The Financial Stability Oversight Council (Council) unanimously approved its 2021 annual report. The 2021 annual report describes activities of the Council over the year, as the U.S. economy has continued to rebound from the disruptions caused by the COVID-19 pandemic. Monetary and fiscal policy, substantial progress in vaccinations, and broadly accommodative financing conditions have together supported this recovery and bolstered the financial condition of households and businesses. Additionally, the Council’s annual report describes significant financial market and regulatory developments, potential emerging threats to U.S. financial stability, and recommendations to promote U.S. financial stability.
“The Financial Stability Oversight Council’s annual report analyzes past episodes of financial turmoil to understand weak points in our financial system. It also reviews the actions taken by the Council to strengthen our financial system, with one eye on the past and one on the future. In the coming year, the Council will continue to monitor threats to financial stability and take concrete action where appropriate.”Secretary of the Treasury Janet L. Yellen
The Council’s recommendations in the annual report include the following, among others:
- Climate-related Financial Risk: The Council recognizes the critical importance of taking prompt action to improve the availability of data and measurement tools, enhance assessments of climate-related financial risks and vulnerabilities, and incorporate climate-related risks into risk management practices and supervisory expectations for regulated entities, where appropriate. In addition, financial regulators, consistent with their mandates and authorities, should promote consistent, comparable, and decision-useful disclosures that allow investors and financial institutions to take climate-related financial risks into account in their investment and lending decisions. Through these actions, financial regulators can both promote financial-sector resilience and help the financial system support an orderly economy-wide transition to net-zero emissions.
- Digital Assets: The Council recommends that federal and state regulators continue to examine risks to the financial system posed by new and emerging uses of digital assets and coordinate to address potential issues that arise from digital assets. The Council recommends that member agencies consider the recommendations in the Report on Stablecoins published by the President’s Working Group on Financial Markets, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency on November 1, 2021 (PWG Report). The Council will further assess and monitor the potential risks of stablecoins and recommends that its members consider appropriate actions within each member’s jurisdiction to address those risks while continuing to coordinate and collaborate on issues of common interest. The Council will also be prepared to consider steps available to it to address risks outlined in the PWG Report in the event comprehensive legislation is not enacted.
- LIBOR Transition: Market participants should act with urgency to address their existing LIBOR exposures and transition to robust and sustainable alternative rates. The Council commends the efforts of the Alternative Reference Rates Committee and recommends that it continue to facilitate an orderly transition to alternative reference rates. Member agencies should determine whether regulatory relief is necessary to encourage market participants to address legacy LIBOR portfolios. Member agencies should also continue to use their supervisory authority to understand the status of regulated entities’ transition from LIBOR, including their legacy LIBOR exposure and plans to address that exposure.
- Cybersecurity: The Council recommends that federal and state agencies continue to monitor cybersecurity risks and conduct cybersecurity examinations of financial institutions and financial infrastructures to ensure, among other things, robust and comprehensive cybersecurity monitoring, especially in light of new risks posed by the pandemic, ransomware incidents, and supply chain attacks.
The annual report 2021 of the Financial Stability Oversight Council is available here.
The Council provided more detailed recommendations to Council members in its Report on Climate-Related Financial Risk dated October 2021, available here.
“According to the National Oceanic and Atmospheric Administration’s (NOAA’s) National Centers for Environmental Information (NCEI), 2020 was a “historic year of extremes” for the United States. The year 2020 witnessed 22 billion-dollar-or-greater weather and climate disasters, a record number of such events, which caused a combined $95 billion in damages. Moreover, the 2020 experience reflected a long-running trend, as the frequency and costs of severe weather-related events have been rising over the last two decades. This trend reflects the impact of climate change, as well as other factors, such as increased economic development in high-risk areas.”