The U.S. Department of the Treasury today issued the nation's Annual Report of the The Financial Stability Oversight Council (Council).

Also, earlier today, a fresh jobs and employment report from the Bureau of Labor Statistics might (subject to adjustment) signal steadiness that many investors welcome, especially as they contemplate the Federal Reserve's much-anticipated Dec. 18 consideration of a further interest-rate cut.

Today's Council report probably comes with little of the headline-driven excitement of the job numbers, but it strikes us as bringing some coherence to the inventorying of issues unfolding nationally, regionally and globally.

In a press release that accompanied release of the full report (PDF), the Council provide some emphasis on threats and vulnerabilities categorized as:

• Cybersecurity
• Depository Institutions
• Third-Party service providers to financial institutions
• Commercial Real Estate
• Digital Assets
• Investment Funds.

In the prelude summary of today's 136-page full report, the Council at one point notes "...This year, the Council has identified financial vulnerabilities in 14 areas divided into three broad categories: financial risks, financial institutions, and market structure or other operational or technological factors."

The Council's report notes that against a backdrop of stable economic growth, "the financial sector overall performed well and is supporting credit provision. Nonetheless, financial risks in some areas are elevated. For example, commercial real estate (CRE) credit conditions in the banking sector are weakening, and leverage in private funds and insurance companies is growing. As highlighted by several high-profile adverse events this year, operational risks, like cybersecurity and third-party risks, remain significant."

The Council also noted, "Financial asset prices rose in 2024, but valuations of some assets are elevated relative to fundamentals."

In a section headed "Vulnerabilities, Significant Market Developments, and Council Recommendations," the Council addresses dozens of broad issues and more narrow topics.

Among items of broad interest were the Council's observations about Investment Funds' resiliency amid market stress; signs of rising credit risk in Commercial Real Estate; promise and peril of artificial intelligence; stress tests for financial institutions; benefits and potential threats generally inherent in technology innovation within financial institutions, and more.

Entrepreneurs and investors pressing forward in fintech and other startup sectors might focus more intensely on references to payment systems, stablecoins and other digital assets, third-party delivery of bank products and services (and within that, e.g., references to risks and benefits associated with Central Counterparties).

[Regular readers of VNC's fintech coverage will recall our report earlier this year regarding efforts by Tennessee Departent of Financial Institutions (DFI) to address innovation challenges.]

In delivering today's Council report, Treasury Secretary Janet Yellen PhD and her colleagues -- naturally, with no reference to next month's Inauguration -- said they "believe that additional actions, as described [in the report], should be taken to ensure financial stability and to mitigate systemic risk that would negatively affect the economy: the issues and recommendations set forth in the Council's annual report should be fully addressed; the Council should continue to build its systems and processes for monitoring and responding to emerging threats to the stability of the U.S. financial system, including those described in the Council's annual report; the Council and its member agencies should continue to implement the laws they administer, including those established by, and amended by, the Dodd-Frank Act, through efficient and effective measures; and the Council and its member agencies should exercise their respective authorities for oversight of financial firms and markets so that the private sector employs sound financial risk management practices to mitigate potential risks to the financial stability of the United States."

Treasury today explained the Council was established by the Dodd-Frank Wall Street Reform and Consumer Protection Act (2010) and is charged with three primary purposes, quoting:

1. To identify risks to the financial stability of the United States (U.S.) that could arise from the material financial distress or failure, or ongoing activities, of large, interconnected bank holding companies or nonbank financial companies, or that could arise outside the financial services marketplace.

2. To promote market discipline by eliminating expectations on the part of shareholders, creditors, and counterparties of such companies that the U.S. government will shield them from losses in the event of failure.

3. To respond to emerging threats to the stability of the U.S. financial system.

The Council's full report is here. Secretary of the Treasury Janet Yellen's opening remarks before the Council, as prepared for delivery, are here.

.last edited 1556 6 December 2024