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The Financial Stability Oversight Council (FSOC) released its annual report Friday, noting that, “amid heightened geopolitical and economic shocks and inflation, risks to the U.S. economy and financial stability have increased even as the financial system has exhibited resilience.” The report includes details on risks related to digital assets, climate, cybersecurity, and more, and recommendations to mitigate them.

On digital assets, FSOC reported that these assets currently have limited impact on the broader U.S. financial system, but that their interconnectedness with traditional financial institutions could increase rapidly.

To guard against risks that could have a significant impact, the council recommended Congress give federal financial regulators rulemaking authority for digital assets that are not securities, as well as enact legislation to prevent digital-assets-related regulatory arbitrage. Regulatory and legislative efforts on this front could impact credit unions’ ability to engage in digital asset activity and their relationships with third-party digital asset service providers.

NAFCU has called on lawmakers and regulators to ensure a level playing field and appropriate cybersecurity regulations within the financial services industry. However, the association has also fought against efforts to extend the NCUA’s authority to third-party vendors due to the extreme costs and regulatory burdens it would put on credit unions.

Additionally, the council gave support for actions to improve the availability of data for assessing climate-related financial risks and called on state and federal agencies coordinate on ways to identify, prioritize, and procure the necessary data – NAFCU has previously encouraged FSOC members to coordinate on climate risk policies. While recommending appropriately tailored supervisory expectations of risk management practices, the council highlighted the need for financial regulators to continue to promote consistent, comparable, and decision-useful disclosures that allow investors and financial institutions to consider climate-related financial risks in their investment and lending decisions. 

Cybersecurity vulnerability and resilience remain priorities within the financial services system. The council touted partnerships between state and federal agencies and the strides made over the past year to manage and track cyber risk. NAFCU continues to advocate for a national data security standard that establishes robust data privacy and data security standards for all entities that collect and use consumers’ financial information.

In addition, the council gave recommendations for financial institutions to prepare for the end of LIBOR; the Federal Reserve Board Friday adopted a final rule selecting SOFR as the replacement benchmark rate.

Read the full annual report here.