Top Financial Threats Seen by Regulators
May 8, 2014 7:30 AM
The Financial Stability Oversight Council released its annual report to Congress on Wednesday detailing steps regulators have taken in implementing financial reform and what remains on their agenda. It also specified their top concerns, including some threats that could topple the financial system. Following are their biggest worries.
Short-term wholesale funding markets
Regulators, including Federal Reserve Board Gov. Dan Tarullo, have repeatedly raised concerns about the threat posed to banks' continued reliance on short-term wholesale funding, which is vulnerable to sudden runs. Though the situation has improved over the past year, FSOC said more remains to be done.
(Image: Bloomberg News)
Cybersecurity and operational risks
In its report, FSOC specifically cited the Target data breach last year, warning against "attempts to disrupt institutions, markets or commerce." It also raised fears about other technological vulnerabilities, including software failures and power outages.
(Image: Bloomberg News)
Housing finance reform
While FSOC did not endorse a specific legislative approach to changing the situation, the council noted that Fannie Mae and Freddie Mac, which were seized by the government in 2008, continue to provide the majority of financing for borrowers.
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Foreign markets
While the economic situation in Europe has stabilized, the FSOC said emerging markets "have become a focus of concern," citing exchange rates and asset prices that have become much more volatile. The potential spillover to U.S. banks is "limited," FSOC said, "but a substantial worsening of EME [emerging market economy] stress is a risk."
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Too Big to Fail
Despite progress made in implementing financial reform, regulators are still worried that some credit ratings agencies "explicitly factor in the possibility that the government will provide support to the largest banks if they become financially distressed." The full implementation of new powers to seize and unwind big banks should help end that perception, the report said.
(Image: Bloomberg News)
Reference rates
FSOC called for reforms of reference rates, citing the systematic false reporting and manipulation of the London Interbank Offered Rate by reporting banks as a key reason why. "More recently, concerns have been raised about the integrity of certain foreign exchange rate benchmarks."
(Image: Bloomberg News)
Interest rate volatility
Fed Chair Janet Yellen warned Wednesday of the dangers of continued low interest rates, which is forcing some banks to take on more risk in an effort to "reach for yield." The FSOC report amplifies those concerns while also raising the possibility of what happens when interest rates begin to rise, including losses on holders of fixed income assets.
(Image: Bloomberg News)
