now
significantly more data available to regulators to
monitor and analyze developments concerning fund
liquidity, leverage, and risk-taking. The Council
recommends that the SEC and other relevant
regulators consider whether there are additional
steps that should be taken to address these
vulnerabilities.

5.4

Financial Market Structure, Operational
Challenges, and Financial Innovation

5.4.1

Central Counterparties

The benefits of CCPs include improved
transparency, the application of centralized
risk management and standardized margin
methodologies, multilateral netting, and clear,
predetermined procedures for the orderly
management of counterparty credit losses. Central
clearing mandates have increased the volume of
cleared OTC derivatives trades, both in absolute
terms and relative to the size of the markets.
The introduction of the CPMI-IOSCO Principles
for Financial Market Infrastructures (PFMI) sets
forth international principles for CCPs and other
types of financial market infrastructures. The
implementation of the PFMI worldwide, as well
as other risk-management-focused policies, has
improved the safety and efficiency of CCPs across a
broad set of jurisdictions.
There have also been advances in the development
of plans for CCP recovery. Regarding those CCPs
designated as systemically important FMUs by the
Council, the CFTC has regulations requiring such
CCPs it supervises to maintain recovery and orderly
wind-down plans, and the CFTC has reviewed and
provided guidance on these recovery plans. The SEC
has also approved recovery and orderly wind-down
plans for the CCPs it supervises.

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Although CCPs provide significant benefits to
market functioning and financial stability, the
inability of a CCP to meet its obligations arising
from one or more clearing member defaults could
potentially introduce strains on the surviving
members of the CCP and, more broadly, the
financial system. The overall market impact of
these demands depends on the size of the CCP
and its interconnectedness with other systemically
important financial institutions.
CCPs’ risk management frameworks are designed
to ensure that they have sufficient pre-funded
resources to cover a member default and, in the
case of systemically important CCPs, multiple
member defaults. In order to mitigate their risk,
CCPs impose liquidity and resource requirements
on clearing members that can increase with market
volatility. The first line of defense of the CCP is often
through initial margin requirements which, in order
to achieve adequate risk coverage, are inherently
procyclical. Initial margin models, however, also
have features that mitigate procyclicality, including
the use of historical and theoretical stress scenarios
even during low volatility periods, to dampen the
sensitivity of initial margin to changes in market
volatility.
In response to the market volatility in March 2020,
aggregate margin levels increased significantly.
However, the markets served by the CCPs continued
to function in an orderly fashion (see Section
3.6.1.1). While the cleared derivatives markets
functioned as designed, there is continued concern
about the impact on clearing members and their
clients of liquidity demands related to margin
requirements. Similar concerns exist in the context
of uncleared swaps and the collateral flows between
swap dealers and their clients. Relevant authorities
are engaged in efforts to examine the performance
of CCPs’ and dealers’ margin frameworks and the
potential strains placed on intermediaries and
clients.
A number of regulatory efforts have focused on
monitoring and quantifying potential systemic risks.
Many authorities regularly monitor risk exposures
at CCPs and clearing members or broker-dealers
pursuant to their regulatory regime. Both the CFTC
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and SEC maintain active risk surveillance programs
of CCPs’ and intermediaries’ risk management and
receive daily or weekly reports of positions, risk
measures, margins, collateral, and default resources.
In addition to risk surveillance programs,
supervisory stress tests involving multiple CCPs can
be an important tool in this assessment. Supervisory
stress tests can, for example, help shed light on
the risks and vulnerabilities related to potential
failures of the largest clearing members. Because
these clearing members are often active across many
markets, such failures could create exposures across
multiple CCPs.

Recommendations

The Council recommends that the CFTC, Federal
Reserve, and SEC continue to coordinate in the
supervision of all CCPs designated by the Council
as systemically important FMUs. Relevant agencies
should continue to evaluate whether existing
risk management expectations for CCPs are
sufficiently robust to mitigate potential threats
to financial stability. Member agencies should
continue working with global counterparts and
international standard-setting bodies to identify
and address areas of common concern. During the
last year, EU authorities and the CFTC have taken
a number of steps to provide greater clarity to the
regulation and supervision of CCPs operating in
their markets. The Council encourages continued
engagement by Treasury, CFTC, Federal Reserve,
and SEC with foreign counterparts to address the
potential for inconsistent regulatory requirements
or supervision to pose risks to U.S. financial stability
and encourages cooperation in the oversight and
regulation of FMUs across jurisdictions.
The Council also encourages agencies to continue
to monitor and assess interconnections among
CCPs, their clearing members, and other financial
institutions. While margin requirements have
increased significantly in the aftermath of the
financial fallout from the COVID-19 pandemic,
agencies should continue to analyze and monitor the
impact of regulatory risk management frameworks
in cleared, uncleared, and related securities
markets and their impact on systemically important
intermediaries and clients.

Finally, the Council encourages regulators to
continue to advance recovery and resolution
planning for systemically important FMUs and to
coordinate in designing and executing supervisory
stress tests of multiple systemically important CCPs.

5.4.2 Alternative Reference Rates
The UK FCA continues to urge firms and regulators
to prepare for a transition away from LIBOR on a
global scale by year-end 2021. With more than $200
trillion of USD LIBOR-based contracts outstanding,
the transition from LIBOR, given its anticipated
cessation or degradation, will require significant
effort from market participants. The failure of
market participants to adequately analyze their
exposure to LIBOR and transition ahead of LIBOR’s
anticipated cessation or degradation could expose
market participants to significant legal, operational,
and economic risks that could adversely impact U.S.
financial markets.
In March, the FCA stated publicly that, despite the
COVID-19 pandemic, the assumption that firms
cannot rely on LIBOR being published after the
end of 2021 has not changed (see Section 3.6.1.2).
Currently, the FCA has voluntary agreements with
LIBOR panel banks to continue submissions for
publication of LIBOR through year-end 2021.
The FCA expects some banks to stop submissions
around that time. If a bank leaves the LIBOR
submission panel, the FCA must assess whether
LIBOR continues to be representative of the
underlying market. The FCA could deem LIBOR
“unrepresentative,” at which time EU-regulated
financial institutions would no longer be able to
rely on the rate for new transactions. Additionally,
if enough banks leave the LIBOR panel, LIBOR
may cease to be published. Even if LIBOR continues
for some period with diminished submissions,
its performance may become increasingly
unpredictable and unstable.
In the U.S., the ARRC has made significant progress
toward analyzing and adopting an alternative
rate (SOFR), creating robust contract fallback
language for a variety of products, and building
the infrastructure for the development of SOFR
markets. Broadly speaking, the pandemic has not
materially slowed the progress, but progress has

been faster in derivatives cleared on CCP platforms
and floating-rate note (FRNs) markets, and relatively
slower in bilateral markets with bespoke contract
terms, such as bank loans to businesses (see Section
3.5.3.2). Despite this progress, market participants
with significant exposure to USD LIBOR remain
vulnerable if they do not sufficiently prepare prior
to the end of 2021.
Legacy cash products and new transactions without
robust fallback language present a particular
difficulty for transition. Contractual fallback
provisions may not contemplate the need for an
alternative rate or may include provisions that
probably cannot be operationalized in the event
of LIBOR’s cessation, like the polling of LIBOR
panel banks by the issuer. While many new FRN
issuances include more robust contract fallback
language, some new issuances still do not include
these provisions, putting issuers and investors at
risk. Securitized products are further complicated,
as legacy contracts may require the consent of all
parties to amend the transaction and new issuance
continues to use legacy language that may not
be feasible to implement. Re-documenting these
products will require significant effort and expense,
and in most cases, it may not be possible to contact
and obtain the required consent from all parties
involved; the slow adoption of more robust fallback
language in these instruments, therefore, presents a
particular vulnerability.
Consumer exposures to LIBOR, most commonly
through adjustable-rate mortgages, present a special
set of considerations in addition to those discussed.
Noteholders will need to take care in working to
ensure that consumers are treated fairly and that the
transition is explained clearly. The ARRC is working
with consumer groups, lenders, investors, and
regulators to achieve a smooth LIBOR transition.

Recommendations

The ARRC has released the Recommended Best
Practices for completing the transition from LIBOR.
Market participants should analyze their exposure to
USD LIBOR, assess the impact of LIBOR’s cessation
or degradation on existing contracts, and remediate
risk from existing contracts that do not have robust
fallback arrangements to transition the contract

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to an alternate rate. Market participants should
consider participation in ISDA’s protocol, which
takes effect in 2021, as it will be especially important
in remediating risks to existing derivatives contracts
referencing LIBOR. Market participants that
do not sufficiently prepare for this inevitable
transition could face significant legal, operational,
and economic risks. Market participants that have
determined that SOFR is an appropriate rate for
their LIBOR transition should not wait for the
possible introduction of the forward-looking SOFR
term rates to execute the transition. The Council
recommends that market participants formulate
and execute transition plans so that they are fully
prepared for the anticipated discontinuation or
degradation of LIBOR. Because of the uncertainty
around the exact timing of the cessation of LIBOR,
including the potential of LIBOR to be deemed nonrepresentative by the FCA under UK regulations,
market participants should formulate and execute
plans to transition prior to year-end 2021, taking
into account their business requirements. Market
participants must understand the exposure of their
firm to LIBOR in every business and function, assess
the impact of LIBOR’s cessation or degradation
on existing contracts, and remediate risks from
existing contracts that do not have robust fallback
provisions to transition the contract to an alternate
rate. It is also important that participants consider
potential LIBOR exposure in services provided by
third parties, such as contract servicing, systems,
and models. Market participants should evaluate
whether any new agreements contain sufficiently
robust fallback provisions, such as those endorsed
by the ARRC, to mitigate risk that the contract’s
interest rate benchmark becomes unavailable.
The Council commends the efforts of the ARRC and
recommends that it continue to facilitate an orderly
transition to alternative reference rates. Council
member agencies should determine whether
further guidance or regulatory relief is required to
encourage market participants to address legacy
LIBOR portfolios. Council member agencies should
also use their supervisory authority to understand
the status of regulated entities’ transition from
LIBOR, including their legacy LIBOR exposure and
plans to address that exposure.

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5.4.3 Financial Market Structure
The extreme volatility in financial markets early in
the pandemic further emphasized the importance
of ensuring that appropriate market structures
are in place so that financial markets can function
effectively during stress events. Advances in
information and communications technologies, as
well as regulatory developments, have altered the
structure of financial markets over the last decade.
The Council and member agencies are closely
monitoring how changes in market structure have
affected the robustness and efficiency of capital
markets and the stability of the financial system.
Interlinkages among dollar funding markets:
In the decade since the 2008 financial crisis,
new regulations on bank capital and liquidity,
structural reforms in MMFs, and a new operating
environment for bank-affiliated broker dealers have
fundamentally altered how market participants
interact and the various interlinkages among the
federal funds market, the repo market, and the
Eurodollar market.
Some market participants are active in both secured
and unsecured short-term funding markets.
Commercial banks, affiliated broker dealers, and
the FHLBs operate in the secured repo market as
well as the unsecured federal funds market. While
money funds lend in the repo and the Eurodollar
market, they cannot participate in the federal funds
market. Meanwhile, borrowing options in the dollar
funding market for some entities, such as hedge
funds, are limited to the repo market. Given the
myriad of participants and strong interlinkages
between them, disruptions in one market can
transmit to another (see, for example, Box D).
There are benefits from interdependencies among
markets, including enhanced price discovery and
more options for hedging risks. At the same time,
interdependencies create transmission risks from
volatile or inaccurate pricing that have the potential
to amplify market shocks across different markets.
Pressures on dealer intermediation: The financial
fallout from the pandemic was disruptive in the
markets for critical securities such as Treasuries (see
Box B), MBS (see Section 3.3.5), and corporate

bonds (see Box A). Market disruptions not only have
implications for financial stability but also affect the
implementation of monetary policy.
Traditionally, market-making and arbitrage
mechanisms involving securities dealers have helped
in the orderly functioning of the secondary market
for Treasury and MBS. Bank-affiliated brokerdealers are also the principal participants in the
tri-party and GCF repo markets that use these
securities as collateral.
However, two developments in the post-crisis
financial landscape have imposed significant
pressures on dealer intermediation. First, issuance
volumes of these marketable securities, especially
Treasury securities, have increased significantly.
Second, the post-crisis regulatory framework has
also imposed balance sheet constraints at bankaffiliated broker-dealers. With the implementation
of Basel III regulations on capital and leverage,
major bank-affiliated broker-dealers have reduced
the amount of their balance sheet that is allocated
to trading and repo transactions. Together, these
developments may have contributed to episodes of
illiquidity in Treasury, MBS, and corporate bond
markets in March 2020 (see Box B and Section
3.4.2.2).
Role of non-traditional market participants: Nontraditional market participants, including principal
trading firms, play an increasingly important role
in securities and other markets. These firms may
improve liquidity and investor outcomes under
normal circumstances, but they may also introduce
new potential risks. For instance, the trading
strategies that non-traditional market participants
employ and the incentives and constraints that
they operate under may not be as well understood,
leading to uncertainty about how these firms might
behave during periods of market stress.

Recommendations

Episodes of volatility in wholesale funding
markets over the past two years have highlighted
the importance of interdependencies across the
different dollar funding markets. Policy measures
to address imbalances in one funding market can
potentially create imbalances in another funding

market. For example, the volatility experienced
in September 2019 and March 2020 has renewed
attention on the dealers’ traditional role of direct
liquidity provision through market-making. To
the extent that dealers have reduced their market
footprint over time, this could contribute to
market volatility, particularly during stress events.
The significant role of non-traditional market
participants may have also amplified market
volatility. The temporary solution has been to
provide more balance sheet space to BHCs in the
form of relief on capital and liquidity regulation so
that affiliates of the BHCs are better positioned to
intermediate investors’ demands for liquidity. In
addition, the Federal Reserve has increased the size
of its balance sheet to absorb selling pressures on
Treasury and MBS to a significant degree.
In light of these developments, there should be
active collaboration among regulators across
jurisdictions to ensure coordination of efforts.
The Council recommends that member agencies
conduct an interagency operational review of
market structure issues that may contribute to
market volatility in key markets, including shortterm funding, Treasuries, MBS, and corporate bond
markets, and study the interlinkages between them.
Market participants should also regularly assess how
market developments affect the risk profile of their
institutions. The Council recommends that financial
regulators continue to monitor and evaluate
ongoing changes that might have adverse effects on
markets, including on market integrity and liquidity.

5.4.4 Cybersecurity
Financial institutions continue to invest in and
expand their reliance on information technology
and cloud-based computing to reduce costs and to
increase efficiency and resiliency. The COVID-19
pandemic may accelerate this trend as financial
institutions have implemented business continuity
plans through increased use of teleworking systems
and dual work locations, for example. However,
greater reliance on technology, particularly across a
broader array of interconnected platforms, increases
the risk that a cybersecurity incident may have
severe consequences for financial institutions. In
fact, a recent analysis by economists at the FRBNY
details how impairment of payment systems at any

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of the five most active U.S. banks would result in
significant spillovers to other banks.
The financial sector, like other critical sectors, is
vulnerable to malware attacks, ransomware attacks,
denial of service attacks, data breaches, and other
events. Such incidents have the potential to impact
tens or even hundreds of millions of Americans and
result in financial losses of billions of dollars due to
disruption of operations, theft, and recovery costs.
The implementation of teleworking strategies
using virtual private networks, virtual conferencing
services, and other technologies can increase
cybersecurity vulnerabilities, insider risks, and other
operational exposures (see Section 3.6.2). Market
participants have observed a spike in COVID-19
related phishing attacks, as attackers seek to exploit
less secure home networks. At the same time,
financial institutions have increased their reliance
on third-party service providers for teleworking tools
and services. The interdependency of these networks
and technologies supporting critical operations
magnifies cyber risks, threatening the operational
risk capabilities not just at individual institutions,
but also of the financial sector as a whole.
A destabilizing cybersecurity incident could
potentially threaten the stability of the U.S. financial
system through at least three channels:
The incident could disrupt a key financial service or
utility for which there is little or no substitute. This
could include attacks on central banks; exchanges;
sovereign and sub-sovereign creditors, including
U.S. state and local governments; custodian banks,
payment clearing and settlement systems; or other
firms or services that lack substitutes or are sole
service providers.
The incident could cause a loss of confidence among
a broad set of customers or market participants. If
it causes customers or participants to question the
safety of their assets or transactions and leads to
significant withdrawal of assets or activity, the effects
could be destabilizing to the broader financial
system.

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The incident could compromise the integrity of
critical data. Accurate and usable information
is critical to the stable functioning of financial
firms and the system; if such data is corrupted
on a sufficiently large scale, it could disrupt the
functioning of the system. The loss of such data also
has privacy implications for consumers and could
lead to identity theft and fraud.

Recommendations

Improving the cybersecurity and operational
resilience of the financial sector requires continuous
assessment of cyber vulnerabilities and critical
connections across firms. Sustained senior-level
commitment to mitigate cybersecurity risks and
their potential systemic implications is necessary at
both member agencies and private firms.
The Council recommends that federal and state
agencies continue to monitor cybersecurity risks
and conduct cybersecurity examinations of financial
institutions and financial infrastructures to ensure,
among other things, robust and comprehensive
cybersecurity monitoring, especially in light
of new risks posed by the pandemic. However,
the authority to supervise third-party service
providers varies across financial regulators. To
further enhance third-party service provider
information security, the Council recommends
that Congress pass legislation that ensures that
FHFA, NCUA, and other relevant agencies have
adequate examination and enforcement powers to
oversee third-party service providers. The Council
also recommends that federal banking regulators
continue to coordinate third-party service provider
examinations, work collaboratively with states,
and also work with the State Liaison Committee
to identify additional ways to support information
sharing among state and federal regulators.
The Council encourages continued cooperation
across government agencies and private firms
to improve cybersecurity through the adoption
of authenticable digital identities that offer
agencies and firms the ability to mitigate the
risk of cybersecurity incidents through digital
authentication of parties (e.g. trading partners,
vendors, customers) to enhance the financial
sector’s strong cybersecurity posture.

The Council supports the ongoing work of
partnerships between government agencies and
private firms, including the Financial and Banking
Information Infrastructure Committee (FBIIC),
the Financial Services Sector Coordinating Council,
and the Financial Services Information Sharing
and Analysis Center (FS-ISAC). These partnerships
focus on improving the financial sector’s ability
to rapidly respond to and recover from significant
cybersecurity incidents, thereby reducing the
potential for such incidents to threaten the stability
of the financial system and the broader economy.
The Council recommends that the FBIIC continue
to promote processes to strengthen response and
recovery efforts, including efforts to address the
systemic implications of significant cybersecurity
incidents. The FBIIC should continue to work
closely with the Department of Homeland Security,
law enforcement, and industry partners to carry
out regular cybersecurity exercises recognizing
interdependencies with other sectors, such as
telecommunications and energy.
The Council further recommends that agencies
work to improve information sharing among
private firms and government partners. Sharing
timely and actionable cybersecurity information
can reduce the risk that cybersecurity incidents
occur and can mitigate the impacts of those that
do occur. Treasury and relevant agencies should
carefully consider how to appropriately share
information and, where possible, continue efforts
to declassify (or downgrade classification) to the
extent practicable, consistent with national security
imperatives. The Council encourages efforts to
enhance information sharing with the FS-ISAC
and its growing community of financial sector
institutions.
Financial institutions are rapidly adopting new
technologies, including cloud computing and
artificial intelligence. The Council supports the
efforts of the FBIIC Technology Working Group,
which examines the extent to which financial
services firms using emerging technologies
introduce new cyber vulnerabilities into the
financial services critical infrastructure. The
Council recommends agencies consider how such

emerging technologies change the sector’s risk
profile, and consider the need for any corresponding
change to supervision and regulation.

5.4.5 Data Gaps and Challenges
The 2008 financial crisis exposed several major
gaps and deficiencies in the range and quality of
data available to financial regulators to identify
emerging risks in the financial system. These gaps
and shortcomings include firm-level structure and
ownership information; transaction data in certain
important financial markets, including short-term
funding, securities lending arrangements, repo
contracts, and OTC derivatives; and limitations
in financial statement reporting for certain types
of institutions. The usefulness of data was often
limited by institutional or jurisdictional differences
in reporting requirements. These types of
inconsistencies created challenges for data sharing
and increased the reporting burden on market
participants.
Progress has been made on these fronts. Reporting
of centrally cleared repurchase rate agreements
initiated by the OFR in 2019 incorporates the use
of the LEI. Trade Information Warehouse data on
credit derivatives provided to OFR is currently being
revised to also include the LEI.
Council member agencies have been actively
engaged with each other, regulators in other
jurisdictions, and firms in the financial sector to
develop standards and protocols and to execute on
data collection initiatives. Staff of the OFR, CFTC,
SEC, and Federal Reserve meet regularly with their
international regulatory counterparts from the
FSB to implement UTIs, UPIs, and CDE standards
for OTC derivatives and have recently developed
a governance structure for oversight. Member
agencies have also been working to facilitate the
adoption of LEIs and Universal Loan Identifiers
(ULIs) for mortgage loans.

Recommendations

High-quality financial data is an essential input
into the financial regulatory process. The Council
and member agencies rely on data collected from
market participants to monitor developments in the
financial system, identify potential risks to financial
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stability, and prioritize and execute supervisory
and examination work. The Council encourages
member agencies to collaborate and expand their
data resources and analytical capabilities to assess
interconnectedness and concentration risks in their
respective areas of responsibility.
The establishment of uniform standards for
reporting and collection enhances the usefulness
of market data and reduces the reporting
burdens on market participants. The failure to
adopt broadly shared granular data standards
for financial products, transactions, and entities
can lead to unnecessary costs and inefficiencies,
such as duplicate reporting, and may impede the
ability to aggregate data for risk-management and
reporting purposes. The Council recommends
that regulators and market participants continue
to partner to improve the scope, quality, and
accessibility of financial data, as well as data sharing
among relevant agencies. These partnership efforts
include implementing new identifiers such as the
UTI, Unique Product Identifier (UPI), and CDE;
developing and linking data inventories; and
implementing industry standards, protocols, and
security for secure data sharing.
Broader adoption of the LEI by financial market
participants continues to be a Council priority. The
LEI enables unique and transparent identification of
legal entities participating in financial transactions.
ULIs will make it possible to track loan records
through a loan’s life cycle. The Council recommends
that member agencies update their regulatory
mortgage data collections to include LEI and ULI
fields. The Council also recommends that member
agencies support adoption and use of standards
in mortgage data, including consistent terms,
definitions, and data quality controls, which will
make transfers of loans or servicing rights less
disruptive to borrowers and investors.
Important initiatives are underway at member
agencies that will improve the functioning of
financial markets. Among these is the collection of
repo transaction data, which is used to create SOFR
benchmark rates for use by market participants.
The Council recommends that member agencies
continue to work to harmonize domestic and global
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derivatives data for aggregation and reporting and
ensure that appropriate authorities have access
to trade repository data needed to fulfill their
mandates.
The Council encourages pension regulators and
FASB to improve the quality, timeliness, and depth
of disclosures of pension financial statements.

5.4.6 Financial Innovation
Financial innovation offers considerable benefits
to consumers and providers of financial services
by reducing the cost of certain financial services,
increasing the convenience of payments, and
potentially increasing the availability of credit. But
innovation can also create new risks that need to be
understood.
Digital assets, which are still a new and relatively
small sector of the financial market, are a
particularly good example of both the benefits and
potential risks associated with innovation. Digital
assets may present a new means of conducting realtime payment activities. Some nations have begun
exploring or, in some cases, using central bank
digital currencies to enhance the global standing
of their own currencies and enable faster payments.
Likewise, several nations have begun assessing
whether and how privately-issued stablecoins may
serve a role in facilitating faster and more efficient
payments, provided that such activities are subject to
appropriate regulation and oversight.
However, if a stablecoin became widely adopted as
a means of payment or store of value, disruptions
to the stablecoin system, as with any payment or
value system, could affect the financial system and
the wider economy, warranting greater regulatory
scrutiny. A decline in the value of assets involved in
a traditional or new payment or value system can
result in the transmission of risk to the financial
sector through financial institution exposures, risks
to the payment system involved, wealth effects and
confidence effects. Risks to payment systems, if not
properly managed, can present financial stability
risks, given the importance of a well-functioning
payments system in facilitating commercial activities.

The benefits and potential risks associated with
digital assets underscore the importance of U.S.
regulators adopting an approach to digital assets that
will provide for responsible innovation in a manner
that is safe, fair, and complies with all applicable laws.
Clear guidance will support the development of a
payment system that is consistent with the changing
needs of institutions and consumers within the U.S.
and that is competitive with payment systems abroad.
This is particularly important given the European
Commission’s recently revealed draft framework for
cryptoassets and stablecoins.
The continued evolution of the market for digital
assets highlights the importance of coordinated
engagement and leadership by relevant U.S.
regulators. Digital asset arrangements vary widely
(see Section 3.6.3.1). The risk each digital asset
poses depends, among other things, on its overall
usage in the market, the structure of the asset and
its consensus mechanism, and the risk management
practices of participants. The potential risks
presented by different stablecoin systems may vary
according to the mechanism by which they are
made stable and the governance policies of the
administrator.
As discussed in Section 3.6.3.4, large technology
and e-commerce companies providing financial
services may increasingly seek to compete directly
with incumbent financial service providers, and their
market presence could grow significantly. These
firms currently may not be subject to the same type
of financial services regulation with which incumbent
financial service providers are required to comply.

and services; in evaluating how innovation is used;
and in monitoring how responsible innovation can
benefit investors and consumers, regulated entities,
and financial markets. The Council also encourages
relevant authorities to evaluate the potential effects
of new financial products and services on financial
stability, including operational risk. Agencies should
ensure that their monitoring and data collection
systems identify risks associated with financial
innovations. To ensure comprehensive visibility into
innovation across the financial system and avoid
regulatory fragmentation, regulators should share
relevant information on financial innovation as
appropriate with the Council and other agencies.
The Council recommends that federal and state
regulators continue to support responsible innovation
by examining the benefits of, and potential risks to
the financial system posed by, new and emerging uses
of digital assets and distributed ledger technologies.
Financial regulators should review existing and
planned digital asset arrangements and their risks as
appropriate.
The Council encourages continued coordination
among federal and state regulators to support
responsible financial innovation and competitiveness,
promote consistent regulatory approaches, as well as
to identify and address potential risks that arise from
such innovation.

Financial firms’ rapid adoption of fintech innovations
in recent years may increase operational risks
associated with financial institutions’ use of thirdparty service providers. Third-party service providers
may create financial stability risks if financial
institutions outsource critical services because
operational failures or faults at a key service provider
could disrupt the activities of multiple financial
institutions or financial markets.

Recommendations

The Council encourages financial regulators to
continue to be proactive in identifying new products
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183

5.5

Global Economic and Financial
Developments

Downside risks to global economic growth have
increased significantly since the outbreak of
the COVID-19 pandemic. In response to the
collapse of global economic activity in the first
half of 2020, national authorities in advanced and
many emerging economies implemented rapid
and decisive fiscal and monetary policy actions.
Although these measures helped support incomes
and employment and eased global financial
conditions in the initial phase of the pandemic, the
path of the economic recovery will be dependent on
continued fiscal and monetary support along with
health policy responses, including authorities’ ability
to limit the spread of COVID-19 without re-imposing
lockdown measures along with the development of
therapeutics and a vaccine.
At the onset of the pandemic, many European
countries introduced lockdowns to reduce the
spread of the disease. These lockdowns led to a
sharp contraction in real activity and employment
that could lead to significant losses in the banking
system. As part of their response to the crisis,
European governments undertook fiscal policy
actions that increased government spending and
tax relief and likely reduced financial stability risks
(see Section 3.7.2). Over the longer run, however,
additional expansionary policies may result in sizable
increases in government debt and a further increase
in sovereign risk. If debt sustainability were to worsen
in the highly indebted countries, it could stress
European financial institutions and lead to political
tensions within the euro area. This distress has the
potential to spill over to the U.S. financial system
through direct exposures and counterparty risks.
Although somewhat overshadowed by the COVID-19
crisis, the prospect of a no-trade-deal Brexit
represents an ongoing risk to both the European
and U.S. financial systems. On January 31, 2020, the
United Kingdom left the EU but remains under EU
trade rules through the transition period, which
is set to expire at the end of 2020 (see Section
3.7.2). Regulators in Europe and the United States
have taken steps to lessen potential disruptions
to the financial system of a disorderly Brexit. On
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September 28, 2020, the European Securities and
Markets Authority granted time-limited equivalence
to three UK CCPs, which allows them to continue
providing their services in the EU until mid-2022.
While this development has reduced financial
stability risks, risks remain elevated as other UK
financial services will lose passporting rights under
MiFD II at the end of the transition period absent
any agreement. Additionally, the failure of the two
parties to reach a trade agreement at the end of the
transition period poses significant downside risks to
both the UK and the EU because of the disruptions
it would cause to cross-border supply chains. A
no-trade-deal Brexit could lead to financial market
stress through several channels – disruptions in
cross-border trade, reductions in investor confidence
in the UK economy, increased FX volatility, and a
decline in UK asset values.
The size of the Chinese economy and its centrality
to global supply chains also makes it a potential
source of risk. After a rapid increase in debt and
leverage following the 2008 financial crisis, Chinese
authorities began taking steps to encourage
financial deleveraging in 2016. In 2020, Chinese
regulators paused the deleveraging campaign as
authorities try to balance COVID-19 related credit
support with longer-term financial stability goals
(see Section 3.7.3). More significantly, the PBOC
provided guidance to banks that they should
sacrifice profits to help stabilize growth. Although
this guidance is likely to stabilize the Chinese
economy in the short run, it comes at the expense
of leaving the banking sector weaker and less likely
to rebuild capital margins over the medium run.
At present, U.S. exposures to the Chinese financial
sector are limited, and financial stability risks
associated with a potential decline in Chinese asset
valuations or stress in the Chinese banking sector
appear manageable. Indirect effects on global
economic and market confidence, however, could
adversely impact U.S. economic performance.
Similarly, EMEs represent another indirect source
of risk to the U.S. financial system. The COVID-19
shock affected EMEs initially through a reduction
in Chinese demand and later through the spread of
the virus globally. In response, many EME central
banks broke with their usual policy of raising rates

in the face of currency depreciation and massive
portfolio outflows. Instead, they addressed the
market stress by easing monetary policy, with many
implementing bond purchase programs. Since the
initial period of volatility and massive portfolio
outflows in March and April, flows to EMEs have
broadly stabilized, with risks to the external sector
remaining moderate because many EMEs have
relatively large foreign reserves. The current risks
EMEs pose to the U.S. financial system are related
to the build-up of sovereign and nonfinancial debt.
The accumulation of sovereign debt creates the
risk that it is not sustainable over the long run and
that the necessary fiscal space will be unavailable
to deal with additional contingencies, such as a
renewed wave of COVID-19 infections. The rise
in nonfinancial debt levels creates vulnerabilities
because of a reduced repayment capacity during
the recession. Although the direct exposures of the
U.S. financial system to EMEs are limited, spillovers
to the U.S. economy could manifest themselves in
the form of shifts in market confidence or increases
in market stress that lead to a tightening of U.S.
financial conditions.

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185

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

The Federal Reserve’s initial policy response to
the COVID-19 pandemic and later shift to averageinflation targeting both imply that monetary policy
will be accommodative for the foreseeable future.
Although a looser monetary policy stance is
warranted by the need for immediate support to the
real economy and the achievement of the Federal
Reserve’s maximum employment mandate, it also
raises questions about the medium-term financial
stability implications of long periods of low shortterm rates and a potentially flatter yield curve. For
example, there is an inherent tradeoff between the
evident need for low rates to stimulate economic
activity now and the possibility that persistently
low rates may distort risk-taking over a longer time
horizon. Understanding how such a “low-for-long”
environment reshapes market participants’ and
financial institutions’ incentives to borrow, lend, and
take excessive risk is critical for understanding its
financial stability implications.
To that end, recent historical experience provides
some guidance on the possible effects of a lowfor-long interest-rate environment. After the 2008
financial crisis, a combination of forces created
conditions under which interest rates were also
expected to remain low for an extended period,
reducing yields on many assets and providing market
participants with the incentive to assume more
financial risk – the so-called “reach for yield.” This
reach-for-yield behavior led to increases in asset
prices in a range of markets, a portfolio reallocation to
riskier and less liquid asset classes, and an increase
in corporate leverage. In today’s environment, it is
possible that we will observe similar types of changes
in market participants’ behavior.
Key Implications of Low-for-Long and Potential
Vulnerabilities
Low rates for an extended period will have broad
implications for several key market participants. At the
same time, the types of behavior low interest rates
will induce, and therefore the extent to which that

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behavior may lead to the build-up of risks, are likely to
vary across market participants.
Retail investors
One of the main effects on retail investors of
persistently low rates is a decrease in their interest
income. As a result, retirees and other fixed-income
dependent investors may face a decline in their
primary source of income, which, in principle,
incentivizes them to reallocate their portfolio to riskier
assets, as it does for other market participants. But
predicting the precise effect of how retail investors
respond is difficult because their balance sheets
are smaller and their portfolios less diversified than
institutions, and hence their behavior is more sensitive
to risk. Empirical studies show that household
savings are positively related to interest rates, though
the size of the effect varies widely. In addition, there
is little systematic evidence on how low rates for
a prolonged period affect the portfolio allocation
decisions of individual investors. Thus, while it is
prudent to monitor possible reach-for-yield behavior
by retail investors, it is not clear that it has the same
broad financial stability implications that the decisions
of larger financial institutions do.
Banks
Low interest rates are generally expected to reduce
banks’ profitability: Both low short-term rates and a
flatter yield curve reduce banks’ interest income and
compress their net interest margin. How damaging
this deterioration in profitability will be remains an
open question. Banks are well capitalized today
as a result of the post-crisis financial reforms and
can draw on this capital buffer to absorb losses.
Nevertheless, the resulting decline in banks’
profitability, in principle, gives them an incentive to
increase fees and other charges, make riskier loans,
and shift the composition of their balance sheets to
generate other sources of income.
The evidence that banks’ behavior in a low-for-long
environment leads to an increase in systemic risk
is more mixed, however. A retrospective analysis of

the post-financial crisis period conducted by
the Committee on the Global Financial System
(CGFS) suggests that while low interest rates
and flatter yield curves reduce net interest
margins, as expected, banks in the United
States and elsewhere adjusted in ways that
mitigated the effects on their overall return
on assets. What is more, the study found no
systematic correlation between the level of
interest rates, on the one hand, and measures
of bank soundness and excessive risk-taking,
on the other. In terms of evidence for the United
States specifically, research shows that while
a low interest rate environment is generally
associated with narrower net interest margins
and reduced profitability, especially for small
banks, these negative effects may be offset
by the positive effects of low rates on profits
through increased economic activity. Thus, while
net interest margins do narrow when interest
rates are lower, the overall effects on profitability
and excessive risk-taking seem to be more
muted than might be expected, and the broader
effects on systemic risk in the banking sector
modest.

financing because of lower credit spreads in the future.
These easier financing conditions are likely to fuel the
same trend in debt accumulation that pre-dated the
current period of low interest rates, creating a potential
vulnerability in the form of excessive corporate debt levels.

Corporations
For corporations, low rates affect both their
borrowing behavior and the willingness of
investors to supply credit to them. Even before
we entered the current low-for-long environment,
the level of corporate indebtedness was high
by historical standards, driven, in part, by
the growth in the leveraged loan market to
lower-rated borrowers. This growth was itself
a consequence of a prolonged period of low
rates after the 2008 financial crisis. Today, low
yields are encouraging borrowers to lock in rates
with fixed-rate corporate bonds, as opposed
to leveraged loans, which are floating-rate
instruments. As a result, high-yield corporate
bond issuance is at a record level in 2020.
Moreover, firms that successfully weather the
current COVID crisis will have easier access to

The combined effect of low expected returns and state
and local budget shortfalls also creates a set of risks
for public pensions. These two factors may force state
and local governments to make tradeoffs between
meeting their public pension liabilities, which have strong
legal protections, and current spending demands that
will stress public finances. Because most states have
balanced-budget requirements, these tradeoffs could be
especially stark. The reconciliation of these underlying
tensions may manifest themselves in the municipal bond
market if investors begin to question the long-term ability
of states and localities to meet their existing obligations.

Pension funds
Low interest rates also affect the demand for risky assets
through their effect on pension funds and insurance
companies, which face similar issues because of the
structure of their balance sheets. Both types of institutions
have long-lived liabilities that make them vulnerable to
declining or low interest rates. For pension funds, low
rates increase the present value of their assets and
liabilities, but the duration of their liabilities is higher
than that of their assets. As a result, the duration effect
implies that low interest rates have a net negative effect
on their balance sheets. To meet their expected return
targets, pension funds can respond in several ways -- by
increasing contribution requirements, by switching to
alternative investments such as private equity, by issuing
pension obligation bonds to increase leverage, or by
increasing the duration of their assets. These adjustments
are likely to happen gradually because pension funds
have long liability maturities and are hence unlikely to
pose an immediate risk to financial stability.

Insurance companies
Insurance companies could face greater challenges
with their balance sheets. Low interest rates compress
insurers’ investment margins, reduce their ability to meet
their product guarantees, and weaken their earnings
Box G: “ Low- For- Long” I nte re st Ra te s a nd I mp lic a tions for Fina nc ial S t abi l i t y

187
187

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

and capital. For example, life insurance product
reserves are generally determined using a long-run
interest rate assumption in order to match assets and
liabilities. However, life insurers’ net investment portfolio
yields have been declining due to the reinvestment
of maturing assets at lower rates. The industry’s net
investment portfolio yield has fallen from 6.0 percent
in 2007 to 4.6 percent in 2019, and this trend can
be expected to continue. It provides an incentive to
increase allocations to riskier debt and less liquid
assets to achieve the guaranteed returns on in force
insurance policies. As in the case of pension funds, the
challenges related to a protracted period of low interest
rates confronting insurance companies manifest
themselves over time, giving insurance companies
some latitude in how they adapt to the low-rate
environment. This flexibility reduces the likelihood of a
broader financial disruption.
Longer-Term Risks Related to Future Rate
Increases
The discussion thus far has focused on current or
medium-term implications of low-for-long. A longerterm risk is how the market participants’ exposures to
greater levels of duration risk affect financial stability
when rates eventually increase. The 2013 Taper
Tantrum is an example of this potential dynamic,
although the wider financial stability implications of
that episode were limited. The potential risk here is
that unexpected increases in rates negatively affect
the balance sheets of financial institutions in such a
way that leads to financial instability. Banks without
adequate capital buffers could face solvency issues,
while pension funds and insurance companies could
experience liquidity problems related to losses on
derivatives positions or increases in early liquidations.
Additionally, with valuations in both equity and credit
markets relatively high by historical standards and
likely to become further stretched in a low-for-long
environment, the risk of a sharp correction becomes
more likely, especially in conjunction with high levels of
leverage or excessive reliance on short-term wholesale
funding. Even small changes to expectations of far188

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in-the-future cash flow may have a disproportionate
effect on current valuations when interest rates are
low. As a result, such rate changes can lead to sharp
adjustments in valuations. The potential negative effects
that an unexpected increase in rates would have across
a variety of market participants make this longer-term
risk worth monitoring. Adequate guidance on the timing
and pace of any such policy-related increase will likely
reduce this risk.

Abbreviations

AANA

Average Aggregate Notional Amount

CMG

Crisis Management Group

ABS

Asset-Backed Security

Council

Financial Stability Oversight Council

ACL

Allowances for Credit Losses

Commercial Paper

Advisers
Act

Investment Advisers Act of 1940

CPFF

Commercial Paper Funding Facility

AML

Anti-Money Laundering

CPI

Consumer Price Index

ANPR

Advance Notice of Proposed Rulemaking

CPMI

Committee on Payments and Market
Infrastructures

APP

Asset Purchase Programme

CRA

Community Reinvestment Act

ARM

Adjustable Rate Mortgage

CRE

Commercial Real Estate

ARRC

Alternative Reference Rates Committee

CSBS

Conference of State Bank Supervisors

AUM

Assets Under Management

Desk

Open Market Trading Desk

BCBS

Basel Committee on Banking Supervision

DFAST

Dodd-Frank Act Stress Tests

BDC

Business Development Company

DIP

Debtor-in-Possession

BHC

Bank Holding Company

BIS

Bank for International Settlements

DoddFrank Act

Dodd-Frank Wall Street Reform and
Consumer Protection Act

BOE

Bank of England

DSB

Derivatives Service Bureau

BOJ

Bank of Japan

DSSI

Debt Service Suspension Initiative

BTP

Italian Government Bond

DTCC

Depository Trust & Clearing Corporation

Bund

German Government Bond

DTI

Total Monthly Debt to Total Monthly Income

C&I

Commercial and Industrial

EBITDA

Earnings Before Interest, Taxes,
Depreciation, and Amortization

CARES

Coronavirus Aid, Relief, and Economic
Security

ECB

European Central Bank

CCAR

Comprehensive Capital Analysis and Review

EGRRCPA

Economic Growth, Regulatory Relief, and
Consumer Protection Act

CCP

Central Counterparty

EME

Emerging Market Economy

Certificate of Deposit

ENN

Entity-Netted Notional

CDB

China Development Bank

Enterprises

Fannie Mae and Freddie Mac

CDE

Critical Data Elements

ETF

Exchange-Traded Fund

CDO

Collateralized Debt Obligation

ETN

Exchange-Traded Note

CDS

Credit Default Swap

ETP

Exchange-Traded Product

CECL

Current Expected Credit Losses

European Union

CEM

Current Exposure Method

Euro Stoxx

50 Euro Area Stock Index

CET1

Common Equity Tier 1
Consumer Financial Protection Bureau

Exchange
Act

Securities Exchange Act of 1934

CFPB
CFT

Countering the Financing of Terrorism

Fannie Mae Federal National Mortgage Association

CFTC

Commodity Futures Trading Commission

FASB

Financial Accounting Standards Board

CIF

Collective Investment Funds

FATF

Financial Action Task Force

CLO

Collateralized Loan Obligation

FBIIC

CMBS

Commercial Mortgage-Backed Security

Financial and Banking Information
Infrastructure Committee

FBO

Foreign Banking Organization

CME

Chicago Mercantile Exchange Inc.

FCA

Financial Conduct Authority

Ab brev i at i ons

189

190

FCM

Futures Commission Merchant

IAIS

International Association of Insurance
Supervisors

FCU

Federal Credit Union

FDI

Foreign direct investment

ICS

International Capital Standard

FDIC

Federal Deposit Insurance Corporation

IHC

Intermediate Holding Company

Federal
Reserve

Board of Governors of the Federal Reserve
System

IMF

International Monetary Fund

FHA

Investment
Company
Act

Investment Company Act of 1940

Federal Housing Administration

FHFA

Federal Housing Finance Agency

IPO

Initial Public Offering

FHLB

Federal Home Loan Bank

IOSCO

FICC

Fixed Income Clearing Corporation

International Organization of Securities
Commissions

FICO

Fair Isaac Corporation

ISDA

FICU

Federally Insured Credit Union

International Swaps and Derivatives
Association

ISO

FIMA

Foreign and International Monetary
Authority

International Organization for
Standardization

JGB

Japanese Government Bond

FinCEN

Financial Crimes Enforcement Network

LCR

Liquidity Coverage Ratio

FIO

Federal Insurance Office

LEI

Legal Entity Identifier

FMI

Financial Market Infrastructure

LEI ROC

FMU

Financial Market Utility

Legal Entity Identifier Regulatory Oversight
Committee

FOMB

Financial Oversight and Management Board

M&A

Merger and Acquisition

FOMC

Federal Open Market Committee

MBS

Mortgage-Backed Security

FNAV

Floating Net Asset

MBSD

Mortgage-Backed Securities Division

FRBNY

Federal Reserve Bank of New York

MiFID II

Markets in Financial Instruments Directive

Freddie
Mac

Federal Home Loan Mortgage Corporation

MLF

Municipal Liquidity Facility

MMLF

Money Market Fund Liquidity Facility

FRN

Floating Rate Notes

MMF

Money Market Mutual Fund

FSB

Financial Stability Board

mREIT

Mortgage REITs

FS-ISAC

Financial Services Information Sharing and
Analysis Center

MSLP

Main Street Lending Program

FSOC

Financial Stability Oversight Council

MSP

Major Swap Participant

Foreign Exchange

MSR

Mortgage Servicing Right

G-SIB

Global Systemically Important Bank

NAIC

GAAP

Generally Accepted Accounting Principles

National Association of Insurance
Commissioners

NAL

No-Action Letter

GAV

Gross Asset Value

NAV

Net Asset Value

GCC

Group Capital Calculation

NCD

Negotiable Certificates of Deposit

GDP

Gross Domestic Product

NCUA

National Credit Union Administration

GLEIF

Global LEI Foundation

NIM

Net Interest Margin

GNMA

Government National Mortgage Association
(Ginnie Mae)

NMDB

National Mortgage Database

GSE

Government-Sponsored Enterprise

NMS

National Market System

GSD

Government Securities Division

NPL

Non-Performing Loan

GUUG

FSB’s Working Group on UTI and UPI
Governance

NPRM

Notice of Proposed Rulemaking

NSCC

National Securities Clearing Corporation

HFT

High-Frequency Trader

NYDFS

New York Department of Financial Services

HQLA

High-Quality Liquid Asset

OCC

Office of the Comptroller of the Currency

HMDA

Home Mortgage Disclosure Act

OFR

Office of Financial Research

2 0 2 0 F S O C / / Annual Report

OIS

Overnight Index Swap

SIPC

Securities Investors Protection Corporation

ON RRPF

Overnight Reverse Repurchase Agreement
Facility

SLOOS

Senior Loan Officer Opinion Survey

SLR

Supplementary Leverage Ratio

SMBs

Small and Mid-Sized Regional Banks

OPEC

Organization of Petroleum Exporting
Countries

OPEC+

OPEC and non-OPEC Participating Countries

SMCCF

Secondary Market Corporate Credit Facility

OTC

Over-the-Counter

SME

Small and Medium-Sized Enterprises

P&C

Property and Casualty

SOFR

Secured Overnight Financing Rate

PBA

Puerto Rico Public Buildings Authority

SRC

Systemic Risk Committee

PBGC

Pension Benefit Guaranty Corporation

SPAC

Special Purpose Acquisition Company

PBOC

People’s Bank of China

STFM

Short-Term Funding Market

PDCF

Primary Dealer Credit Facility

STIF

Short-Term Investment Fund

PEPP

Pandemic Emergency Purchase Programme

SWIFT

PFMI

Principles for Financial Market
Infrastructures

Society for Worldwide Interbank Financial
Telecommunications

TALF

Term Asset-Backed Securities Loan Facility

PMCCF

Primary Market Corporate Credit Facility

TBA

To Be Announced

PPP

Paycheck Protection Program

TDR

Troubled Debt Restructurings

PPPLF

Paycheck Protection Program Lending
Facility

TIPS

Treasury Inflation-Protected Securities

PREPA

Puerto Rico Electric Power Authority

TLAC

Total Loss Absorbing Capital

PROMESA

Puerto Rico Oversight, Management, and
Economic Stability Act

TLTRO

Targeted Long-Term Refinancing Operations

Treasury

Department of the Treasury

PSPA

Preferred Stock Purchase Agreement

TRIA

PTF

Principal Trading Firm

Terrorism Risk Insurance Act of 2002, as
Amended

Qualified Mortgage

TRIP

Terrorism Risk Insurance Program

RBIC

Rural Business Investment Companies

United Kingdom

REIT

Real Estate Investment Trust

ULI

Universal Loan Identifier

Repo

Repurchase Agreement

UMBS

Uniform Mortgage-Backed Security

RMB

Renminbi

UPB

Unpaid Principal Balance

RMBS

Residential Mortgage-Backed Security

UPI

Unique Product Identifier

ROAA

Return on Average Assets

USD

U.S. Dollar

RRC

Regulation and Resolution Committee

USDA

U.S. Department of Agriculture

RWA

Risk-Weighted Asset

UTI

Unique Transaction Identifier

S&P

Standard & Poor’s

U.S. Department of Veterans Affairs

S&P LCD

Standard & Poor’s Leveraged Commentary
& Data

VaR

Value at Risk

VRDN

Variable-Rate Demand Notes

SA-CCR

Standardized Approach for Counterparty
Credit Risk

VIX

SBA

Small Business Administration

Chicago Board Options Exchange Volatility
Index

WAL

Weighted Average Life

SBSD

Security-Based Swap Dealer

WAM

Weighted-Average Maturity

Swap Dealer

WEO

World Economic Outlook

SDR

Stressed Default Rate

WLA

Weekly Liquid Assets

SEC

Securities and Exchange Commission

WTI

West Texas Intermediate

SEF

Swap Execution Facility

YTD

Year-to-Date

SIFMA

Securities Industry and Financial Markets
Association

Ab brev i at i ons

191

Glossary

Additional Tier 1 Capital
A regulatory capital measure that may include items
such as noncumulative perpetual preferred stock
and mandatory convertible preferred securities
that satisfy the eligibility criteria in the Revised
Capital Rule, as well as related surplus and minority
interests.
Advanced Approaches Capital Framework
The Advanced Approaches capital framework
requires certain banking organizations to use
an internal ratings-based approach and other
methodologies to calculate risk-based capital
requirements for credit risk and advanced
measurement approaches to calculate risk-based
capital requirements for operational risk. The
framework applies to large, internationally active
banking organizations—generally those that
are G-SIBs or with at least $700 billion in total
consolidated assets or at least $75 billion in crossjurisdictional activity with at least $250 billion
in total consolidated assets or at least $10 billion
in total on-balance sheet foreign exposure—and
includes the depository institution subsidiaries of
those firms.
Affiliate
In general, a company is an affiliate of another
company if: (1) either company consolidates
the other on financial statements prepared
in accordance with U.S. Generally Accepted
Accounting Principles, the International Financial
Reporting Standards, or other similar standards;
(2) both companies are consolidated with a third
company on financial statements prepared in
accordance with such principles or standards; (3)
for a company that is not subject to such principles
or standards, consolidation as described above
would have occurred if such principles or standards
had applied; or (4) a primary regulator determines
that either company provides significant support to,
or is materially subject to the risks or losses of, the
other company.

Short-term debt which has a fixed maturity of up
to 270 days and is backed by some financial asset,
such as trade receivables, consumer debt receivables,
securities, or auto and equipment loans or leases.
Asset-Backed Security (ABS)
A fixed-income or other type of security which is
collateralized by self-liquidating financial assets that
allows the holder of the security to receive payments
that depend primarily on cash flows from the assets.
Bilateral Repo
A repo between two institutions in which
negotiations are conducted directly between the
participants or through a broker, and in which the
participants must agree on the specific securities
to be used as collateral. The bilateral repo market
includes both non-cleared trades and trades cleared
through Fixed Income Clearing Corporation’s
delivery versus payment repo service.
Central Counterparty (CCP)
An entity which interposes itself between
counterparties to contracts traded in one or more
financial markets, becoming the buyer to every seller
and the seller to every buyer, thereby ensuring the
performance of open contracts.
Clearing Bank
A BHC subsidiary that facilitates payment and
settlement of financial transactions, such as check
clearing, or facilitates trades between the sellers and
buyers of securities or other financial instruments or
contracts.
Collateral
Any asset pledged by a borrower to guarantee
payment of a debt.
Collateralized Loan Obligation (CLO)
A securitization vehicle backed predominantly by
commercial loans.

Asset-Backed Commercial Paper (ABCP)
Gl os s ary

193

Commercial Mortgage-Backed Security (CMBS)

Defined Benefit Plan

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.

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.

Commercial Paper (CP)
Short-term (maturity of up to 270 days), unsecured
corporate debt.
Commercial Paper Funding Facility (CPFF)
A funding backstop established by the Federal
Reserve under section 13(3) of the Federal Reserve
Act to facilitate the issuance of term commercial
paper by eligible issuers. The CPFF is structured as a
credit facility to a special purpose vehicle.
Common Equity Tier 1 Capital (CET1)
A regulatory capital measure which includes capital
with the highest loss-absorbing capacity, such as
common stock and retained earnings.
Common Equity Tier 1 Capital Ratio
A ratio which divides common equity tier 1 capital
by total risk-weighted assets. The ratio applies to all
banking organizations subject to the Revised Capital
Rule.
Comprehensive Capital Analysis and Review
(CCAR)
An annual exercise by the Federal Reserve to ensure
that institutions have robust, forward-looking capital
planning processes that account for their unique
risks and sufficient capital to continue operations
throughout times of economic and financial stress.
Consumer Price Index (CPI)
A monthly index containing data on changes in the
prices paid by urban consumers for a representative
basket of goods and services.
Credit Default Swap (CDS)
A financial contract in which one party agrees to
make a payment to the other party in the event of a
specified credit event, in exchange for one or more
fixed payments.

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Defined Contribution Plan
A retirement plan in which the cost to the employer
is limited to the specified annual contribution. In
defined contribution plans, the investment risk is
borne by the plan participant.
Digital Asset
Digital asset is an asset that is issued/transferred
using distributed ledger or blockchain technology.
A cryptocurrency is a digital asset designed to work
as a medium of exchange. Digital assets include
instruments that may qualify under applicable U.S.
laws as securities, commodities, and security- or
commodity-based instruments such as futures or
swaps. Other industry terms used for these assets
include cryptocurrencies, crypto assets, virtual
currencies, digital currencies, stablecoins, and
crypto tokens.
Dodd-Frank Act Stress Tests (DFAST)
Annual stress tests required by the Dodd-Frank Act
for national banks and federal savings associations
with total consolidated assets of more than $10
billion.
Duration
The sensitivity of the prices of bonds and other
fixed-income securities to changes in the level of
interest rates.
Emerging Market Economy (EME)
Although there is no single definition, emerging
market economies are generally classified according
to their state of economic development, liquidity,
and market accessibility. This report has grouped
economies based on the classifications used by
significant data sources such as the MSCI and
Standard & Poor’s, which include, for example,
Brazil, China, India, and Russia.

Entity-Netted Notional (ENN)
A risk-based measure of size for the interest rate
swap market. To describe ENNs intuitively, imagine
that each pair of swap counterparties established
its net interest rate risk position with bonds instead
of swaps. More precisely, within each pair of
counterparties, the counterparty that is net long has
purchased a 5‐year equivalent risk position in bonds
from the counterparty that is net short. Then, the
sum of those hypothetical bond positions across all
pairs of counterparties is a measure of the size of the
market and is equal to ENNs.
Exchange-Traded Product (ETP)
An investment fund or note that is traded on an
exchange. ETPs offer continuous pricing—unlike
mutual funds, which offer only end-of-day pricing.
ETPs are often designed to track an index or a
portfolio of assets. ETPs include: (1) exchangetraded funds (ETFs), which are registered as
investment companies under the Investment
Company Act of 1940 (’40 Act); (2) non-’40 Act
pooled investment vehicles, which are generally
trust or partnership vehicles that do not invest in
securities; and (3) exchange-traded notes (ETNs),
which are senior debt instruments issued by
financial institutions that pay a return based on the
performance of a “reference asset”.
Federal Funds Rate
The interest rate at which depository institutions
lend reserve balances to other depository
institutions overnight. The FOMC sets a target range
for the level of the overnight federal funds rate. The
Federal Reserve Bank of New York then uses open
market operations to influence the rate so that it
trades within the target range.
FICO Score
A measure of a borrower’s creditworthiness based
on the borrower’s credit data; developed by the Fair
Isaac Corporation.
Financial and Banking Information Infrastructure
Committee (FBIIC)
The FBIIC consists of 18 member organizations
from across the financial regulatory community,
both federal and state. It was chartered under
the President’s Working Group on Financial

Markets following September 11, 2001 to improve
coordination and communication among financial
regulators, enhance the resiliency of the financial
sector, and promote public-private partnership.
Financial Market Infrastructure (FMI)
A multilateral system among participating financial
institutions, including the operator of the system,
used for the purposes of recording, clearing, or
settling payments, securities, derivatives, or other
financial transactions. Under the Dodd-Frank Act,
certain FMIs are recognized as FMUs.
Financial Market Utility (FMU)
An entity, as defined in the Dodd-Frank Act, that,
subject to certain exclusions, “manages or operates a
multilateral system for the purpose of transferring,
clearing, or settling payments, securities, or other
financial transactions among financial institutions
or between financial institutions and the person.”
Fire Sale
The disorderly liquidation of assets to meet margin
requirements or other urgent cash needs. Such
a sudden sell-off drives down prices, potentially
below their intrinsic value, when the quantities to
be sold are large relative to the typical volume of
transactions. Fire sales can be self-reinforcing and
lead to additional forced selling by some market
participants which, subsequent to an initial fire sale
and consequent decline in asset prices, may also
need to meet margin or other urgent cash needs.
Fiscal Year
Any 12-month accounting period. The fiscal year for
the federal government begins on October 1 and
ends on September 30 of the following year; it is
named after the calendar year in which it ends.
Futures Contract
An agreement to purchase or sell a commodity
for delivery in the future: (1) at a price that is
determined at initiation of the contract; (2) that
obligates each party to the contract to fulfill the
contract at the specified price; (3) that is used
to assume or shift price risk; and (4) that may be
satisfied by delivery or offset.

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General Collateral Finance (GCF)

Initial Public Offering (IPO)

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.

The first time a company offers its shares of capital
stock to the general public.

Government-Sponsored Enterprise (GSE)
A corporate entity with a federal charter authorized
by law, but which is a privately owned financial
institution. Examples include the Federal National
Mortgage Association (Fannie Mae) and the Federal
Home Loan Mortgage Corporation (Freddie Mac).
Gross Domestic Product (GDP)
The broadest measure of aggregate economic
activity, measuring the total value of all final goods
and services produced within a country’s borders
during a specific period.
Gross Notional Exposure (GNE)
The sum of the absolute values of long and short
notional amounts. The “notional” amount of a
derivative contract is the amount used to calculate
payments due on that contract, just as the face
amount of a bond is used to calculate coupon
payments.
Haircut
The discount, represented as a percentage of par or
market value, at which an asset can be pledged as
collateral. For example, a $1,000,000 bond with a 5
percent haircut would collateralize a $950,000 loan.
The purpose of a haircut is to provide a collateral
margin for a secured lender.
High-Quality Liquid Asset (HQLA)
An asset—such as a government bond—which is
considered eligible as a liquidity buffer in the U.S.
banking agencies’ liquidity coverage ratio. Highquality liquid assets should be liquid in markets
during times of stress and, ideally, be central bankeligible.
Initial Margin
Collateral that is collected to cover potential
changes in the value of each participant’s position
(that is, potential future exposure) over the
appropriate closeout period in the event the
participant defaults.
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Institutional Leveraged Loan
The term portion of a leveraged loan that is sold to
institutional investors.
Interest Rate Swap
A derivative contract in which two parties swap
interest rate cash flows on a periodic basis,
referencing a specified notional amount for a fixed
term. Typically, one party will pay a predetermined
fixed rate while the other party will pay a short-term
variable reference rate which resets at specified
intervals.
Index Tranche Credit Default Swap (CDS)
A synthetic collateralized debt obligation (CDO)
based on a CDS index where each tranche (equity,
mezzanine, senior, and super senior) references
a different segment of the loss distribution of the
underlying CDS index.
Intermediate Holding Company (IHC)
A company established or designated by an FBO
under the Federal Reserve Board’s Regulation Y Y.
Regulation Y Y requires that an FBO with U.S. nonbranch assets of $50 billion or more must hold its
entire ownership interest in its U.S. subsidiaries,
with certain exclusions, through a U.S. IHC.
Legal Entity Identifier (LEI)
A 20-character alpha-numeric code that connects to
key reference information which enables clear and
unique identification of legal entities participating
in global financial markets. The LEI system is
designed to facilitate many financial stability
objectives, including improved risk management
in firms; better assessment of microprudential
and macroprudential risks; expedition of orderly
resolution; containment of market abuse and
financial fraud; and provision of higher-quality and
more accurate financial data.
Leveraged Buyout (LBO)
An acquisition of a company financed by a private
equity contribution combined with borrowed funds,

with debt constituting a significant portion of the
purchase price.
Leveraged Loan
While numerous definitions of leveraged lending
exist throughout the financial services industry,
generally a leveraged loan is understood to be a type
of loan that is extended to companies that already
have considerable amounts of debt and/or have a
non-investment grade credit rating or are unrated
and/or whose post-financing leverage significantly
exceeds industry norms or historical levels.
LIBOR
A rate based on submissions from a panel of banks.
LIBOR is intended to reflect the rate at which large,
globally-active banks can borrow on an unsecured
basis in wholesale markets.
Limit (Up or Down)
The maximum price advance or decline from the
previous day’s settlement price permitted during one
trading session, as fixed by the rules of an exchange.
Effective October 12, 2020, S&P 500 e-mini futures
are subject to a hard upside and downside limit of
7 percent during non-U.S. trading hours. Prior to
that, S&P 500 e-mini futures were subject to a hard
upside and downside limit of 5 percent during nonU.S. trading hours.
Liquidity Coverage Ratio (LCR)
A standard to ensure that covered companies
maintain adequate unencumbered, high-quality
liquid assets to meet anticipated liquidity needs for a
30-day horizon under a standardized liquidity stress
scenario.
Loan-to-Value Ratio
The ratio of the amount of a loan to the value of
the asset that the loan funds, typically expressed as
a percentage. This is a key metric when considering
the level of collateralization of a mortgage.
Major Swap Participant
A person that is not a swap dealer and maintains
a substantial position in swaps, creates substantial
counterparty exposure, or is a financial entity that is
highly leveraged and not subject to federal banking
capital rules.

Margin
In the context of clearing activity, collateral that
is collected to protect against current or potential
future exposures resulting from market price
changes or in the event of a counterparty default.
Money Market Fund Liquidity Facility (MMLF)
A facility established by the Federal Reserve under
section 13(3) of the Federal Reserve Act that
provides funding to U.S. depository institutions and
bank holding companies to finance their purchases
of certain types of assets from MMFs under certain
conditions. The MMLF is intended to assist MMFs in
meeting demands for redemptions by investors and
to foster liquidity in the markets for the assets held
by MMFs.
Money Market Mutual Fund (MMF)
A type of mutual fund which invests in short-term,
high-quality, liquid securities such as government
bills, CDs, CP, or repos.
Mortgage-Backed Security (MBS)
An ABS backed by a pool of mortgages. Investors
in the security receive payments derived from the
interest and principal payments on the underlying
mortgages.
Mortgage Servicing Company
A company which acts as an agent for mortgage
holders by collecting and distributing mortgage
cash flows. Mortgage servicers also manage defaults,
modifications, settlements, foreclosure proceedings,
and various notifications to borrowers and investors.
Mortgage Servicing Right (MSR)
The right to service a mortgage loan or a portfolio
of mortgage loans.
Municipal Bond
A bond issued by states, cities, counties, local
governmental agencies, or certain nongovernment
issuers to finance certain general or project-related
activities.
Net Asset Value (NAV)
An investment company’s total assets minus its total
liabilities.

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Net Interest Margin (NIM)
Net interest income as a percent of interest-earning
assets.
Net Stable Funding Ratio (NSFR)
A liquidity standard to promote the funding
stability of internationally active banks, through the
maintenance of stable funding resources relative to
assets and off-balance sheet exposures.
Open Market Operations
The purchase and sale of securities in the open
market by a central bank to implement monetary
policy.
Operational Resilience
The ability of an entity’s personnel, systems,
telecommunications networks, activities or processes
to resist, absorb, and recover from or adapt to an
incident that may cause harm, destruction, or loss of
ability to perform mission-related functions.
Option
A financial contract granting the holder the
right but not the obligation to engage in a future
transaction on an underlying security or real asset.
The most basic examples are an equity call option,
which provides the right but not the obligation to
buy a block of shares at a fixed price for a fixed
period, and an equity put option, which similarly
grants the right to sell a block of shares.
Overnight Reverse Repurchase Agreement Facility
(ON RRPF)
A supplementary policy tool that the Federal Reserve
uses to set the floor on rates to keep the federal
funds rate in the target range set by the FOMC.
Over-the-Counter (OTC)
A method of trading which does not involve a
registered exchange. An OTC trade could occur on
purely a bilateral basis or could involve some degree
of intermediation by a platform that is not required
to register as an exchange. An OTC trade could,
depending on the market and other circumstances,
be centrally cleared or bilaterally cleared. The
degree of standardization or customization of
documentation of an OTC trade will depend on
the whether it is cleared and whether it is traded
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on a non-exchange platform (and, if so, the type of
platform).
Paris Club
An informal group of official creditors whose role is
to find coordinated and sustainable solutions to the
payment difficulties experienced by debtor countries
Primary Dealer
A financial institution that is a trading counterparty
of the Federal Reserve Bank of New York. Primary
dealers are expected to make markets for the
Federal Reserve Bank of New York on behalf of its
official accountholders as needed, and to bid on a
pro-rata basis in all Treasury auctions at reasonably
competitive prices.
Prudential Regulation
Regulation aimed at ensuring the safe and sound
operation of financial institutions, set by both state
and federal authorities.
Public Debt
All debt issued by Treasury and the Federal
Financing Bank, including both debt held by
the public and debt held in intergovernmental
accounts, such as the Social Security Trust Funds.
Not included is debt issued by government agencies
other than Treasury.
Qualifying Hedge Fund
A hedge fund advised by a Large Hedge Fund
Adviser that has a net asset value (individually or in
combination with any feeder funds, parallel funds,
and/or dependent parallel managed accounts) of
at least $500 million as of the last day of any month
in the fiscal quarter immediately preceding the
adviser’s most recently completed fiscal quarter.
Large Hedge Fund Advisers are advisers that have at
least $1.5 billion in hedge fund AUM.
Real Estate Investment Trust (REIT)
An operating company which manages incomeproducing real estate or real estate-related assets.
Certain REITs also operate real estate properties in
which they invest. To qualify as a REIT, a company
must have three-fourths of its assets and gross
income connected to real estate investment and
must distribute at least 90 percent of its taxable

income to shareholders annually in the form of
dividends.
Repurchase Agreement (Repo)
The sale of a security combined with an agreement
to repurchase the security, or a similar security, on a
specified future date at a prearranged price. A repo
is a secured lending arrangement.
Residential Mortgage-Backed Security (RMBS)
A security which is collateralized by a pool of
residential mortgage loans and makes payments
derived from the interest and principal payments on
the underlying mortgage loans.
Risk-Weighted Assets (RWAs)
A risk-based concept used as the denominator of
risk-based capital ratios (common equity tier 1, tier
1, and total). The total RWAs for an institution are a
weighted total asset value calculated from assigned
risk categories or modeled analysis. Broadly, total
RWAs are determined by calculating RWAs for
market risk and operational risk, as applicable, and
adding the sum of RWAs for on-balance sheet, offbalance sheet, counterparty, and other credit risks.
Rollover Risk
The risk that as an institution’s debt nears maturity,
the institution may not be able to refinance the
existing debt or may have to refinance at less
favorable terms.
Run Risk
The risk that investors lose confidence in an
institution—stemming from concerns about
counterparties, collateral, solvency, or related
issues—and respond by pulling back their funding.
Secured Overnight Financing Rate (SOFR)
A broad measure of the cost of borrowing cash
overnight collateralized by Treasury securities. The
rate is calculated as a volume-weighted median
of transaction-level tri-party repo data as well as
GCF Repo transaction data and data on bilateral
Treasury repo transactions.

Securities Lending/Borrowing
The temporary transfer of securities from one party
to another for a specified fee and term, in exchange
for collateral in the form of cash or securities.
Securitization
A financial transaction in which assets such as
mortgage loans are pooled, securities representing
interests in the pool are issued, and proceeds from
the underlying pooled assets are used to service and
repay the securities.
Security-Based Swap Dealer
A person that holds itself out as a dealer in securitybased swaps, makes a market in security-based
swaps, regularly enters into security-based swaps
with counterparties, or engages in any activity
causing it to be known as a dealer or market maker
in security-based swaps; does not include a person
entering into security-based swaps for such person’s
own account.
Short-Term Wholesale Funding
Short-term funding instruments not covered by
deposit insurance which are typically issued to
institutional investors. Examples include large
checkable and time deposits, brokered CDs, CP,
Federal Home Loan Bank borrowings, and repos.
Special Purpose Acquisition Company (SPAC)
Companies formed through an IPO to raise funds
to purchase businesses or assets to be acquired after
the IPO.
Supplementary Leverage Ratio (SLR)
Tier 1 capital of an advanced approaches banking
organization divided by total leverage exposure. All
advanced approaches banking organizations must
maintain an SLR of at least 3 percent. The SLR is
effective January 1, 2018, and organizations must
calculate and publicly disclose their SLRs beginning
March 31, 2015.
Swap
An exchange of cash flows with defined terms and
over a fixed period, agreed upon by two parties. A
swap contract may reference underlying financial
products across various asset classes including
interest rates, credit, equities, commodities, and FX.
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Swap Data Repository (SDR)

Tier 2 Capital

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.”

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.

Swap Dealer
Section 1a(49) of the Commodity Exchange Act
defines the term “swap dealer” (SD) to include any
person who: (1) holds itself out as a dealer in swaps;
(2) makes a market in swaps; (3) regularly enters
into swaps with counterparties as an ordinary course
of business for its own account; or (4) engages in any
activity causing the person to be commonly known
in the trade as a dealer or market maker in swaps.

Total Capital
A regulatory capital measure comprised of tier 1
capital and tier 2 capital. See Tier 1 Capital and Tier
2 Capital.

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.

Tri-Party Repo
A repo in which a clearing bank acts as third-party
agent to provide collateral management services and
to facilitate the exchange of cash against collateral
between the two counterparties.
Underwriting Standards
Terms, conditions, and criteria used to determine
the extension of credit in the form of a loan or
bond.
Variation Margin
Funds that are collected and paid out to reflect
current exposures resulting from actual changes in
market prices.

Swaption
An option granting the right to enter into a swap.
See Option and Swap.

VIX (Chicago Board Options Exchange Market
Volatility Index)
A standard measure of market expectations of shortterm volatility based on S&P equity index option
prices.

Syndicated Loan
A loan to a commercial borrower in which financing
provided by a group of lenders. The loan package
may have a revolving portion, a term portion, or
both

Weighted Average Life (WAL)
A weighted average of the maturities of all securities
held in a MMF’s portfolio.

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.
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Time Deposits
Deposits that the depositor generally does not have
the right to withdraw before a designated maturity
date without paying an early withdrawal penalty. A
CD is a time deposit.

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

Window-Dressing
Period-ending transactions that are reflected on a
statement or report.
Yield Curve
A graphical representation of the relationship
between bond yields and their respective maturities.

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List of Charts
3.1.1 Household Debt as a Percent of Disposable Personal Income.............................................11
3.1.2 Household Debt Service Ratio ...........................................................................................12
3.1.3 Owners’ Equity as Share of Household Real Estate ............................................................12
3.1.4 Components of Consumer Credit........................................................................................13
3.1.5 Change in Inquiries Relative to First Week of March 2020..................................................13
3.1.6 Percentage of Mortgages in Forbearance ..........................................................................14
3.1.7 Share Of Open Accounts that Transitioned to Delinquent ...................................................14
3.2.1.1 Nonfinancial Corporate Credit as Percent of GDP.............................................................15
3.2.1.2 U.S. Nonfinancial Business Leverage..............................................................................15
3.2.1.3 Bank Business Lending Standards..................................................................................16
3.2.1.4 Investment Grade Corporate Bond Spreads ....................................................................16
3.2.1.5 Gross Issuance of Corporate Bonds.................................................................................16
3.2.1.6 High-Yield Corporate Bond Spreads................................................................................17
3.2.1.7 Leveraged Loan Spreads ................................................................................................17
3.2.1.8 Institutional Leveraged Loan Issuance.............................................................................17
3.2.1.9 Nonfinancial Corporations Liquid Assets.........................................................................18
3.2.1.10 Maturity Profile of U.S. Nonfinancial Corporate Debt......................................................18
A.1 U.S. Corporate Defaults .......................................................................................................19
A.2 Chapter 11 Bankruptcy Filings..............................................................................................19
A.3 U.S. Nonfinancial Corporate Downgrade-Upgrade Ratio....................................................... 20
A.4 Fallen Angel Debt................................................................................................................ 20
3.2.2.1 S&P 500 Volatility.......................................................................................................... 22
3.2.2.2 S&P 500 Forward Price-to-Earnings Ratio..................................................................... 22
3.2.2.3 S&P 500 1-Year Price Returns by Sector....................................................................... 22
3.2.2.4 Performance of Global Stock Indices..............................................................................23
3.3.1.1 Federal Debt Held by the Public.......................................................................................24
3.3.1.2 Publicly Held Treasury Securities Outstanding.................................................................24
3.3.1.3 Treasury General Account Balance..................................................................................25
3.3.1.4 U.S. Treasury Yields........................................................................................................25
3.3.1.5 10-Year TIPS Yield and 10-Year Break Even....................................................................25
3.3.1.6 FRBNY Open Market Operations: Treasury Purchases.................................................... 26
B.1 Intraday Volatility for 10-Year Treasury Yields........................................................................27
B.2 Bid-Ask Spread for 30-Year Treasury Bonds.........................................................................27
B.3 Primary Dealer Inventories ...................................................................................................28
3.3.2.1 Changes in State and Local Government Tax Revenues.................................................. 30
3.3.2.2 Municipal Bond Mutual Fund Flows............................................................................... 30
List of C hart s

203

3.3.2.3 Municipal Bonds to U.S. Treasuries................................................................................ 30
3.3.2.4 Municipal Bond Issuance................................................................................................31
C.1 Breakdown of State Tax Revenues ...................................................................................... 34
C.2 Breakdown of Local Tax Revenues...................................................................................... 34
C.3 Liabilities of Severely Underfunded Public Pension Plans..................................................... 34
3.4.1.1 CP Outstanding by Issuer Type....................................................................................... 35
3.4.1.2 CP Issuance by Issuer Type and Rating.......................................................................... 35
3.4.1.3 CP Outstanding & MMF Holdings.................................................................................... 36
3.4.1.4 Three Month CP Interest Rate Spreads .......................................................................... 36
3.4.1.5 Weekly CP Issuance by Tenor......................................................................................... 36
3.4.1.6 Commercial Bank Deposit Growth...................................................................................37
3.4.2.1 FICC Repo Balances and MMF Holdings......................................................................... 38
3.4.2.2 Primary Dealer Repo Agreements.................................................................................. 38
3.4.2.3 Overnight Repo Volumes and Dealer Inventories............................................................ 38
3.4.2.4 Primary Dealer Reverse Repo Agreements......................................................................39
3.4.2.5 Primary Dealer Repo Collateral.......................................................................................39
3.4.2.6 Collateral in the Tri-Party Repo Market...........................................................................39
3.4.2.7 Repo Rate Spreads........................................................................................................ 40
3.4.2.8 Value of Securities on Loan.............................................................................................41
3.4.2.9 U.S. Securities Lending Cash Reinvestment....................................................................42
3.4.2.10 U.S. Securities Lending Cash Reinvestment Collateral...................................................42
3.4.3.1 U.S. Futures Markets: Volume........................................................................................ 46
3.4.3.2 3-Month Implied Volatility ............................................................................................. 46
3.4.3.3 U.S. Futures Markets Open Interest............................................................................... 46
3.4.3.4 Micro Futures: Open Interest..........................................................................................47
3.4.3.5 U.S. Treasury Futures: Open Interest..............................................................................47
3.4.3.6 Exchange-Traded Equity Option Volume......................................................................... 48
3.4.3.7 Call Option Volume for Select Technology Stocks........................................................... 48
3.4.3.8 Options on Futures: Open Interest.................................................................................. 48
3.4.3.9 Options on Futures: Volume........................................................................................... 49
3.4.3.10 Options on Futures: Delta Adjusted Open Interest......................................................... 49
3.4.3.11 Delta Adjusted Options on Futures by Asset Classes.................................................... 49
3.4.3.12 Options on 10-Year Treasury Futures............................................................................ 50
3.4.3.13 OTC Options: BHC Gross Notional Outstanding............................................................. 50
3.4.3.14 OTC Options: BHC Net Notional Outstanding................................................................ 50
3.4.3.15 Derivatives Notional Volume..........................................................................................51
3.4.3.16 Derivatives Notional Amount Outstanding......................................................................51
3.4.3.17 Size of Interest Rate Swap Market.................................................................................51
3.4.3.18 Global OTC Positions ....................................................................................................52
3.4.3.19 Commodity Index Swaps: Annual Open Interest............................................................52

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3.4.3.20 Commodity Index Swaps: Monthly Open Interest..........................................................52
3.4.3.21 Commodity Swaps: Open Interest................................................................................ 53
3.4.3.22 Commodity Swaps by Asset Class............................................................................... 53
3.4.3.23 Margin Funds Held at CFTC Registered FCMs ............................................................. 53
3.4.3.24 FCM Concentration: Customer Futures Balances......................................................... 54
3.4.3.25 FCM Concentration: Customer Swap Balances............................................................ 54
3.4.3.26 Concentration of Swap Positions for Registered SDs................................................... 54
3.4.3.27 Interest Rate Swap SEF Trading Volumes..................................................................... 55
3.4.3.28 Credit Default Swap SEF Trading Volumes................................................................... 55
3.4.4.1 Commodities Futures & Options: Open Interest ............................................................. 56
3.4.4.2 Total Net Asset Value – Commodity ETFs....................................................................... 56
3.4.4.3 Metals Indices............................................................................................................... 56
3.4.4.4 Cash-Futures Spread: Gold.............................................................................................57
3.4.4.5 Agriculture Prices...........................................................................................................57
3.4.4.6 Cash-Futures Spread: Cattle.......................................................................................... 58
3.4.4.7 Net Farm Income .......................................................................................................... 58
3.4.4.8 Energy Futures & Options: Open Interest.........................................................................59
3.4.4.9 Energy Futures & Options by Product..............................................................................59
3.4.4.10 Global Petroleum Consumption and Production............................................................ 60
3.4.4.11 WTI Crude Oil Futures.................................................................................................. 60
3.4.4.12 Natural Gas Inventories................................................................................................ 60
3.4.4.13 Natural Gas Forward Curves.........................................................................................61
3.4.5.1 House Prices by Census Division.....................................................................................61
3.4.5.2 Home Sales....................................................................................................................62
3.4.5.3 New Housing Starts and Price Changes..........................................................................62
3.4.5.4 Homeownership and Vacancy Rates.............................................................................. 63
3.4.5.5 Mortgage Originations and Rates................................................................................... 63
3.4.5.6 Purchase Origination Volume by Credit Score................................................................. 64
3.4.5.7 Shares of Mortgages by Equity Percentage.................................................................... 64
3.4.5.8 Mortgage Delinquency................................................................................................... 65
3.4.5.9 Forbearance Rates by Investor Type.............................................................................. 66
3.4.5.10 Mortgage Originations by Product.................................................................................67
3.4.5.11 RMBS Issuance.............................................................................................................67
3.4.5.12 Cumulative MBS Purchases by the Federal Reserve..................................................... 68
3.4.6.1 Conduit CMBS Delinquency and Foreclosure Rate...........................................................70
3.4.6.2 Conduit CMBS Delinquency Rates by Industry................................................................70
3.4.6.3 CMBS Issuance..............................................................................................................71
3.4.6.4 Commercial Property Price Growth.................................................................................72
3.4.6.5 Capitalization Rates and Spreads....................................................................................72
E.1 Sector Equity REIT Indices....................................................................................................74

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3.5.1.1 Categorization of Large U.S. BHCs.................................................................................. 77
3.5.1.2 Total Assets by BHC Type................................................................................................78
3.5.1.3 Common Equity Tier 1 Ratios..........................................................................................78
3.5.1.4 Common Equity Tier 1 Ratios at U.S. G-SIBs...................................................................79
3.5.1.5 Payout Rates at U.S. G-SIBs........................................................................................... 80
3.5.1.6 Supplementary Leverage Ratios at U.S. G-SIBs.............................................................. 80
3.5.1.7 Return on Assets.............................................................................................................81
3.5.1.8 Net Interest Margins........................................................................................................81
3.5.1.9 Selected Sources of Funding at U.S. G-SIBs....................................................................81
3.5.1.10 Deposit Growth, All Commercial Banks..........................................................................82
3.5.1.11 Effective Deposit Rates by BHC Category.......................................................................82
3.5.1.12 Delinquency Rates on Real Estate Loans.......................................................................82
3.5.1.13 Delinquency Rates on Selected Loans........................................................................... 83
3.5.1.14 Provisions to Loans Ratios at BHCs............................................................................... 83
3.5.1.15 C&I Loan Growth, All Commercial Banks...................................................................... 84
3.5.1.16 Loans to Nondepository Financial Institutions............................................................... 84
3.5.1.17 High-Quality Liquid Assets by BHC Type....................................................................... 84
3.5.1.18 Selected Liquid Assets at All BHCs............................................................................... 85
3.5.1.19 Liquidity Coverage Ratios at U.S. G-SIBs...................................................................... 85
3.5.1.20 Held-to-Maturity Securities ......................................................................................... 85
3.5.1.21 Duration Gap................................................................................................................ 86
3.5.1.22 Bank Stock Performance............................................................................................. 86
3.5.1.23 Price-to-Book of Select U.S. G-SIBs............................................................................. 86
3.5.1.24 5-Year CDS Premiums of Select U.S. G-SIBs.................................................................87
3.5.1.25 5-Year CDS Premiums of Select Foreign Banks ............................................................87
3.5.1.26 Initial and Stressed Capital Ratios................................................................................ 88
3.5.1.27 .Minimum CET1 Capital Ratios in the Severely Adverse and
Alternative Downside Scenarios................................................................................... 89
3.5.1.28 FDIC-Insured Failed Institutions .................................................................................. 89
3.5.1.29 Commercial Bank and Thrift Net Income...................................................................... 90
3.5.1.30 Total Assets of Largest Insured Depository Institutions ................................................91
3.5.1.31 U.S. Branches and Agencies of Foreign Banks: Assets..................................................91
3.5.1.32 U.S. Branches and Agencies of Foreign Banks: Liabilities............................................. 92
3.5.1.33 Credit Union Income..................................................................................................... 93
3.5.1.34 Credit Union Deposits................................................................................................... 95
3.5.1.35 Credit Union Net Long-Term Assets.............................................................................. 95
3.5.1.36 Credit Union Composition of Assets.............................................................................. 95
3.5.2.1 Number of Broker-Dealers and Industry Net Income...................................................... 96
3.5.2.2 Broker-Dealer Revenues................................................................................................ 96
3.5.2.3 Broker-Dealer Assets and Leverage................................................................................97

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3.5.2.4 REITs Total Assets......................................................................................................... 98
3.5.2.5 mREIT Stock Performance ............................................................................................ 98
3.5.2.6 Agency MBS Spread to Treasuries ................................................................................ 99
3.5.2.7 MMF Assets by Fund Type............................................................................................100
3.5.2.8 Liquid Asset Shares of Prime MMFs.............................................................................101
3.5.2.9 Weighted Average Maturities by Fund Type...................................................................101
3.5.2.10 Net Assets of the Investment Company Industry.........................................................103
3.5.2.11 Monthly Bond Mutual Fund Flows...............................................................................103
3.5.2.12 Monthly Equity Mutual Fund Flows..............................................................................103
3.5.2.13 Monthly Bank Loan Mutual Fund Flows.......................................................................104
3.5.2.14 Monthly High-Yield Mutual Fund Flows........................................................................104
3.5.2.15 Cumulative Equity Fund Flows.....................................................................................104
3.5.2.16 Cumulative Equity and Fixed Income Fund Flows........................................................105
3.5.2.17 U.S.-Listed ETF AUM...................................................................................................105
3.5.2.18 ETF Assets by Category of Investment........................................................................105
3.5.2.19 Monthly ETF Flows: Fixed Income Funds.....................................................................106
3.5.2.20 Monthly ETF Flows: Equity Funds...............................................................................106
3.5.2.21 Monthly Inverse and Leveraged ETF Flows.................................................................106
3.5.2.22 Hedge Fund Gross and Net Assets..............................................................................107
3.5.2.23 Hedge Fund Secured Financing .................................................................................108
3.5.2.24 Hedge Fund Borrowing: Composition of Creditors ......................................................108
3.5.2.25 Hedge Fund Financing Liquidity..................................................................................108
3.5.2.26 Hedge Fund Gross Exposures by Asset Class.............................................................109
3.5.2.27 Hedge Fund Treasury Exposures................................................................................. 110
3.5.2.28 M&A Loan Volume for Private Equity-Backed Issuers................................................. 111
3.5.2.29 Public Plan Allocation to Alternative Assets................................................................ 113
3.5.2.30 Insurance Industry Net Income................................................................................... 115
3.5.2.31 Insurance Industry Capital and Surplus....................................................................... 115
3.5.2.32 Consumer Loans and Leases Outstanding.................................................................. 117
3.5.2.33 Business Loans and Leases Outstanding.................................................................... 117
3.5.2.34 ABS Issuance............................................................................................................. 118
3.6.1.1 Initial Margin Requirements: DTCC................................................................................ 119
3.6.1.2 Maximum Uncovered Exposure for DTCC...................................................................... 119
3.6.1.3 Liquidity Demand at Derivatives Clearing Organizations ...............................................121
3.6.1.4 Initial Margin: U.S. Exchange Traded Derivatives...........................................................121
3.6.1.5 Initial Margin: OTC Derivatives.......................................................................................121
3.6.1.6 Global OTC Central Clearing Market Share....................................................................122
3.6.1.7 Average Clearing Rates for OTC Trading........................................................................122
3.6.3.1 Market Capitalization of Blockchain-Based Digital Assets.............................................126
3.7.1.1 Federal Reserve Swap Lines..........................................................................................129

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3.7.1.2 Change in USD Exchange Rates, Advanced Economies..................................................129
3.7.1.3 Change in USD Exchange Rates, Emerging Markets......................................................129
3.7.1.4 Real U.S. Dollar Trade-Weighted Index...........................................................................130
3.7.2.1 Advanced Economies Real GDP Growth.........................................................................130
3.7.2.2 General Government Gross Debt to GDP........................................................................130
3.7.2.3 Outstanding Negative Yielding Debt..............................................................................131
3.7.2.4 Euro Area H1 2020 Real GDP........................................................................................131
3.7.2.5 Euro Area Business and Consumer Surveys..................................................................131
3.7.2.6 Euro Area 10-Year Sovereign Yields..............................................................................133
3.7.2.7 Euro Area 10-Year Spreads...........................................................................................133
3.7.2.8 UK COVID-19 Business Loan Schemes..........................................................................134
3.7.2.9 Japanese Consumer Price Inflation...............................................................................134
3.7.2.10 Japan 10-Year Government Bond Yield........................................................................135
3.7.3.1 2020 Real GDP Revisions for Developing Economies.....................................................136
3.7.3.2 COVID-19 Impact on 2020 Current Account Balances...................................................136
3.7.3.3 Emerging Market Sovereign Bond Spreads....................................................................136
3.7.3.4 Foreign Investor Capital Inflows to EMEs.......................................................................137
3.7.3.5 Foreign Investor Portfolio Inflows to EMEs....................................................................137
3.7.3.6 Chinese Overseas Lending............................................................................................138
3.7.3.7 Chinese Real GDP Growth and its Components ............................................................139
3.7.3.8 Credit to the Chinese Nonfinancial Private Sector..........................................................139
3.7.3.9 Chinese Credit Growth..................................................................................................139
4.1.1 Total Assets of the Federal Reserve..................................................................................143
4.1.2 Net Portfolio Holdings of 13(3) Facilities ..........................................................................143

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