FSOC Highlights Pandemic-Related Financial Risk in 2020

In its annual review of financial stability and systemic risk, the Financial Stability and Oversight Council ("FSOC") highlighted COVID-19-related financial stresses.

FSOC stated that the pandemic "caused a contraction of economic activity at an unprecedented pace" including reduced consumer spending, slowed manufacturing production, surging unemployment and widespread business closures. FSOC noted the sectors recording the sharpest declines, including airlines, energy, transportation, hotels, and restaurants. FSOC said that "the flight to safety and liquidity also created disruptions in short-term and global dollar funding markets," and that "trading conditions for Treasuries and agency mortgage-backed securities were also strained."

In addition, FSOC highlighted a number of other issues:

• Residential Real Estate: FSOC encouraged state and federal regulators to strengthen oversight of nonbank mortgage origination and servicing during this period of disruption in mortgage payments.
• Financial Market Structure: FSOC described the vulnerabilities of (i) interlinkages among dollar funding markets, (ii) dealer intermediation, and (iii) non-traditional market participants during the pandemic. FSOC also recommended an interagency review that focuses on market volatility in short-term funding, Treasuries, mortgage-backed securities, and corporate bond markets.
• Alternative Reference Rates: FSOC urged market participants to "formulate and execute" transition plans in anticipation of the discontinuation of LIBOR. Furthermore, FSOC advised regulators to: (i) encourage market participants - through guidance or relief - to address legacy LIBOR portfolios; and (ii) use their supervisory authority to evaluate regulated entities' progress in their transitions from LIBOR "including their legacy LIBOR exposure and plans to address that exposure."
• Cybersecurity: FSOC highlighted the risks of cybersecurity due to the increased use of teleworking systems and reliance on interconnected platforms. FSOC supported continued cybersecurity examinations of financial institutions and public-private partnerships to identify cybersecurity risks.
• Financial Innovation: FSOC underlined the operational risks of digital assets and FinTech innovation, and encouraged regulators to continue to monitor the potential effects of new FinTech products on financial consumers and financial stability overall. FSOC also emphasized coordination among federal and state regulatory agencies to "promote consistent regulatory approaches" and identify risks posed by FinTech innovation.