United States: FSOC provides recommendations on climate risk, digital assets, LIBOR and cybersecurity
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In its 2021 Annual Report, the Financial Stability Oversight Council (“FSOC”) assessed the state of the financial system and made recommendations regarding climate-related financial risk, digital asset risk, orderly transition out of LIBOR and cybersecurity.
The far-reaching report offered a comprehensive update on, among other topics, (i) the activities of the FSOC over the past year as the Council worked to tackle the disruption in financial conditions caused by COVID -19, (ii) significant developments in financial markets and regulations, (iii) current and potential threats to financial stability, and (iv) FSOC recommendations to promote financial stability.
On climate-related financial risk, the FSOC recommended:
- improving the availability of data and risk measurement tools;
- improving assessments of climate-related financial risks;
- the integration of these risks into risk management practices; and
- promote information that enables investors to take climate-related financial risks into account in their investment decisions.
On digital assets, the FSOC urged (i) regulators to continue to review and address the risks to the financial system caused by the use of digital assets, and (ii) member agencies to consider the risks to the financial system. recommendations provided in the November 2021 Stablecoins report. The FSOC also noted that it would be prepared to act to address the risks associated with stablecoins if comprehensive legislation was not enacted.
When transitioning away from LIBOR, the FSOC called:
- market participants must act quickly to switch to an alternative rate;
- member agencies to determine whether to grant regulatory relief to encourage market participants to process their existing portfolios that reference LIBOR; and
- member agencies to continue to use their authority to understand and monitor the state of transition of LIBOR regulated entities.
On cybersecurity, the FSOC recommended that agencies continue to conduct cybersecurity reviews of financial institutions and ensure effective cybersecurity oversight.
Treasury Secretary Janet L. Yellen, who is also FSOC President, said over the past year she has focused on three priorities: non-bank financial intermediation, Treasury market resilience America and climate-related financial risks. The purpose of the report, she added, was “to analyze recent episodes of financial turmoil to understand weaknesses in our financial system and identify[y] potential threats. “
FDIC President Jelena McWilliams said that, unlike its situation during the 2008 financial crisis, the banking system has generally remained resilient after the events of 2020. Ms. McWilliams noted that banks have stayed, and are, heavily capitalized in 2021.
In a statement on the annual report, SEC Chairman Gary Gensler said the SEC will do all it can to “build the resilience of [money market]funds. Mr. Gensler added that the SEC will focus on the resilience of the treasury market, the regulation of crypto assets and the development of climate-related disclosures that are “consistent, comparable and useful for decision.”
It is not clear whether the FSOC, as currently structured, can fulfill its role as a watchdog for risks that might otherwise escape attention. Since its members come exclusively, or almost exclusively, from one party, it undoubtedly serves more as an echo chamber for the positions of that party. A financial report that deals with inflation, rising debt levels, and shortening the average duration of government securities, but does not tie all of these events to government spending and fiscal policy, apparently hijacks the Watch out for important systemic risk factors that are considered politically unpleasant. The discussion of energy prices in the report is in the same vein: a number of factors driving the rise in energy prices are mentioned, but there is no mention of the executive decision. on the Keystone pipeline.
The purpose of the FSOC should not be to support or oppose presidential or congressional decisions regarding the level of spending or the construction of pipelines. Rather, its objective should be to establish links between events and to point out the risks that may arise from these links. If the FSOC is unwilling to make connections that seem obvious at first glance, what is its added value? If Congress is to create an advisory group that can serve as a challenge to accepted government positions, or to appeasement, it needs a different approach, whether it is including representatives of minority parties on the committee or representatives of non-governmental organizations.
- FSOC Annual Report 2021
- Treasury press release: Financial Stability Supervisory Board publishes its 2021 annual report
- Remarks by Secretary Janet L. Yellen to the open session of the Financial Stability Supervisory Board meeting
- Statement by FDIC President Jelena McWilliams on the 2021 Annual Report at the Financial Stability Oversight Board meeting
- Statement by SEC Chairman Gary Gensler at the Financial Stability Supervisory Board meeting
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