The Financial Stability Oversight Council approved its 2024 annual report, which reviews developments in financial markets, identifies vulnerabilities and emerging threats to financial stability, and recommends actions to mitigate vulnerabilities and threats.
“The prosperity of the U.S. economy and the American people depend on the stability of the U.S. financial system,” Secretary of the Treasury Janet Yellen said. “This year, the financial system has continued to support a strong economy, marked by declining inflation, solid economic growth, and a healthy labor market. But we must remain focused on ensuring the financial system remains resilient and addressing emerging vulnerabilities. The annual report demonstrates the Council’s commitment to monitoring and responding to current and emerging risks to enhance market resilience, efficiency, and stability.”
Overall, the Council finds that the U.S. financial system remains resilient, though vulnerabilities warrant ongoing vigilance. The Council’s recommendations focus on:
• Cybersecurity: Financial institutions and systems are highly interconnected, so it is important for all financial sector participants to stay updated on cybersecurity developments within the sector and work to reduce cybersecurity risk. The Council supports ongoing partnerships between state and federal agencies and private firms and recommends continued information sharing related to cyber risk. The Council also supports the G7 Cyber Expert Group’s international efforts to help financial institutions better understand cybersecurity risks and improve the resilience of the financial system to cyber incidents.
• Depository Institutions: Overall, the U.S. banking system remains resilient, however, some potential vulnerabilities warrant continued mon¬itoring, including the weakening credit conditions in commercial real estate (CRE) and the strong reliance of some banks on non-deposit funding and uninsured deposit funding. The Council recommends that banks continue to ensure they have sound risk management practices, including contingency planning for funding and liquidity events. The Council also encourages efforts to complete the Basel III reforms to further enhance the resilience of the banking system.
• Third-Party Service Providers: To enhance information security within third-party service providers and address other critical regulatory challenges, the Council recommends that Congress pass legislation ensuring the Federal Housing Finance Agency, National Credit Union Administration, 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 identify additional ways to support information sharing among state and federal regulators.
• Commercial Real Estate: The Council recommends regulators continue to focus on the financial industry’s ability to withstand CRE stress from declines in property prices and loan quality. CRE exposure among bank and nonbank industry participants can also be interconnected. Therefore, the Council recommends that member agencies ensure financial institutions continue to monitor these correlated risks in their risk management and contingency planning.
• Digital Assets: The Council reiterates its prior recommendation that Congress pass legislation to create a federal prudential framework for stablecoin issuers. The Council also recommends that Congress pass legislation providing federal financial regulators with explicit rulemaking authority over the spot market for crypto assets that are not securities.
• Investment Funds: The Council supports the SEC’s continued engagement on open-end funds, including the SEC’s adoption of amendments to require more frequent and timely reporting of funds’ portfolio information. The Council and state and federal regulators should consider what steps are needed to address financial stability risks from open-end funds and CIFs. Lastly, the Council has continued working to support better data collection and monitoring to identify risks from highly leveraged hedge funds and the growth in private credit.
The report also details the activities of the Council and summarizes significant regulatory developments.