On December 16, 2022, the Financial Stability Oversight Council unanimously approved its 2022 annual report. The report highlights that, amid heightened geopolitical and economic shocks and inflation, risks to the U.S. economy and financial stability have increased even as the financial system has exhibited resilience.
From Secretary of the Treasury Janet L. Yellen’s statement:
“This year’s annual report highlights the resilience of the financial system in the face of significant headwinds over the past year. The Council will continue to coordinate to address the risks identified in this year’s report so that the financial system remains a source of strength for the U.S. economy.”
The Council’s annual report reviews financial market developments, describes potential emerging threats to U.S. financial stability, identifies vulnerabilities in the financial system, and makes recommendations to mitigate those threats and vulnerabilities. The Council’s recommendations in the annual report include the following:
Nonbank Financial Intermediation. The Council supports the initiatives undertaken by the SEC and other agencies to address risks presented by investment funds, including the proposed data-collection improvements to Form PF, new rules to address the liquidity mismatch in open-end funds and money market funds. It will also continue to evaluate potential risks to financial stability posed by hedge funds.
Digital Assets. In light of the gaps in the regulation of digital asset activities identified by the Council, it recommends the enactment of legislation providing for rulemaking authority for federal financial regulators over the spot market for crypto-assets that are not securities. The Council said that regulatory arbitrage should be addressed, an assessment should be made of whether vertically integrated market structures can or should be accommodated under existing laws and regulations, and that Council members should continue to build capacities related to data and the analysis, monitoring, supervision, and regulation of digital asset activities.
Climate-related Financial Risk. With regards to climate-related financial risks, the Council recommends the following:
State and federal agencies should continue to ensure appropriate risk management practices are implemented by the regulated entities;
Financial regulators should continue to promote consistent, comparable, and decision-useful disclosures that allow investors and financial institutions to consider climate-related financial risks in their investment and lending decisions;
Carry out an enhanced coordination of data and risk assessment through the Council’s Climate-related Financial Risk Committee.
Treasury Market Resilience. The Council recommends that member agencies continue to review Treasury market structure and liquidity challenges in the context of changes in the technology and the counterparties providing market liquidity, as well as the growth in Treasury debt outstanding. The Council also supports the Treasury Department’s efforts to enhance collection and transparency in post-trade transactions in the cash market for Treasury securities.
Cybersecurity. The Council encourages the continued partnerships between state and federal agencies and private firms to assess cyber vulnerabilities and further build cyber resilience.
Transition from LIBOR. The Council advises firms to take advantage of any existing contractual terms or opportunities for renegotiation to transition their remaining legacy LIBOR contracts before the publication of USD LIBOR ends. Council members have emphasized that derivatives and capital markets should continue moving to SOFR, a broad and robust measure of borrowing rates.
The annual report also included certain vulnerabilities identified by the Council related to the nonfinancial corporate credit sector, as well as the commercial and residential real estate sectors.
The Treasury’s press release can be found here.
The full report can be found here.