Economic uncertainty and rising borrowing costs have increased risk in both the residential and commercial real estate sectors, which could increase risks to U.S. financial stability, the Financial Stability Oversight Council warned in its annual report released today. The council urged supervisors and banks to carefully monitor exposures and ensure the adequacy of credit loss allowances. The report also flagged three other potential financial risks and vulnerabilities related to nonfinancial corporate credit, short-term wholesale funding markets and digital assets.
Turning to operational and technological risk, the council also flagged the financial sector’s dependence on “a limited number of third-party service providers””—including core processors—as a potential risk to financial stability. “The Council recommends Congress pass legislation that ensures that the FHFA, NCUA and other relevant agencies have adequate examination and enforcement powers to examine certain services of third-party service providers to banking organizations,” FSOC said.
Meanwhile, climate-related financial risk continues to pose an emerging threat to U.S. financial stability. FSOC said it “supports member agencies’ continued efforts to: address climate-related data gaps; promote consistent, comparable and decision-useful disclosures; improve assessments of climate-related financial risks and vulnerabilities; and incorporate climate-related financial risks into their risk management practices and supervisory expectations for regulated entities where appropriate.”