In its 2021 Annual Report, the Financial Stability Oversight Council ("FSOC") assessed the state of the financial system and provided recommendations concerning climate-related financial risk, digital asset risk, the orderly transition away from LIBOR, and cybersecurity.
The wide-ranging report offered a comprehensive update on, among other topics, (i) FSOC activities over the past year as the Council worked to combat disruptions to financial conditions caused by COVID-19, (ii) significant financial market and regulatory developments, (iii) ongoing and potential threats to financial stability, and (iv) FSOC recommendations to promote financial stability.
Recommendations
With respect to climate-related financial risk, FSOC recommended:
- improving the availability of data and risk-measurement tools;
- improving assessments of climate-related financial risks;
- incorporating such risks into risk-management practices; and
- promoting disclosures that allow investors to take climate-related financial risks into account in their investment decisions.
On digital assets, FSOC urged (i) regulators to continue to examine and address risks to the financial system caused by the use of digital assets, and (ii) member agencies to consider recommendations provided in the November 2021 Report on Stablecoins. FSOC also noted that it would be prepared to act to address risks associated with stablecoins if comprehensive legislation is not enacted.
On the transition away from LIBOR, FSOC called on:
- market participants to act promptly in transitioning to an alternative rate;
- member agencies to determine whether to provide regulatory relief to encourage market participants to address their existing portfolios that reference LIBOR; and
- member agencies to continue to use their authority to understand and monitor the status of regulated entities' transition from LIBOR.
On cybersecurity, FSOC recommended that agencies continue to conduct cybersecurity examinations of financial institutions and ensure effective cybersecurity monitoring.
Statements
Treasury Secretary Janet L. Yellen, who also serves as Chair of FSOC, said that over the last year, she focused on three priorities: nonbank financial intermediation, the resilience of the U.S. Treasury market and climate-related financial risks. The purpose of the report, she added, was to "analyze[] recent episodes of financial turmoil to understand weak points in our financial system and identif[y] potential threats."
FDIC Chair Jelena McWilliams stated that, in sharp contrast to its condition during the financial crisis of 2008, the banking system generally remained resilient following 2020's events. Ms. McWilliams noted that banks remained, and continue to remain, strongly capitalized in 2021.
In a statement on the annual report, SEC Chair Gary Gensler said the SEC is going to do everything possible to "strengthen the resiliency of [money market] funds." Mr. Gensler added that the SEC will be focused on ensuring Treasury market resilience, the regulation of crypto assets, and developing climate-related disclosures that are "consistent, comparable, and decision-useful."
Commentary
It's not clear whether FSOC, as presently structured, can fulfill its intended role of being a watchdog for risks that might otherwise escape notice. Given that its membership is drawn exclusively, or almost so, from one party, it arguably serves more as an echo chamber for the positions of that party. A financial report that discusses inflation, rises in the debt level, and the shortening of the average term of government securities, but does not tie all those events to government spending and fiscal policy, is seemingly averting attention from important systemic risk factors that are regarded as politically unpleasant. The discussion of energy prices in the report is in the same vein: a number of factors for rising energy prices are mentioned, but there is no mention of the executive decision on the Keystone Pipeline.
The purpose of FSOC should not be to support or dissent from Presidential or Congressional decisions as to the level of spending or the building of pipelines. Rather, its purpose should be to make connections between events and to point to risks that may arise from those connections. If FSOC is not willing to make connections that seem obvious on their face, what is its value-add? If Congress wants to create an advisory group that may serve as a challenge to accepted governmental positions, or to complacency, it needs a different approach, whether that is including minority party representatives on the committee or representatives of non-governmental bodies.
Primary Sources
- FSOC's 2021 Annual Report
- Treasury Press Release: Financial Stability Oversight Council Releases 2021 Annual Report
- Remarks by Secretary Janet L. Yellen at the Open Session of the Meeting of the Financial Stability Oversight Council
- Statement by FDIC Chair Jelena McWilliams on the 2021 Annual Report at the Financial Stability Oversight Council Meeting
- Statement by SEC Chair Gary Gensler at the Financial Stability Oversight Council Meeting
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