Risks posed by nonbank mortgage servicers topic of briefing for all federal regulators; LIBOR end, bank trading “shock” test also outlined

Financial stability risks related to nonbank mortgage servicers was among the briefings the top federal financial institution regulators Friday, according to a readout of the regulators’ meeting released by the Treasury Department.

In its monthly meeting, the Financial Stability Oversight Council (FSOC) heard several briefings, including that of the financial stability of the mortgage servicers and climate risk, current conditions in the banking industry, results of the most recent stress tests (announced July 3 for tests conducted earlier in the year), and the final transition away from the now-defunct London Inter Bank Offered Rate (LIBOR).

The briefing about addressing financial stability of the nonbank mortgage servicers was held in a secret (executive) session. The presentation was offered by the Treasury, the Federal Housing Finance Agency (FHFA, the regulator and conservator of the government-sponsored enterprises [GSEs] of the Federal National Mortgage Association [Fannie Mae], the Federal Home Loan Mortgage Corporation [Freddie Mac], and the Federal Home Loan Bank System) and the Government National Mortgage Association (Ginnie Mae). As the session was secret, the FSOC offered no additional details.

Regarding stress tests results (also offered in secret), the Federal Reserve staff told the FSOC that participating banks are “well positioned to weather significant downside scenarios and to continue to lend to households and businesses even during a severe recession.”

However, according to the readout, the Fed staff described to the group an exploratory market shock on the trading books of the largest banks. The FSOC was told the exploratory “shock” is intended to “further understand the risks with their trading activities and to ensure banks are resilient to a range of different risks.”

During the public session, the readout explained, the council heard:

  • A briefing on the report of the Progress on the Climate-related Financial Risk Committee (published after the meeting). Several council members provided updates on their agencies’ progress in assessing and addressing climate-related financial risks, FSOC said.
  • An update on the transition away from LIBOR (which ended June 30). “The Council noted that the successful transition to SOFR (Secured Overnight Financing Rate, a Fed-developed alternative to LIBOR) bolstered the resiliency of the financial system and was the result of a public-private partnership spanning nearly a decade,” the readout stated.

READOUT: Financial Stability Oversight Council Meeting on July 28, 2023