The Financial Stability Oversight Council said that risks to U.S. financial stability are higher today than before the pandemic, as rising debt levels, climate risks and the ongoing uncertainty related to the COVID-19 pandemic pose threats to the global financial system.
“The outlook for global growth is characterized by elevated uncertainty, with the potential for continued volatility and unevenness of growth across countries and sectors,” the council said in its annual report to Congress, issued Friday.
FSOC was created in the wake of the 2008 financial crisis to identify potential risks to the financial stability of the United States and to promote market discipline. It comprises the heads of the major U.S. financial regulators and is chaired by Treasury Secretary Janet Yellen.
The report identified a number of risks to the financial system, including the impact of climate change, elevated corporate debt levels, vulnerabilities in markets for short-term debt and commercial real estate and the growing popularity of digital assets like bitcoin BTCUSD, -2.69% and ether ETHUSD, -3.54%, as well as meme stocks like GameStop Corp GME, +8.76%. and AMC Entertainment Holdings Inc. AMC, +22.41%
“Digital assets are a prominent example of financial innovation that present potential benefits and risks,” the report said. “Regulatory attention and coordination are critically important in light of the quickly evolving market for these assets. Because speculation appears to drive the majority of digital asset activity at the time, the price of digital assets may be highly volatile.”
FSOC also stressed the dangers that climate change poses to financial stability, as rapid changes to the global climate cause more frequent storms, droughts, floods and other natural disasters could force the market to reprice assets in a destabilizing fashion.
The financial stability report comes on the heels of another paper issued in October that called on financial firms to create and collect risk data and on the government to institute policies that reduce carbon emissions.
The ongoing COVID-19 pandemic also continues to pose threats to the global financial system, the report said, labeling the market crash in March of 2020 “an acute financial crisis” brought on by the pandemic. That the U.S. economy rebounded swiftly from those events “in part reflected the effectiveness of extraordinary measures taken by the Federal Reserve to support the functioning of a wide range of financial markets and institutions,” the report said.