The Financial Stability Oversight Council (FSOC) has released the first annual Annual Report as mandated by the Dodd-Frank Act to cover a wide range of issues in the financial and regulatory arenas.

Under Dodd-Frank, the Council is required to issue a report each year that analyzes the activities of the council, significant financial market and regulatory developments, an potential emerging threats to the financial stability of the United States.  It is also expected to make recommendations to promote market discipline, maintain investor confidence and enhance the integrity, efficiency, competitiveness and stability of the financial markets.

“The most important thing we can do right now to safeguard financial stability is lift the cloud of default hanging over our economy,” said Treasury Secretary Tim Geithner. “As we move forward, however, we must also work to ensure that our regulatory framework keeps pace with the evolving global financial system. This report provides key recommendations that will build on the progress we’ve made through the Dodd-Frank Act and further strengthen the resilience of the financial markets and our economy.”

The 192 page report included recommendations that urged Congress to pass responsible legislation related to reforming the housing finance system.  It warned that further legislation could further destabilize an already fragile U.S. housing market.  However, it did not provide specific details regarding what responsible legislation would look like or what types regulations would threaten to destabilize the markets.

Suggesting ways to strengthen the housing finance system, the report recommended that FSOC member agencies, such as the Department of Housing and Urban Development (HUD), set forth standards and guidelines for housing system participants that seek to strengthen mortgage underwriting.

The recommendations set forth the by the annual report also focus on the need for heightened risk management and supervisory attention to capital market participants.  It points to the need for more robust capital, liquidity and resolution plans to insure that participants are making significant progress in enhancing their risk management strategies.  By increasing resilience to unexpected interest rate shifts, maintaining discipline in credit underwriting and standards and exercising more in-depth due diligence in emerging financial products, financial institutions can more appropriately manage the risk profile of their organizations. 

Pointing to the wide ranging reforms mandated by the Dodd-Frank Act, the report highlights significant progress by FSOC member agencies to implement many of the reforms set forth by the legislation.  The reforms have required not only the creation of the new Consumer Financial Protection Bureau, but have also requires greater collaboration among the various regulatory agencies responsible for oversight of the financial markets.  The report calls for additional resources to be dedicated to financial oversight to help attract greater talent to the agencies and to drive increased coordination of regulators.  Working together, the report states, the agencies must seek to balance market efficiencies, competitiveness and stability while providing for innovation.