FSOC 2024 Annual Report

Let me begin by thanking the FSOC staff and the staff of the FSOC agencies who prepared this Annual Report. 

I continue to be impressed by the value of the requirement that the FSOC produce this annual report summarizing in one place the collective financial stability risks confronting the United States.

Banks

As the Report notes, the banking industry continued to show resilience in 2024 following the failure of three large regional banks in the spring of last year. Net income remains relatively high and asset quality metrics remain generally favorable. However, the industry continues to report weakness in several loan portfolios including commercial real estate and credit cards, as well as deterioration in multifamily loans. In addition, the second quarter of 2024 marked the tenth straight quarter that the banking industry reported unusually high unrealized losses on available for sale and held to maturity securities.

Many banks also remain reliant on uninsured deposits and the liquidity risks they pose which contributed to last year’s regional bank failures. I appreciate the Report’s recommendation that the banking agencies finalize a proposal to improve the resilience and resolvability of certain large banks by requiring them to maintain outstanding long-term debt that can provide additional loss protection for depositors and the Deposit Insurance Fund. 

Importantly, the Report also encourages the banking agencies to complete the Basel III capital reforms to further enhance the resilience of the banking system.

In addition, the Report notes that risks involving third-party service providers continue to be a financial stability concern. These providers deliver products and services to financial institutions, and the arrangements they make with banks have become more frequent and complex. The failure of Synapse, a third party provider of deposits to banks, resulted in thousands of depositors being unable to access their accounts and illustrated the need for banks to maintain adequate controls.

Non-banks 

I particularly want to commend the Annual Report’s discussion of the Council’s extensive work this year on risks in the non-bank financial sector. 

The Council members’ work to analyze and address high leverage in the largest hedge funds, and their interconnections with Treasury markets and the banking system, is essential and should be an ongoing priority. 

This year’s FSOC report on non-bank mortgage servicers provided important recommendations to improve the financial stability of mortgage markets going forward. 

I also appreciate the Annual Report’s attention to the rapid growth and risks of private credit. The opaque nature of private credit makes it difficult for regulators to assess risk management practices and the buildup of interconnections in the financial system. 

Finally, I appreciate the Annual Report’s support for resources to be set aside for the resolution of central counterparties (CCPs). These resources are essential to ensure that the resolution authority has what it needs to maintain operational continuity of the critical services that these firms provide. Earlier this year the Financial Stability Board issued a report and a new international standard for resolution authorities to have access to dedicated resources and tools for CCP resolution. I would also like to acknowledge the rulemaking by the SEC and the proposed rule by the CFTC to strengthen their recovery and wind down plans for CCPs on which they worked collaboratively with the FDIC. 

Conclusion

Let me close by thanking the Secretary for her strong leadership and commitment to the work of the FSOC and its important role in fostering cooperation among the responsible agencies of our government to address financial stability risks.

I would also like to add what a pleasure and privilege it has been to work with Secretary Yellen during her exceptionally distinguished tenure at the Treasury, as well as with all of my colleagues on the FSOC.