Cybersecurity Policy Report, Financial Stability Oversight Council releases 2024 annual report, (Dec 9, 2024)

By Patricia K. Ruiz, J.D.

The report focuses on the issues most likely to affect the stability of the U.S. financial system.

The Financial Stability Oversight Council’s 2024 annual report details developments in financial markets and identifies vulnerabilities and emerging threats to the financial stability of the U.S. In its annual report, the Council also makes recommendations to mitigate those vulnerabilities and threats.

Cybersecurity. In its report, the Council expressed support for ongoing partnerships between state and federal agencies and private firms. It recommended continued information sharing related to cyber risk and additional work to assess and mitigate cyber-related financial stability risks. The Council also gave its support to 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 through preparedness, a shared understanding of the threat landscape, and a shared approach to mitigating risk.

Depository institutions. While the U.S. banking system remains resilient, supported by sound levels of regulatory capital, adequate liquidity buffers, and healthy levels of profitability, potential vulnerabilities, such as the weakening credit conditions in commercial real estate and the strong reliance of some banks on non-deposit funding and uninsured deposit funding, warrant continued monitoring. The Council recommended that banks continue to ensure they have sound risk management practices that include contingency planning for funding and liquidity events. The Council also encourages efforts to further enhance the resilience of the banking system by completing the Basel III reforms.

Third-party service providers. The Council recommended that Congress pass legislation to ensure 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 further recommended that federal banking regulators continue to coordinate third-party service provider examinations, work collaboratively with states, and identify ways to support information sharing among state and federal regulators.

Commercial real estate. The Council recommended that regulators continue to focus on the ability of the financial industry to withstand stress from declines in property prices and loan quality in commercial real estate (CRE). Because CRE exposure among bank and nonbank industry participants can be interconnected, the Council recommended that member agencies ensure financial institutions continue to monitor these correlated risks in their risk management and contingency planning.

Digital assets. The Council reiterated a prior recommendation that Congress pass legislation to create a comprehensive federal prudential framework for stablecoin issuers. It also recommended that Congress pass legislation providing federal financial regulators with explicit rulemaking authority over the spot market for crypto assets that are not securities.

In a statement responding to the annual report, Adrienne A. Harris, superintendent of the New York Department of Financial Services, said, “I must note that this year’s report amends the Council’s previous recommendation, and now focuses exclusively on the federal role for comprehensive stablecoin regulation. We share the goal of establishing a national framework to protect consumers across the country, but there is an important role for states to play in the regulation of innovative financial services. States can act nimbly in response to industry developments, to modernize regulations more quickly, and to support reasonable innovation.”

Investment funds. The Council expressed support for the Security and Exchange Commission’s continued engagement on open-ended funds, including its adoption of amendments to require more frequent and timely reporting of funds’ portfolio information. The Council recommended that state and federal regulators should consider what steps are needed to address financial stability and risks from open-ended funds and collective investment funds.

Statements. Treasury Secretary Janet L. Yellen discussed the Department’s efforts to strengthen the Council by increasing staff, creating more opportunities for agencies to come together, and developing new tools, including the analytic framework for financial stability risks. Yellen stated, “This strengthened Council has delivered, helping make our financial system more resilient and our economy stronger. It is crucial that it continue to do so for the benefit of the American people.”

Securities and Exchange Commission (SEC) Chair Gary Gensler said in a statement, “The job... of this Council and the SEC in promoting financial resiliency is never finished. Technology and business models are forever changing. Thus, our successors will need to be just as vigilant about assessing risks in our financial system that may spill out and hurt everyday Americans.”

Acting Comptroller of the Currency Michale J. Hsu issued a statement in support of the Council’s annual report, saying, “The Annual Report is a fitting reflection of all the hard work the Council has done this past year. Its recommendations cover both traditional and emerging risks, from cybersecurity and commercial real estate risks in the banking system; to the growth of nonbanks, like mortgage servicers, hedge funds, and private credit funds; to artificial intelligence, digital assets, and climate-related financial risks.”

In a statement, National Credit Union Administration (NCUA) Chairman Todd M. Harper said, “For the first time, this annual report … aptly recognizes the need to anticipate and mitigate the likelihood of large credit union failures, especially with system assets heavily concentrated in a few large institutions.”

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