The US financial system remains resilient, though vulnerabilities warrant ongoing vigilance. That is the main message from the 2024 annual report of the Financial Stability Oversight Council (FSOC) which has just unanimously approved its publication.

The annual report reviews developments in financial markets, identifies vulnerabilities and emerging threats to US financial stability and makes recommendations to mitigate those vulnerabilities and threats. The report also details the activities of FSOC and summarizes significant regulatory developments.

SEC Chair Gary Gensler also offered some remarks, noting that the FSOC open meeting was likely to be the last of the current Administration. He took the chance to share his reflections about this Council and the US financial system.

Recommendations

FSOC’s recommendations in the annual report touched on the cybersecurity incidents that have disrupted critical operations and services and continue to pose a significant risk to US businesses and government agencies, thanks to business and system interconnectedness. And it mentioned third-party service providers which offer tremendous services but can also enhance certain risks for businesses, and digital assets, which still need appropriate risk-management standards.

More specifically, FSOC said its recommendations in those important areas were as follows:

• Cybersecurity: The Council supports ongoing partnerships between state and federal agencies and private firms and recommends continued information sharing related to cyber risk and additional work to assess and mitigate cyber-related financial stability risks. The Council also supports the G7 Cyber Expert Group’s international efforts to help financial institutions better understand cybersecurity risks, and to improve the resilience of the financial system to cyber incidents through preparedness, along with a better un­derstanding of the threat landscape and how to mitigate risk. 
• 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 that interact with their regulated entities. The Council also recommends that federal banking regulators continue to work collaboratively with states, and identify additional ways to support information sharing among state and federal regulators.   
• Digital Assets: The Council said that absent appropriate risk management standards, stablecoins represent a potential risk to financial stability because of their vulnerability to runs. The Council reiterates its prior recommendation that Congress pass legislation to create a comprehensive 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. 

FSOC also said the US banking system remains resilient, but some potential vulnerabilities warrant continued mon­itoring.

Those areas include the weakening credit conditions in commercial real estate and the strong reliance of some banks on non-deposit funding and uninsured deposit funding. FSOC said banks should continue to ensure they have sound risk management practices, including contingency planning for funding and liquidity events and should complete the Basel III reforms to further enhance the resilience of the banking system.

Gensler backs his agency’s work

SEC Chair Gary Gensler issued remarks to add context to FSOC’s 2024 annual report, highlighting the efforts his securities regulatory agency has taken to protect investors, issuers and markets.

“Not every risk is the same,” Gensler said. “In fact, the financial sector is about allocating and pricing risk, not eliminating it. It’s important to focus on the activities that are more likely to contribute to fragility in the system.”

He said that is why the agency embarked on key reforms, including rules to promote central clearing in the Treasury markets; updated Form PF; shortened the settlement cycle for equities, corporate bonds, and municipal bonds to one day; and adopted rules requiring broker-dealers and investment advisers to notify customers of data breaches that might put personal information at risk, among other things.

He concluded his remarks with this message to those who will assume the seats of securities rule oversight after him: “I also want to say to those who will fill these seats in the future: remember that the privilege of this service comes with a responsibility to look out for the everyday bystanders along the highways of finance.”