Financial Stability Oversight Council has recommended steps for regulators and market participants to address risks to financial stability.

Steven Mnuchin

Steven Mnuchin

US agencies should monitor vulnerabilities in wholesale funding markets, levels of non-financial business leverage and volatility in commercial real estate prices, the Financial Stability Oversight Council (FSOC) said in its 2020 annual report. 

“The council’s recommendations in the report provide actionable steps for regulators and market participants to address potential risks to financial stability as our economy continues to recover,” said treasury secretary Steven Mnuchin. 

The FSOC recommends that the agencies study vulnerabilities such as possible large-scale redemptions from prime and tax-exempt money market mutual funds, and the role leveraged non-bank financial institutions may have played in the March market volatility. The council said the agencies should tackle these vulnerabilities.

The FSOC expressed concern about non-financial business leverage and called on supervisors to keep tabs on asset valuations, and potential implications for the entities they regulate and if necessary reinforce their ability to manage severe, simultaneous losses. 

Concentration risks

The report highlights concentration risks around bank exposures to commercial real estate (CRE) as areas needing to be monitored. It recommends supervisors encourage banks, where needed, to bolster their loss-absorption capacity by strengthening their capital and liquidity buffers in line with the concentration of CRE exposures on their books. 

The largest banks must maintain sufficient capital and liquidity to ensure their resiliency against economic and financial shocks, the FSOC said. 

The council recommends that regulators ensure the banks maintain sufficient capital and liquidity to make them resilient against economic and financial shocks. This also means assessing the impact of rules on those institutions and checking that banking holding companies are properly capitalised to reflect their size, risk and concentration of activities. 

The last set of FSOC recommendations focused on the agencies monitoring cybersecurity risks by conducting examinations of banks and also to improve information sharing among private firms and government partners. 

Innovation

Acting comptroller of the currency Brian Brooks said he supports FSOC’s recommendations and was particularly praiseworthy of its comments on financial innovation. “Innovation can also create new risks that need to be understood. Such risks underscore the need for the development of oversight standards, appropriate regulation, and US leadership,” he said. 

Mr Brooks also called for US regulators to foster responsible innovation, given that other countries are well advanced in exploring digital currencies and stablecoins. 

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