The Financial Stability Oversight Council (FSOC) has issued a report providing a measured overview of U.S. financial stability, indicating that markets and institutions have “performed well” amid a brief spike in volatility earlier this month. The assessment highlights resilience across core markets and infrastructure but raises concerns over elevated asset prices that may not align with economic fundamentals. Such insights suggest that while the financial system remains robust, vigilance is warranted as conditions evolve.
The FSOC’s findings suggest a shift in stability policy focus from traditional credit-cycle issues to market mechanics and operational resilience. The report’s chair emphasized the interconnectedness of financial stability with long-term growth and “economic security,” suggesting that regulators need to consider the cumulative impacts of regulations rather than their isolated costs. This broader perspective may influence how future policy frameworks are developed and implemented.
One significant concern raised in the report pertains to cyber risks, identified as a credible systemic threat despite a lack of major disruptions to financial stability so far. The FSOC pointed to the increasing interconnectivity within financial systems, advancements that enable more sophisticated cyber attacks, and the limited substitutability of essential third-party services. These factors could transform a successful cyber attack into operational outages and liquidity crises, undermining public confidence in financial institutions.
On the regulatory front, the FSOC advocates for coordinated examinations of third-party service providers among federal banking regulators. Additionally, it calls for legislative measures to empower the Federal Housing Finance Agency (FHFA) with adequate oversight capabilities concerning third-party risks associated with its regulated entities.
In terms of bank regulation, the report emphasizes the need for simplification and clearer supervisory frameworks. The FSOC supports a “holistic review” aimed at modernizing capital requirements and supervision, which could help alleviate some of the regulatory burdens currently faced by banks. The Council noted that increasing complexity in regulation has led to unintended consequences, such as a migration of lending from banks to non-banks and leverage ratios that may inadvertently discourage low-risk market intermediation.
Further, the report outlines administrative reforms intended to enhance clarity, including proposals to standardize the definition of “unsafe or unsound practice” and improve communication regarding supervisory findings. It also addresses the removal of “reputational risk” from supervisory programs and the rescindment of previous climate-related financial risk management principles.
Artificial intelligence (AI) has emerged as a focal point in the report, with FSOC noting its rapid integration into financial services. The Council is exploring how AI can bolster supervision and aid in the development of early-warning indicators for potential risks. To this end, it has established an AI working group designed to facilitate public-private dialogue and identify key use cases that could benefit from responsible AI adoption.
Among the key market developments the FSOC intends to monitor are short-term funding and cash products. The report highlights the substantial size of repo markets, estimated at nearly $12 trillion, and the commercial paper market, which stands around $1.3 trillion. The FSOC cautions that these markets could exacerbate stress through dynamics associated with runs and rollovers. Moreover, a significant portion of commercial paper is held in other short-term investment vehicles, which could also be susceptible to similar pressures.
Tokenization is also making strides in cash management, with FSOC noting the growth of money-market fund exchange-traded funds (ETFs), which have exceeded $4 billion in assets under management, alongside tokenized money-market funds that amount to approximately $1.7 billion as of October.
The report further addresses the refinancing risk in the commercial real estate sector, where mortgage debt reached $6.2 trillion as of the second quarter. The FSOC pointed out a looming maturity wall, with approximately $936 billion due in 2026 and $983 billion in 2027, posing potential risks for financial stability.
Corporate credit stress is another area of concern, particularly among lower-rated borrowers, with elevated defaults on leveraged loans commonly occurring through distressed exchanges. The FSOC urges attention to these vulnerabilities as they could contribute to broader financial instability.
Lastly, the FSOC has expressed support for the full implementation of the GENIUS Act, noting that the growth of payment stablecoins is becoming a notable source of demand for U.S. Treasury securities. The Act proposes a regulatory framework for stablecoin issuers, including mandates for liquid reserve requirements and monthly reporting on reserve compositions.
For stakeholders in banking, payments, and fintech, the FSOC’s report serves as a roadmap rather than a warning. Anticipated policy efforts will likely focus on Treasury market infrastructure, operational resilience, third-party oversight, and governance surrounding AI. Simultaneously, the Council is closely observing how cash management products and corporate refinancing needs could amplify stress levels should market volatility resurface.
See also
Healthcare Faces Rising Cyber Threats: Generative AI Deep Fakes Target Vulnerable Systems
AI Threat Intelligence Breakthroughs: 5 Innovations Reshaping Cybersecurity in 2025
86% of Organizations Experienced Cyber Breaches in 2024, Fortinet Report Reveals
Cyberattacks Surge 230% in 2025 as AI Exploits Third-Party Vulnerabilities
NIST Releases Cyber AI Profile to Guide Secure AI Adoption in Organizations
