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FSOC annual report notes 'significant risks' remain
ALEXANDRIA, Va. (5/8/14)--The Financial Stability Oversight Council (FSOC) released its annual report for 2013, citing seven themes throughout the 195-page document.
The council noted that the U.S. financial system has seen positive developments and continues to grow stronger. However, "significant risks to the financial stability of the U.S. remain," the council said.
Practices by nonbank financial firms, such as mortgage-servicing companies, is one area that is coming under scrutiny ( The Wall Street Journal May 7).
The themes of the council's fourth annual report are:
  • A vulnerability to runs in wholesale funding markets and destabilizing fire sales;
  • A housing finance system that relies heavily on government and agency guarantees;
  • Operational risks such as technological failures, natural disasters and cyberattacks from internal or external sources;
  • Reliance on reference interest rates
  • Resilience to interest rate risk;
  • Long-term fiscal imbalances; and
  • The sensitivity to possible adverse development in foreign economies.
"It is important for us to be continually reconsidering and evaluating risks to the credit union system," said National Credit Union Administration Board Chairman Debbie Matz, who is a voting member. "Participation in FSOC and the annual report are valuable components of that process."
She urged credit unions to read the report, "Because financial stability and the health of a growing economy are critical to the success of the industry."
Matz pointed out the following items:
  • The council recommends that agencies continue to promote forward-looking capital and liquidity planning. She noted that "NCUA recently finalized a stress testing and capital planning requirement for credit unions with more than $10 billion in assets, and we are receiving public comment on a modernized risk-based capital rule."
  • The council also identifies the risk of increased interest rate volatility. "Over the last several years, many credit unions increased their exposure to fixed rate real estate and more recently have dramatically lengthened the tenor of their investments. These changes have exacerbated exposure to interest rate movements," she said. "The council recommends that supervisors continue to monitor and assess the growing risks resulting from the continued search-for-yield behaviors, as well as the risks from potential severe interest rate shocks. I can assure you this is a high priority area for NCUA."
  • The council identified operational risks such as cybersecurity issues. "Credit unions are not immune to this threat, and this will be an area of continued emphasis and guidance," Matz said.
Among the council members are representatives from the Treasury Department, Federal Reserve System, Comptroller of the Currency, Consumer Financial Protection Bureau, Securities and Exchange Commission; Federal Deposit Insurance Corp., Commodity Futures Trading Commission and the Federal Housing Finance Agency.

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