ANNUAL 

REPORT 

2023

Financial Stability Oversight Council 1

The Financial Stability Oversight Council (Council) was established by the Dodd-Frank Wall Street 

Reform and Consumer Protection Act (Dodd-Frank Act) and is charged with three primary purposes:

1. To identify risks to the financial stability of the United States (U.S.) that could arise from the

material financial distress or failure, or ongoing activities, of large, interconnected bank holding

companies or nonbank financial companies, or that could arise outside the financial services

marketplace.

2. To promote market discipline by eliminating expectations on the part of shareholders, creditors,

and counterparties of such companies that the U.S. government will shield them from losses in

the event of failure.

3. To respond to emerging threats to the stability of the U.S. financial system.

Pursuant to the Dodd-Frank Act, the Council consists of ten voting members and five nonvoting 

members and brings together the expertise of federal financial regulators, state regulators, and an 

insurance expert appointed by the President.

The voting members are:

• the Secretary of the Treasury, who serves as the Chairperson of the Council;

• the Chair of the Board of Governors of the Federal Reserve System;

• the Comptroller of the Currency;

• the Director of the Consumer Financial Protection Bureau;

• the Chair of the Securities and Exchange Commission;

• the Chairman of the Federal Deposit Insurance Corporation;

• the Chairman of the Commodity Futures Trading Commission;

• the Director of the Federal Housing Finance Agency;

• the Chairman of the National Credit Union Administration; and

• an independent member having insurance expertise who is appointed by the President and

confirmed by the Senate for a six-year term.

The nonvoting members, who serve in an advisory capacity, are:

• the Director of the Office of Financial Research;

• the Director of the Federal Insurance Office;

• a state insurance commissioner designated by the state insurance commissioners;

• a state banking supervisor designated by the state banking supervisors; and

• a state securities commissioner (or officer performing like functions) designated by the state

securities commissioners.

The state insurance commissioner, state banking supervisor, and state securities commissioner serve 

two-year terms. 

Financial Stability Oversight Council
2 2023 FSOC // Annual Report

Statutory Requirements for the Annual Report

Section 112(a)(2)(N) of the Dodd-Frank Act requires that the Council’s annual report address the 

following:

1) the activities of the Council;

2) significant financial market and regulatory developments, including insurance and accounting

regulations and standards, along with an assessment of those developments on the stability of the

financial system;

3) potential emerging threats to the financial stability of the United States;

4) all determinations made under Section 113 or Title VIII and the basis for such determinations;

5) all recommendations made under Section 119 and the result of such recommendations; and

6) recommendations—

a) to enhance the integrity, efficiency, competitiveness, and stability of United States financial

markets;

b) to promote market discipline; and

c) to maintain investor confidence.

Approval of the Annual Report

This annual report was approved by the voting members of the Council on December 14, 2023.

Abbreviations for Council Member Agencies and Member Agency Offices

• Department of the Treasury (Treasury)

• Board of Governors of the Federal Reserve System (Federal Reserve)

• Office of the Comptroller of the Currency (OCC)

• Consumer Financial Protection Bureau (CFPB)

• Securities and Exchange Commission (SEC)

• Federal Deposit Insurance Corporation (FDIC)

• Commodity Futures Trading Commission (CFTC)

• Federal Housing Finance Agency (FHFA)

• National Credit Union Administration (NCUA)

• Office of Financial Research (OFR)

• Federal Insurance Office (FIO)
Table of Contents 3

Table of Contents

1 Member Statement .................................................................................5

2 Executive Summary ................................................................................. 7

Box A: Global Economic Conditions .............................................................................................................16

3 Vulnerabilities, Significant Market Developments, and Council 

 Recommendations ................................................................................. 18

3.1 Financial Risks .........................................................................................................18

3.1.1 Commercial Real Estate ..................................................................................................................18

3.1.2 Residential Real Estate ....................................................................................................................21

Box B: Household Finance ........................................................................................................................ 28

3.1.3 Corporate Credit ............................................................................................................................. 31

3.1.4 Short-Term Funding Markets .......................................................................................................... 35

3.1.5 Digital Assets................................................................................................................................... 41

3.1.6 Climate-Related Financial Risks ..................................................................................................... 45

3.2 Financial Institutions ...............................................................................................50

3.2.1 U.S. Banking System ...................................................................................................................... 50

3.2.1.1 G-SIBs and Large Non-G-SIBs ..........................................................................................................51

3.2.1.2 Regional Banks............................................................................................................................... 53

Box C: The Spring 2023 Turmoil and Policy Responses ............................................................................ 56

3.2.2 Investment Funds ........................................................................................................................... 59

3.2.3 Central Counterparties ................................................................................................................... 69

3.2.4 Insurance Sector .............................................................................................................................73

3.3 Financial Market Structure, Operational Risk, and Technological Risk ..................... 79

3.3.1 Treasury Markets .............................................................................................................................79

Box D: Treasury Market Resilience During March 2023 .............................................................................81

Box E: Successful Implementation of Alternative Reference Rates ........................................................... 84

3.3.2 Cybersecurity ................................................................................................................................. 86

Box F: Speed of Financial Transactions and Information Transmission .................................................... 89

3.3.3 The Use of Artificial Intelligence in Financial Services ....................................................................91

Box G: Quantum Computing ...................................................................................................................... 94

3.3.4 Third-Party Service Providers ......................................................................................................... 95

Box H: ION Case Study .............................................................................................................................. 98
4 2022 FSOC // Annual Report

4 Council Activities and Regulatory Developments ...................................99

4.1 Council Activities....................................................................................................99

4.1.1 Risk Monitoring and Regulatory Coordination ............................................................................... 99

4.1.2 Determinations Regarding Nonbank Financial Companies...........................................................100

4.1.3 Operations of the Council .............................................................................................................100

4.2 Safety and Soundness...........................................................................................101

4.2.1 Enhanced Capital and Prudential Standards and Supervision .......................................................101

4.2.2 Dodd-Frank Act Stress Tests..........................................................................................................102

4.2.3 Resolution Planning and Orderly Liquidation................................................................................102

4.2.4 Insurance.......................................................................................................................................103

4.3 Financial Infrastructure, Markets, and Oversight ..................................................104

4.3.1 Climate-Related Financial Risks....................................................................................................104

4.3.2 Digital Assets, Payment Systems, and Technological Innovation..................................................105

4.3.3 Derivatives, Swap Data Repositories, Regulated Trading Platforms, Central Counterparties, 

and Financial Market Utilities........................................................................................................105

4.3.4 Securities and Asset Management................................................................................................106

4.3.5 Accounting Standards...................................................................................................................109

4.3.6 Bank Secrecy Act/Anti–Money Laundering Regulatory Reform ....................................................109

4.4 Mortgages and Consumer Protection....................................................................110

4.4.1 Mortgages and Housing Finance ...................................................................................................110

4.4.2 Consumer Protection ..................................................................................................................... 111

4.5 Data Scope, Quality, and Accessibility................................................................... 112

4.5.1 Data Scope.....................................................................................................................................112

4.5.2 Data Quality ...................................................................................................................................112

5 Select Council Member Agency Publications on Financial and 

Regulatory Developments.....................................................................115

6 Abbreviations .......................................................................................117

7 Glossary .............................................................................................. 120

8 List of Charts........................................................................................ 126

9 Endnotes ............................................................................................. 129
Member Statement 5

The Honorable Kamala D. Harris

President of the Senate

United States Senate

The Honorable Charles E. Schumer

Majority Leader

United States Senate

The Honorable Mitch McConnell

Republican Leader

United States Senate

Jerome H. Powell

Chair

Board of Governors of the Federal Reserve System

Rohit Chopra

Director

Consumer Financial Protection Bureau

Martin J. Gruenberg

Chairman

Federal Deposit Insurance Corporation

Sandra L. Thompson

Director

Federal Housing Finance Agency

Thomas E. Workman

Independent Member Having Insurance Expertise

Financial Stability Oversight Council

The Honorable Mike Johnson

Speaker of the House

United States House of Representatives

The Honorable Hakeem Jeffries

Democratic Leader

United States House of Representatives

Janet L. Yellen

Secretary of the Treasury

Chairperson, Financial Stability Oversight Council

Michael J. Hsu

Acting Comptroller of the Currency

Office of the Comptroller of the Currency

Gary Gensler

Chair

Securities and Exchange Commission

Rostin Behnam

Chairman

Commodity Futures Trading Commission

Todd M. Harper

Chairman

National Credit Union Administration

1 Member Statement 

In accordance with Section 112(b)(2) of the Dodd-Frank Wall Street Reform and Consumer Protection 

Act, for the reasons outlined in the annual report, I believe that additional actions, as described below, 

should be taken to ensure financial stability and to mitigate systemic risk that would negatively affect 

the economy: the issues and recommendations set forth in the Council’s annual report should be 

fully addressed; the Council should continue to build its systems and processes for monitoring and 

responding to emerging threats to the stability of the U.S. financial system, including those described 

in the Council’s annual report; the Council and its member agencies should continue to implement the 

laws they administer, including those established by, and amended by, the Dodd-Frank Act, through 

efficient and effective measures; and the Council and its member agencies should exercise their 

respective authorities for oversight of financial firms and markets so that the private sector employs 

sound financial risk management practices to mitigate potential risks to the financial stability of the 

United States.

Executive Summary 7

Reviews of the events by federal and state regulators have yielded lessons about the ways in which 

banking supervision and resolution preparedness can be enhanced. These include improving 

data and the monitoring of uninsured deposits 

and depositor composition, proposals for longterm debt requirements, enhancing resolution 

planning guidance and requirements under the 

Dodd-Frank and Federal Deposit Insurance Acts, 

changing supervisory risk identification frameworks, and strengthening the processes and 

culture of supervision. 

In a dynamic, innovative financial system such 

as that of the U.S., risks that have been well 

understood for quite some time can manifest 

in new and unexpected ways. Bank runs are 

not new, but the speed with which deposits 

flowed out of some banks in early March was 

unprecedented. Prior bank runs, such as those 

that occurred in 2008, took place over a week or 

more. In contrast, in March, SVB and Signature 

Bank depositors withdrew over 20 percent of their 

deposits in one day, forcing immediate closure 

of the banks and spurring concerns of contagion. 

These rapid withdrawals were exacerbated by the 

highly concentrated depositor base, technological 

advances in digital banking, and the increasing 

speed of information transmission through 

social media (see Box F: Speed of Financial 

Transactions and Information Transmission). 

The contours of these recent failures provide 

important lessons for managing and responding 

to run risk going forward. 

Despite the regional bank stress in the Spring, the 

U.S. banking system remains resilient overall. U.S. 

banks continue to have sound levels of regulatory 

capital and healthy levels of profitability while 

maintaining ample liquidity buffers. In particular, the global systemically important banks have 

maintained risk-based capital positions within 

the range exhibited in the last decade, and experienced deposit inflows during the turmoil in the 

Spring. However, banks continue to face challenges as interest rates increased further in 2023, leading to market value losses on some bank assets 

The Council was established by the Dodd-Frank 

Act in 2010 and was charged with the collective 

responsibility to monitor and promote U.S. financial stability. Financial stability can be defined as 

the financial system being resilient to events or 

conditions that could impair its ability to support 

economic activity, such as by intermediating 

financial transactions, facilitating payments, allocating resources, and managing risks. This annual 

report summarizes the Council’s assessment of 

current vulnerabilities that contribute to financial 

stability risks, the Council’s recommendations for 

mitigating vulnerabilities across a variety of asset 

classes, institutions, activities, and developments, 

and the 2023 activities of the Council and member agencies to reduce and respond to risks and 

lessen vulnerabilities facing the financial system. 

This year, vulnerabilities in the banking sector 

that increased risks to financial stability were exposed. While fundamentally resulting from poor 

risk management practices and a heavy reliance 

on uninsured deposits, the failure of two regional 

banks in Spring 2023 underscored that activities 

of non–global systemically important banks can 

pose a risk to financial stability. As Silicon Valley 

Bank (SVB) and Signature Bank were failing in 

early March, other regional banks with similar 

business models, like First Republic Bank, also experienced larger than normal uninsured deposit 

outflows. Concern then mounted about the risk 

of additional regional bank failures. This potential contagion could have impaired the ability of 

households and businesses to manage their immediate financial obligations and in turn had the 

potential to cause significant disruptions to economic activity. Together, the Treasury, FDIC, and 

the Federal Reserve responded immediately with 

decisive actions to strengthen public confidence 

in the U.S. banking system and protect the U.S. 

economy (see Box C: The Spring 2023 Turmoil 

and Policy Response). Through the successful 

and timely resolution of the failed banks, the use 

of the systemic risk exception,1

 and the establishment of the Bank Term Funding Program, the 

systemic risk of contagion from these events was 

successfully mitigated. 

2 Executive Summary
8 2023 FSOC // Annual Report

by 100 basis points in 2023, yields on 10-year U.S. 

Treasuries rose to their highest level since 2007 

in mid-October before partially retracing. While 

volatility of Treasury yields was elevated in 2023, 

market liquidity measures remained within range 

and markets functioned well. In particular, the 

Treasury market exhibited resilience in the Spring 

(see Box D: Treasury Market Resilience During 

March 2023). Since the beginning of 2023, the 

forward rates on U.S. Treasuries have increased, 

suggesting that market participants have increased their assessment of the probability that 

interest rates may remain higher for longer. These 

expectations as well as increasing term premia 

have contributed to the overall increase in rates 

and volatility. 

The financial system has remained resilient amid 

the notable increase in interest rates this year, 

as solid economic conditions have supported 

continued strength in household and business 

balance sheets, as well as the strong performance 

of consumer and corporate credit. However, 

additional increases in market interest rates 

would further increase debt servicing costs for 

those borrowers with variable-rate debt or who 

need to refinance existing debt, as well as reduce 

the value of existing fixed-income instruments. 

Moreover, banks have tightened their lending 

standards in all loan categories, citing a desire 

to improve their capital and liquidity positions, 

increased concerns about deposit outflows, and 

reduced tolerance for risk, as well as uncertainty 

about the economic outlook. In addition, 

refinancing risk of CRE loans is elevated due to 

the sizeable amount of upcoming maturities in 

2024. These factors can lead to potential financial 

stability risks if they result in financial distress 

among financial institutions and investors that 

spills over into other financial institutions and the 

broader system.

Similarly, the evolving participation of nonbank 

financial institutions (NBFIs) in the provision of 

financial services is an important area to monitor 

for vulnerabilities and potential risks to the 

broader financial system. NBFIs have long been 

a feature of the U.S. financial system and include 

institutions as diverse as investment funds, 

insurance companies, and central counterparties 

(CCPs), many of which are regulated or overseen 

by member agencies. As activities migrate to new 

entrants and existing business models evolve 

and contributing to rising funding costs. Among 

some regional and community banks, funding 

risk and exposure to commercial real estate (CRE) 

continue to be vulnerabilities. 

In 2023, the major drivers of economic conditions 

have been persistently high inflation and increasing interest rates. In January 2023, the year-overyear change in the Personal Consumption Expenditure price index was 5.4 percent, and through 

the first half of the year, the Federal Reserve’s 

Federal Open Market Committee (FOMC) continued its tightening of monetary policy to bring 

inflation down. Inflation has decreased to 3.4 percent in September, but this is still well above the 

2 percent target that the FOMC has set for price 

stability. The U.S. economy continued to grow at a 

solid pace through the third quarter of 2023, with 

real gross domestic product (GDP) growth at an 

annualized rate of 3.1 percent over the first three 

quarters of the year and 4.9 percent in the third 

quarter of 2023. The labor market, while showing 

signs of cooling, remains strong, with the unemployment rate remaining below 4 percent and the 

pace of non-farm payroll employment growth 

averaging 240,000 jobs per month for the first ten 

months of 2023. 

Most financial market participants surveyed 

expect that in 2024, real GDP growth will slow 

to below 2 percent, the labor market will soften 

slightly, and inflation will continue to fall.2

 As 

always, there is much uncertainty around these 

forecasts. This uncertainty may be heightened 

now as market participants and forecasters assess 

a high-inflation and high–interest rate environment with which the U.S. has had little modern 

experience. Additionally, the U.S. economy is 

evolving structurally amid the rise of hybrid work, 

the transition to less fossil fuel use, the accelerating use of artificial intelligence (AI), and other 

technology-related developments. There is also 

the potential for new shocks, including geopolitical events, to impact U.S. economic conditions. 

Monetary policy tightening and uncertainty 

related to evolving economic conditions have 

contributed to increasing interest rates across 

the yield curve in 2023. Longer-term Treasury 

yields fell in response to the banking turmoil 

early this year but trended up strongly throughout the second and third quarter. As the FOMC 

raised the effective federal funds overnight rate 
Executive Summary 9

attacks, denial-of-service attacks, or data 

breaches, can impair the operations of individual 

financial institutions and impose losses on 

customers and counterparties. In addition to 

the technological aspects of cybersecurity, 

institutions must address the human element: 

the potential for insider threats and social 

engineering. This vulnerability interacts with 

other operational risks related to the use of thirdparty service providers. Regulatory line of sight 

into these third-party vendors and expertise in 

cybersecurity are critical for the supervisory 

community.

The vulnerability of the financial system to 

the physical components of climate risk can 

involve the manifestation and amplification of 

traditional credit, market, and operational risks. 

In this year’s report, the Council highlights the 

effects of physical climate risk on the pricing 

and availability of property and casualty (P&C) 

insurance, which has implications for the 

functioning of residential real estate markets. 

The increasing frequency and severity of extreme 

weather can affect the solvency of insurers 

and the cost and availability of coverage for 

homeowners and businesses. In 2023, many 

insurance companies have raised their premiums 

or withdrawn from markets completely, most 

notably in high-risk geographic markets such 

as California, Florida, and Louisiana. These 

changes in the P&C insurance market could affect 

mortgage markets and house prices and could 

potentially generate larger economic spillover 

effects. 

The Council has removed the LIBOR-related 

vulnerability from this year’s report following the 

progress made in transitioning to more robust 

alternative reference rates. June 2023 marked the 

completion of a successful transition from the 

use of LIBOR to more robust alternative reference 

rates, including the Secured Overnight Funding 

Rate (SOFR) recommended by the Alternative 

Reference Rate Committee (ARRC). This transition follows a decade of collaborative work by 

the Council, the ARRC, and other private sector 

participants. Without adequate preparation, the 

cessation of LIBOR would have caused widespread disruptions to the financial system. This 

successful transition involved large and complex 

efforts across and within diverse financial institutions and markets. The same type of preparaover time, the Council will continue to assess 

and respond to potential risks posed by evolving 

nonbank activities. This year’s report includes 

a discussion of the potential risks related to the 

increasing role of nonbank mortgage servicers 

and the rapid increase in private credit. To 

enable the Council to more nimbly respond to 

the evolving landscape, in November 2023, the 

Council issued final versions of a new analytic 

framework for financial stability risks and 

updated guidance on the Council’s nonbank 

financial company determinations process. The 

new analytic framework details the vulnerabilities 

and transmission channels that most commonly 

contribute to risks to financial stability. It also 

explains the range of authorities the Council 

may use to address any particular risk, including 

interagency coordination, recommendations to 

regulators, or the designation of certain entities. 

The use of these tools will be driven by the risk 

that has been identified, and the Council does not 

prioritize the use of one type of tool over another.

This year, for the first time, the Council has 

identified the use of AI in financial services as an 

emerging vulnerability in the financial system. 

AI has the potential to spur innovation and drive 

efficiency, but its use in financial services requires 

thoughtful implementation and supervision to 

manage potential risks. The use of AI, including 

machine learning, in financial services has 

been growing over time. This use may be poised 

to accelerate due to the broad introduction of 

generative AI tools early this year. Generative AI 

models use large datasets to identify patterns that 

allow the generation of new content including 

text, software code, images, and other media. 

Many AI approaches3

 present “explainability” 

challenges that make it difficult to assess the 

suitability and reliability of AI models and to 

assess the accuracy and potential bias of AI 

output. In addition, the reliance of AI systems on 

large datasets and third-party vendors introduces 

operational risks related to data controls, privacy, 

and cybersecurity.

In addition to monitoring emerging risks such 

as AI, the Council’s continued monitoring of 

cybersecurity risk and climate-related financial 

risk is equally important, particularly in light of 

the growing number of cybersecurity incidents 

and climate-related events. Cybersecurity 

incidents, whether from ransomware, malware 
10 2023 FSOC // Annual Report

continue to closely monitor CRE exposures and 

concentrations, and to track market conditions. 

They should also continue to evaluate loan 

portfolios’ resilience to potential stress, ensure 

adequate credit loss allowances, assess CRE 

underwriting standards, and review contingency 

planning for a possibly protracted period of rising 

loan delinquencies.

In addition, the Council recommends supervisors 

and financial institutions continue to monitor 

residential real estate exposures and ensure 

the adequacy of credit loss allowances. Federal 

and state agencies should enhance or establish 

information-sharing protocols to enable 

collaboration and communication in response to 

potential increased credit risk in residential real 

estate and mortgage servicing. The increasing 

role of nonbank mortgage companies is tightly 

integrated with other residential real estate 

vulnerabilities. The Council supports recent 

actions by FHFA, the Government National 

Mortgage Association (Ginnie Mae), and state 

regulators to strengthen oversight of nonbank 

companies involved in the servicing of residential 

mortgages. The Council recommends that, 

where possible, relevant federal agencies and 

state regulators continue to coordinate closely 

to collect data, identify risks, and take additional 

steps available to them within their authorities to 

address the potential risks of nonbank mortgage 

companies.

Higher interest rates and slowing economic 

growth have increased nonfinancial corporate 

credit risk. If credit quality significantly worsens, 

a potential wave of debt defaults could lead to 

large redemptions at investment funds with 

significant liquidity mismatches and in turn 

disrupt bond market functioning. Moreover, 

such defaults may also have a cascading effect 

across broader financial markets. The Council 

recommends that member agencies continue to 

monitor levels of nonfinancial business leverage, 

trends in asset valuations, and implications of 

the potential for a sustained period of higher 

interest rates for the entities they regulate in order 

to assess and reinforce the ability of the financial 

sector to manage severe simultaneous losses. The 

Council also supports enhanced data collection 

on nonbank lending to nonfinancial businesses 

to provide additional insight into the potential 

tion and financial industry collaboration will be 

necessary to ensure a smooth transition in 2024 to 

T+1 settlement on securities and ensure that the 

financial stability benefits of faster settlement will 

be realized.

Section 3 of the report includes detailed discussions of the 14 financial stability vulnerabilities 

the Council has identified for 2023, and Council 

recommendations to address them. The vulnerabilities are grouped into three broad categories: 

Financial Risks; Financial Institutions; and Financial Market Structure, Operational Risk, and Technological Risk. In addition, the report includes 

several box topics that provide additional context 

for the assessment of financial stability vulnerabilities. The remainder of the Executive Summary 

provides a high-level overview of these financial 

stability vulnerabilities, some key recommendations, key Council Activities this year, and Box A: 

Global Economic Conditions.

Financial Risks

Section 3.1 Financial Risks includes vulnerabilities related to Commercial Real Estate, Residential Real Estate, Corporate Credit, Short-Term 

Funding Markets, Digital Assets, and Climate-Related Risk. In addition, Section 3.1 includes Box B: 

Household Finance.

Vulnerabilities or shocks in the real estate and 

corporate credit sectors can directly affect the 

flow of credit to households and businesses. 

Conversely, economic conditions can affect 

the performance of these assets and transmit 

financial stress to the holders of mortgage and 

corporate debt. These sectors also act as a nexus 

for a variety of financial institutions, connecting 

banks and nonbanks, such as governmentsponsored enterprises, investment funds, and 

insurance companies.

Elevated interest rates, high costs, weakness 

in central business district CRE conditions, 

and potential structural changes in demand 

for office space have heightened concerns 

about CRE. Maturing loans and expiring leases 

amid weak demand for office space have the 

potential to strain office sector conditions further, 

which could cause stress to spread beyond 

this sector. The Council recommends that 

supervisors, financial institutions, and investors 
Executive Summary 11

previously noted, the Council remains prepared 

to consider steps available to it to address risks 

related to stablecoins in the event comprehensive 

legislation is not enacted. 

Climate-related impacts and events continue 

to impose significant costs on the public and 

the economy. The Council recommends state 

and federal agencies continue to coordinate to 

identify, prioritize, and procure data necessary 

for monitoring climate-related financial risks, 

including via the Council’s working groups. The 

Council also recommends that state and federal 

agencies continue to coordinate on developing a 

robust framework to identify and assess climaterelated financial risks, including by iteratively 

identifying a preliminary set of risk indicators. 

Financial regulators should continue to promote 

consistent, comparable, and decision-useful 

disclosures that allow investors and financial 

institutions to better incorporate climaterelated financial risks in their investment and 

lending decisions. Physical climate risk and its 

intersection with commercial and residential 

real estate vulnerabilities remains a primary 

area of interest for the Council. Given the critical 

role of real estate in the economy and the 

financial system and how it affects the remits of 

multiple Council member agencies, the Council 

recommends that agencies collaborate on 

analysis related to the intersection of physical 

risk, real estate, and insurance in particular.

Financial Institutions

Section 3.2 Financial Institutions includes 

vulnerabilities related to the Banking System, 

Investment Funds, Central Counterparties, and 

the Insurance Sector. In addition, Section 3.2 

includes Box C: The Spring 2023 Banking Turmoil 

and Policy Responses.

The banking system is critical to the supply of 

credit and financial services to households and 

businesses and is central to the stability of the 

U.S. financial system. The banking sector faces 

a challenging environment, including higher 

interest rates and concerns about the economic 

outlook and credit quality. In addition, there are 

key lessons to be learned from the turmoil in the 

Spring that can contribute to reducing financial 

stability risks emanating from this sector. The 

risks associated with the rapid increase in private 

credit.

Short-term funding markets support financial 

market liquidity and the implementation of 

monetary policy, and provide financing for 

businesses, financial intermediaries, state and 

local governments, and the federal government. 

Among the major lenders in short-term funding 

markets are money market funds (MMFs). The 

Council supports the SEC’s finalized rule reducing 

structural vulnerabilities in MMFs to make these 

funds more resilient, liquid, and transparent. 

The Council will continue to monitor shortterm funding market conditions for potential 

vulnerabilities that may warrant additional action 

and recommends that member agencies bolster 

efforts to make these markets more resilient, 

including efforts to increase the resilience of 

investment vehicles with similarities to MMFs. 

Where lack of data prevents close monitoring, 

Council members should develop proposals to 

collect the necessary data. The Council supports 

efforts to examine and consider ways to improve 

counterparty risk management in the noncentrally cleared bilateral repo (NCCBR) market 

given the reported prevalence of zero haircuts on 

collateral. Additional data on dealers’ margining 

practices, including but not limited to the use of 

haircuts, could also improve the Council’s ability 

to monitor risks and evaluate options, such as 

minimum haircuts on repo collateral, in these 

markets.

While the nascent crypto-asset market is not 

significant in its size or broad connection to 

the traditional financial system, distress in that 

market has the potential to transmit to traditional 

financial firms. This year, Council members 

have addressed risks posed by the cryptoasset ecosystem through agency statements, 

guidance, and rulemaking and the Council 

recommends that agencies continue to enforce 

existing rules and regulations. In its 2022 Report 

on Digital Asset Financial Stability Risks and 

Regulation, the Council outlined two gaps in the 

regulation of crypto-asset activities in the United 

States: (1) the regulation of spot markets for 

crypto-assets that are not securities and (2) the 

regulation of stablecoins. The Council reiterates 

its recommendations from last year’s Annual 

Report that Congress pass legislation to close 

each of these regulatory gaps. As the Council has 
12 2023 FSOC // Annual Report

consider whether additional steps should be 

taken to address vulnerabilities related to these 

funds. The Council also supports the SEC’s 

continued engagement regarding potential 

reforms of open-end funds, including the 

liquidity framework enhancements proposed 

in late 2022 that govern open-end fund liquidity 

risk management, swing pricing, and fund 

reporting. The Council looks forward to reforms 

that robustly address the financial stability 

risks from SEC-registered open-end funds. The 

Council recommends that both state and federal 

regulators consider requirements for greater 

transparency and more detailed and timely 

regulatory reporting by collective investment 

funds (CIFs) that would enable both banks and 

regulators to better understand market trends 

and monitor for potential risks. Additionally, the 

Council encourages state and federal regulators to 

consider whether any reforms in the CIF market 

would be appropriate to mitigate these risks, 

particularly given the proposed changes to openend funds. 

CCPs are pivotal entities in the U.S. financial 

system, with responsibility for overseeing the 

fulfillment of outstanding financial agreements 

between CCP member buyers and sellers of cash 

securities and derivatives. While this central 

clearing of agreements serves as a safeguard 

against the transmission of stress through 

counterparty defaults, it also concentrates risk. 

The Council supports the CFTC, Federal Reserve, 

and SEC’s continued efforts to enhance their 

oversight over CCPs designated by the Council as 

systemically important financial market utilities 

(FMUs). It is important for the relevant agencies 

to consistently assess whether the current 

CCP standards effectively mitigate threats to 

financial stability arising from both default and 

nondefault losses. A key consideration includes 

balancing counterparty and liquidity risks. 

Regulatory bodies overseeing clearing members 

should continue evaluating the liquidity risk 

management practices and capabilities of these 

firms. It is crucial for supervisory agencies to work 

alongside, and strengthen information sharing 

agreements with, the FDIC to facilitate resolution 

planning and improve resolvability for CCPs. The 

Council also supports continued monitoring and 

assessment of interconnections among CCPs, 

their clearing members, and other financial 

Council supports member agencies’ efforts to 

examine how recent events can inform potential 

modifications to the regulatory framework for 

regional banks. The Council recommends that 

banking supervisors, including credit union 

supervisors, continue to ensure that banks 

maintain adequate capital and liquidity, sound 

interest rate risk management practices, and welldeveloped operational resilience plans. 

Given the stress in the CRE market, particularly 

within the office sector, and as valuations of other 

types of CRE appear quite elevated, the Council 

recommends that banking supervisors closely 

monitor the performance of CRE loans. The 

Council also recommends that banking agencies 

continue monitoring bank exposures to NBFIs, 

including assessing how banks manage their 

exposure to leverage or liquidity mismatch in the 

nonbank financial sector.

The Council supports member agencies’ plans to 

review whether capital measures appropriately 

reflect an institution’s ability to absorb losses 

and agencies’ proposed measures to improve 

resolvability at large, complex, or interconnected 

banks, such as by requiring long-term debt 

and improved resolution plans. The Council 

encourages efforts to complete the Basel III 

reforms to further enhance the resilience of the 

banking system. 

In addition, the Council recommends that 

banking agencies closely monitor uninsured 

deposit levels and depositor composition and 

collect additional data as necessary. The Council 

supports efforts to reexamine banks’ existing 

deposit insurance systems and credit unions’ 

share insurance systems, to promote financial 

stability while mitigating moral hazard and 

excessive risk taking.

Investment funds of all types play a critical 

role as intermediaries in the U.S. financial 

system, promoting economic growth through 

efficient capital formation and providing vital 

funding to businesses across the economy. The 

Council supports the initiatives by the SEC and 

other agencies to address risks in hedge funds, 

including data collection improvements for 

Form PF. The Council will continue to review 

the findings of the Hedge Fund Working Group 

(HFWG) as they are developed and recommends 

that the SEC and other relevant regulators 
Executive Summary 13

attack on third-party service provider ION in Box 

H: ION Case Study. 

The U.S. Treasury market plays a critical role in 

funding the federal government and implementing monetary policy. In addition, as the deepest 

and most liquid market in the world, the Treasury 

market serves as a risk-free asset benchmark 

supporting the broader financial system. While 

the Treasury market showed resilience to stress 

in 2023, a history of other disruptions to market 

functioning demands continued focus on improving resilience for the future. The Council supports 

the work of the Interagency Working Group on 

Treasury Market Surveillance (IAWG), particularly in the area of data transparency, and recommends that member agencies continue to make 

progress on studying and implementing policies 

to improve the resilience of the Treasury market. 

The Council is also supportive of Treasury’s efforts 

to implement Treasury buybacks for liquidity support and cash management purposes. The Council believes buybacks can reduce Treasury market 

vulnerabilities by improving Treasury market 

liquidity and can also alleviate some intermediation capacity constraints.

Cybersecurity risk is pervasive throughout the 

economy, and reducing cyber vulnerability is 

particularly critical within the financial system. 

Ransomware, malware, denial-of-service attacks, 

and data breaches can disrupt the operations of 

financial institutions, including those that are 

systemically important. The Council recommends 

that the Financial and Banking Information 

Infrastructure Committee (FBIIC), the Financial 

Services Sector Coordinating Council, and the Financial Services Information Sharing and Analysis Center continue to promote information sharing related to cyber risk and undertake additional 

work to assess and mitigate cyber-related financial stability risks. The Council encourages FBIIC 

to continue working closely with federal and state 

agencies, the Department of Homeland Security, 

law enforcement, and industry partners to conduct regular cybersecurity exercises that take into 

account interdependencies with other non-financial sectors. In addition, the Council recommends 

that member agencies carefully consider how to 

share information among themselves, including 

confidential supervisory information and classified information to the extent legally permissible. 

institutions. Lastly, the Council urges regulators 

to continue advancing recovery and resolution 

planning for FMUs and systemically important 

CCPs. Coordination in designing and executing 

supervisory stress tests for these entities should 

also remain a priority.

The U.S. is the world’s largest single-country 

insurance market, with U.S. insurers providing 

valuable risk-pooling services to the economy 

through life and health (L&H) insurance and 

P&C insurance products. Trends in the L&H 

sector may raise concerns related to (1) growth of 

private credit and alternative asset investments 

to support policyholder obligations, (2) growth 

in risk appetite for CRE exposures and increased 

proportion of lower credit quality in corporate 

bond portfolios, (3) growth of the use of offshore 

reinsurance, which is intended to facilitate risk 

transfer of capital-intensive legacy blocks and to 

build capacity in insurers’ balance sheets through 

release of reserves and opportunistic evaluation 

of liabilities, and (4) the growing influence of 

new entrants in life insurance, such as private 

equity and other alternative asset management 

firms. The Council recommends that FIO, along 

with the National Association of Insurance 

Commissioners (NAIC), work with member 

agencies to evaluate the potential impact of these 

trends on systemic risk and associated financial 

stability considerations. The Council supports 

FIO’s work on these issues, as well as NAIC’s 

efforts to advance its macroprudential initiative 

and supervisory considerations for insurers that 

are owned by, or in strategic arrangements with,

private equity firms or other alternative asset 

managers.

Financial Market Structure, Operational Risk, and Technological Risk

Section 3.3 Financial Market Structure, Operational Risk, and Technological Risk includes 

vulnerabilities related to the Treasury Market, 

Cybersecurity, the Use of AI in Financial Services, 

and Third-Party Service Providers. In addition, 

Section 3.3 includes Box D: Treasury Market 

Resilience During March 2023, Box E: The Successful Implementation of Alternative Reference 

Rates, Box F: The Speed of Financial Transactions 

and Information Transmission, Box G: Quantum 

Computing, and a closer look at the ransomware 
14 2023 FSOC // Annual Report

that Congress pass legislation that ensures that 

the FHFA, NCUA, and other relevant agencies 

have adequate examination and enforcement 

powers to oversee third-party service providers 

that interact with their regulated entities.

Council Activities

The Council, as charged by the Dodd-Frank Act, 

works to identify risks to U.S. financial stability, promote market discipline, and respond to 

emerging threats to the financial stability of the 

U.S. financial system. It serves as a vital forum for 

collaboration, discussion, risk analysis, and policy 

formulation among the U.S. financial stability and 

regulatory community. 

The Council took important actions in November 2023 to improve its ability to address risks to 

financial stability and to provide greater public 

transparency. The Council issued a new analytic 

framework for financial stability risks and updated guidance on its nonbank financial company determinations process. The Council’s new 

Analytic Framework for Financial Stability Risk 

Identification, Assessment, and Response (Analytic Framework) offers a detailed public explanation of how the Council monitors, assesses, and 

responds to potential risks to financial stability, 

whether they come from widely conducted activities or from individual firms. The Analytic Framework represents the first time that the Council 

has detailed the vulnerabilities and transmission 

channels that most commonly contribute to risks 

to financial stability irrespective of the source of 

the risk. The Analytic Framework also explains the 

range of authorities the Council may use to address any particular risk, which include interagency coordination, recommendations to regulators, 

or the designation of certain entities. The updated 

Guidance on Nonbank Financial Company Determinations (Nonbank Designations Guidance), 

which replaces the 2019 Guidance, sets forth the 

Council’s procedures for considering whether 

to designate a nonbank financial company for 

Federal Reserve supervision and prudential standards under section 113 of the Dodd-Frank Act.4

The Nonbank Designations Guidance provides a 

transparent process and significant opportunities 

for engagement with both a nonbank financial 

company under review and its existing regulators.

The use of AI by financial sector firms has been 

growing in recent years. AI has the potential to 

increase innovation and efficiency, but it may 

also pose risks to financial stability. The Council 

recommends monitoring the rapid developments 

in AI, including generative AI, to ensure that 

oversight structures keep up with or stay ahead of 

emerging risks to the financial system while facilitating efficiency and innovation. To support this 

effort, the Council recommends financial institutions, market participants, and regulatory and 

supervisory authorities further build expertise 

and capacity to monitor AI innovation and usage 

and identify emerging risks. The Council notes 

existing requirements and guidance may apply 

to AI. The Council also supports the international 

effort by the G7 Cyber Expert Group to coordinate 

cybersecurity policy and strategy across the eight 

G7 jurisdictions and address how new technologies, such as AI and quantum computing, affect 

the global financial system.

Financial institutions rely on third-party service 

providers for an array of services including videoconferencing, core processing functions, banking 

platforms, data storage, and cloud services. The 

Council supports the ongoing collaboration of 

member agencies to examine and address the 

risks posed by third-party service providers and 

the services they provide to the financial system. 

Member agencies continue to enhance their 

supervisory programs for cyber-related controls 

in key areas such as core processing, payment 

services, and cloud computing. 

The Council supports continued risk identification associated with service providers’ roles in the 

financial sector and their potential impacts on 

financial stability. The Council also recommends 

that federal banking regulators continue to coordinate third-party service provider examinations, 

work collaboratively with states, and identify 

additional ways to support information sharing 

among state and federal regulators. Toward that 

end, the Council also supports the ongoing work 

of the Cloud Executive Steering Group and its 

focus on closing gaps identified in Treasury’s 

February 2023 white paper entitled The Financial 

Services Sector’s Adoption of Cloud Services. 

To further enhance third-party service provider 

information security and address other critical 

regulatory challenges, the Council recommends 
Executive Summary 15

Following its October 2022 Report on Digital 

Asset Financial Stability Risks and Regulation, 

the Council established a Digital Asset Working 

Group (DAWG) that met regularly throughout 

2023 to facilitate information sharing and conduct 

analysis on digital asset–related risks and market 

developments. The DAWG functions as an important venue for member agencies to monitor 

and discuss developments in the evolving digital 

assets ecosystem. 

In addition to its efforts on its four priorities, the 

Council has served as an important venue for 

members to discuss potential risks affecting the 

U.S. banking system, both before and after the 

events in the Spring. The Council has continued to bring together federal and state financial 

regulators to monitor and evaluate conditions in 

the banking sector and the financial system more 

broadly.

For more information on the Council’s priorities 

and activities in 2023, please refer to Section 4.1: 

Council Activities.

In 2023, the Council also advanced its four priorities to address risks and vulnerabilities in the 

financial system: (1) nonbank financial intermediation, (2) Treasury market resilience, (3) climate-related financial risk, and (4) digital assets. 

The Council continues to evaluate the vulnerabilities posed by nonbank financial institutions. The 

Council’s HFWG has developed a risk-monitoring 

system to assess hedge fund–related risks to U.S. 

financial stability. In addition, the Council’s Nonbank Mortgage Servicing Task Force, a working 

group including staff from member agencies and 

other government agencies such as the Department of Housing and Urban Development, is facilitating interagency coordination and additional 

market monitoring of the risks that nonbank 

mortgage servicers pose to U.S. financial stability.

Enhancing the resilience of the Treasury market is 

a continuing priority for the Council. The Council supports ongoing efforts across the Treasury 

Department and through the IAWG to strengthen 

the Treasury market. The Council’s work through 

the HFWG also informs the IAWG’s assessment of 

how funds’ leverage affects the Treasury market.

Climate-related financial risk remains another 

key priority for the Council. The Council’s Climate-related Financial Risk Committee (CFRC) 

serves as an active forum for interagency information sharing, coordination, and capacity 

building. In July 2023, the CFRC issued a staff 

progress report to provide an update on efforts by 

the Council and member agencies to advance the 

recommendations in the Council’s 2021 Report 

on Climate-Related Financial Risk. Among its 

other efforts, the CFRC is developing a robust 

framework to identify and assess climate-related 

financial risk, and it is also identifying a preliminary set of risk indicators for banking, insurance, 

and financial markets. In addition, the CFRC has 

identified the intersection of physical risk, real 

estate, and insurance as a particular priority for 

future analysis. The Council also established the 

external Climate-related Financial Risk Advisory Committee (CFRAC), which is composed of 

members from a wide range of backgrounds and 

provides the Council with information on and 

analysis of climate-related financial risks from a 

broad array of perspectives. The CFRAC hosted its 

first three meetings in 2023.
16 2023 FSOC // Annual Report

uted to a steady decline in headline inflation 

in most countries. Core inflation, however, has 

weakened more gradually and remains well above 

historical averages. Its persistence reflects the 

pass-through of past shocks into core inflation, 

tight labor markets, and stickier-than-expected 

services inflation. Overall, the International Monetary Fund (IMF) predicts that global inflation will 

moderate to a still-elevated 5.8 percent in 2024, 

well above the pre-pandemic (2017–19) level of 

3.5 percent.

Turning to growth, the IMF expects global growth 

to remain subdued by historical standards at just 

below 3 percent in 2024 (see Figure A.1). The 

balance of risks to this outlook is tilted to the 

downside, stemming from a possible flare-up in 

inflation and a further weakening of Chinese 

economic activity. Tight labor markets and a 

potential increase in energy and food prices, due 

to extreme weather shocks or an escalation of 

Russia’s war against Ukraine for example, could 

push up inflation more and risk de-anchoring 

longer-term inflation expectations. Also, a deeper-than-expected contraction in Chinese activity 

or deepening concerns about financial stability in 

China could weigh negatively on financial markets, weakening global confidence and trade. 

Notes: Real gross domestic product. Gray bars signify IMF forecasts.

Sources: IMF World Economic Outlook, Haver Analytics

Percent

-6

-3

0

3

6

9

12

-6

-3

0

3

6

9

12

2000 2003 2006 2009 2012 2015 2018 2021 2024 2027

Percent

Emerging & Developing 

economies

World

Advanced economies

As Of: Oct-2023

A.1 Global Economic Outlook

Global growth is slowing due to the significant 

tightening of monetary policy by most central 

banks in response to ongoing elevated inflationary pressures and due to near completion of the 

post-pandemic recovery in both services and supply chains. In advanced economies, the European 

Central Bank and the Bank of England raised their 

policy rates through the summer and communicated that their monetary policy would likely 

need to remain restrictive for some time, to help 

ensure that inflation returns to targeted levels on 

a sustained basis. Other central banks, such as the 

Bank of Canada and the Reserve Bank of Australia, paused policy rate hikes earlier this year, but 

they indicated that additional policy tightening 

might be necessary to bring inflation down in a 

timely manner. In emerging market economies 

(EMEs), particularly Latin American EMEs, many 

central banks began raising their policy rates 

earlier than their counterparts in advanced economies. Many major EME central banks paused 

rate hikes some time ago and have left rate hikes 

on hold against a backdrop of easing domestic inflation. A few EMEs have even begun to cut policy 

rates. 

High interest rates are filtering through the financial system and are increasing pressures on banks, 

both directly, through higher costs of funding,

and indirectly, by increasing credit risk. Banks in 

advanced economies have significantly tightened 

lending standards, curtailing the supply of credit 

for corporations and CRE investors. Surveys suggest that banks in the United States and Europe 

considerably restricted access to credit in the first 

three quarters of 2023, and they are expected to 

continue to do so in coming months. 

Global headline inflation remains elevated but 

is abating, largely reflecting declines in food 

and energy prices. Following the buildup of gas 

inventories in Europe and weaker-than-expected 

demand in China, energy and food prices have 

dropped substantially from their 2022 peaks. 

Together, the normalization of supply chains and 

the tightening of monetary policy have contribBox A: Global Economic Conditions
Executive Summary 17

The Chinese property sector had been an engine 

of growth and was fueled by a rapid rise in 

leverage among property developers, local 

governments, state-owned enterprises, and 

households. By the end of 2022, nonfinancial debt 

in China soared to more than 200 percent of gross 

domestic product (GDP), a level far higher than is 

typical among economies with comparable levels 

of development (see Figure A.3). Chinese 

authorities face the challenging task of deflating 

property prices without triggering broader 

financial stresses in China’s economy. While the 

global repercussions of China’s slowdown have 

thus far been limited, a sharp deterioration in 

financial conditions in China could have more 

significant effects.

Note: Credit-to-GDP data are as of Q1 2023. Per capita GDP data are as of 

2022. The dotted line represents the best linear fit.

Sources: Bank for International Settlements, World Bank

A.3 Credit-to-GDP, Relative to Income

In Europe, the economic outlook has notably 

weakened. The European economy has proven 

to be remarkably resilient to the energy crisis 

caused by Russia’s unprovoked war on Ukraine. 

This resilience has been due to a combination of 

pent-up demand coming out of the pandemic 

and fiscal supports to aid households and firms. 

However, these supports are now fading, and the 

economy faces mounting headwinds from high 

inflation and tighter monetary policy. Indeed, 

credit growth has notably slowed amid tightening 

credit standards and weakening loan demand. 

The European economy has largely stagnated 

over the past year, and incoming activity and 

sentiment indicators continue to point to 

weakness ahead.

In China, an initial burst of growth early in the 

year that followed the country’s decision to 

abandon its “zero-Covid” policies has quickly 

faded. The slowdown in China has been driven in 

large part by an ongoing correction in the 

property sector as authorities attempt to rein in 

financial vulnerabilities following years of strong 

credit growth. Consequently, Chinese real estate 

activity has plummeted, with the numbers of 

property starts and sales falling to roughly half 

their pre-pandemic levels in mid-2023 (see 

Figure A.2).

Note: Data are seasonally adjusted.

Sources: National Bureau of Statistics of China, Haver Analytics

A.2 Chinese Real Estate Indicators
18 2023 FSOC // Annual Report

fied to refinance the loan at maturity without an 

additional injection of equity. Thus, the loan may 

need to be restructured or entered into default, 

causing losses for the lender. As losses from a CRE 

loan portfolio accumulate, they can spill over into 

the broader financial system. Sales of financially 

distressed properties can reduce market values of 

nearby properties, lead to a broader downward 

CRE valuation spiral, and even reduce municipalities’ property tax revenues. In addition, widespread CRE distress can contribute to tightening 

credit availability. Banks with high exposures to 

CRE loans that also face other credit or interest 

rate–related losses may be particularly vulnerable 

to CRE loan distress.

3.1 Financial Risks

3.1.1 Commercial Real Estate

Commercial real estate (CRE) loans totaled almost $6 trillion as of the second quarter of 2023, 

and CRE represents a significant portion of the 

assets of many financial institutions.

5

 Banks hold 

a significant market share of CRE loans at 50 percent, with the rest held by various financial institutions such as insurance companies, holders of 

commercial mortgage-backed securities (CMBS), 

and debt funds. CRE is the largest loan category 

among almost one-half of U.S. banks, and more 

than one-quarter of U.S. banks have CRE loan 

portfolios that are large relative to the capital they 

hold.6 The Council has identified certain market vulnerabilities related to CRE lending, a key 

function of the financial sector. In 2023, the CRE 

market faced a rise in vacancy rates and declines 

in value for some property types, elevated interest 

rates, heightened CRE loan maturities, inflation in 

property operating costs, and an increase in CRE 

loan delinquencies.

While the CRE market is heterogeneous and different dynamics can prevail across various market 

sectors, signs of stress emerged in 2023 and the 

market outlook is challenging. In many major U.S. 

cities, the office vacancy rate is at a multiyear high 

as the shift toward hybrid work arrangements in 

many industries following the COVID-19 pandemic reduced demand for office space. Office 

property values have therefore fallen. In the multifamily and industrial sectors, easing of demand 

from strong levels and a large increase in supply 

pushed the U.S. vacancy rate higher in 2023. CRE 

also experienced headwinds from issues affecting 

all types of properties, such as high interest rates, 

elevated inflation, tighter credit conditions, and 

possible economic slowdown.

High interest rates increase refinancing costs for 

borrowers and can lead to decreasing property 

values across CRE sectors. If the decline in property value is significant relative to the time of 

financing, then the borrower may not be quali3 Vulnerabilities, Significant Market Developments, and Council Recommendations
Vulnerabilities, Significant Market Developments, and Council Recommendations 19

Note: 60+ Days Delinquent includes Foreclosure/Real Estate Owned.

Sources: JPMorgan, Trepp

3.1.1.1 Conduit CMBS Delinquency and Foreclosure Rates

Sources: JPMorgan, Trepp

3.1.1.2 Conduit CMBS Delinquency Rates by Property Type

CRE Loan Performance 

Weakening in CRE credit quality through 

the second quarter of 2023 may have 

signaled a shift in the credit environment. 

The delinquency rate on CRE loans held 

by U.S. banks, which is a lagging indicator, 

was modest at 0.81 percent in the second 

quarter of 2023, but it is up from 0.74 percent 

in the second quarter of 2022.7

 Also, while 

the delinquency rate on conduit CMBS has 

fallen sharply from highs reached during the 

COVID-19 pandemic, it has trended upward 

in recent months. After reaching its postpandemic low of 3.5 percent in April 2023, the 

conduit CMBS delinquency rate increased to 

4.3 percent by September 2023 (see Figure 

3.1.1.1).8

The conduit CMBS delinquency rate in the 

hotel and lodging sector remained elevated 

at 4.8 percent as of September 2023 but 

has steadily improved from a COVID-19 

pandemic peak of 20.5 percent in January 

2021. In the office sector, the delinquency rate 

has risen over the last year, increasing from 

2.3 percent in September 2022 to 4.4 percent 

in September 2023 (see Figure 3.1.1.2). 

CRE Property Sectors

While CRE performance is heterogenous 

across property sectors and geographies, 

some CRE property sectors face substantial 

challenges. The office sector faces the most 

severe challenges because demand for 

office space has been weak, particularly in 

the largest U.S. office markets. During the 

COVID-19 pandemic, net absorption of office 

space turned negative for the first time in a 

decade as commercial office space that was 

vacated or supplied by new construction 

exceeded what was leased or absorbed 

by tenants. Net absorption of office space 

remained soft through the second quarter 

of 2023, and the U.S. office vacancy rate rose 

from 12.1 percent in the second quarter of 

2022 to 13.1 percent in the second quarter of 

2023 (see Figure 3.1.1.3). Major metropolitan 

areas have been particularly impacted, and 

the vacancy rate for the largest 20 U.S. markets 

increased from 13.2 percent in the second 

quarter of 2022 to 14.2 percent in the second 

Note: Gray bars signify NBER recessions.

Sources: CoStar, Haver Analytics

3.1.1.3 Vacancy Rates by Property Type
20 2023 FSOC // Annual Report

quarter of 2023.9 The vacancy rate for other 

U.S. markets increased to 8.5 percent from 

8.0 percent over this same period. The prices 

of office properties have deteriorated much 

more than those of other major property types 

in recent quarters, with an index of office 

property prices more than 30 percent below 

its pre-pandemic level as of September 2023 

(see Figure 3.1.1.4). 

The decline in office property demand may 

take time to stabilize as tenants navigate 

remote-work decisions and adjust how much 

space they need. In addition, a slow return to 

densely populated urban office centers could 

reduce the desirability of office properties 

located there and even nearby retail space. 

This may be especially true for older, less-desirable office spaces with fewer amenities. 

Studies conducted by CRE industry observers 

and market participants have explored the 

concept of converting unused office space to 

multifamily units. Conversion of such space 

has increased in recent years, but challenges 

include economic feasibility, zoning restrictions, and the need for nearby residential 

amenities. Additionally, amid this structural 

shift in the office property sector, softening 

economic conditions could lead to more 

stress. 

As a substantial volume of office property 

loans mature over the next few years, weak 

demand for office space, soft rents, and declines in office property values will create high 

refinancing risks. Without equity injection 

from the borrower, many office properties 

may not meet lenders’ underwriting criteria 

for cash flow or valuation. Properties with a 

large share of their leases expiring into soft 

market conditions and with financing maturing in a high-rate environment could be particularly challenged. Some banks may prefer 

loan modification to foreclosure in order to 

avoid increased default rates and potentially 

having to manage office properties while they 

await sale.

Meanwhile, the vacancy rate in the industrial property sector, mostly warehouse and 

distribution centers, increased in 2023 after 

benefiting from strong demand for space in 

2022. Despite the increase in vacancy rates, 

Note: Data are monthly indexed to 100 as of March 2020.

Source: Green Street Advisors, LLC

3114 Commercial Property Price Indices

Index As Of: Sep-2023 Index

60

80

100

120

140

160

180

60

80

100

120

140

160

180

Mar 2020 Apr 2021 May 2022 Jun 2023

Multifamily

Lodging

Industrial

Shopping mall

Office

3.1.1.4 Commercial Property Price Indexes
Vulnerabilities, Significant Market Developments, and Council Recommendations 21

They should also continue to evaluate loan 

portfolios’ resilience to potential stress, ensure 

adequate credit loss allowances, assess CRE 

underwriting standards, and review contingency 

planning for a possibly protracted period of rising 

loan delinquencies. In this context, the banking 

agencies published in July 2023 a Policy Statement 

on Prudent Commercial Real Estate Loan 

Accommodations and Workouts, which noted that 

accommodations and workouts are often in the 

best interest of borrowers and lenders.

Interlinkages between financial intermediaries 

that are active in the CRE market, including 

banks, insurance companies, REITs, and 

private lenders, could amplify financial stress 

in the sector. These linkages may develop if 

intermediaries have simultaneous exposures 

to CRE as direct mortgage lenders, investors 

in CMBS or property, or lending to other CRE 

investors. The Council recommends that member 

agencies continue to collaborate to better 

understand the interlinkages between financial 

institutions exposed to the CRE market and to 

ensure that they are taken into account in risk 

management and contingency planning.

3.1.2 Residential Real Estate

The size of the total mortgage market, at 

approximately $12 trillion outstanding unpaid 

principal balances,12 coupled with memories 

of the 2007–09 financial crisis underscores 

the importance of vigilant monitoring of the 

residential finance system. The mortgage-backed 

securities (MBS) market is the second deepest 

and second-most-liquid market in the United 

States and a central component of the financial 

system. A breakdown in the components of 

the mortgage market, or the broader economic 

factors that underpin housing demand, could be 

transmitted throughout the residential finance 

system and into other financial markets, with 

significant financial stability implications.

The housing market vulnerabilities of 2022 

remained in 2023, primarily stemming from 

the continuation of elevated mortgage interest 

rates. However, supply-and-demand factors 

caused the direction of house prices, which had 

previously been declining, to increase midway 

through the year. Home buyers experienced low 

inventory of existing homes for sale, extended 

industrial property values were up 42 percent 

from March 2020 and 2 percent from one year earlier, and the construction of new space remained 

brisk. 

In the multifamily sector, the vacancy rate increased 1.6 percentage points, from 5.3 percent 

in the second quarter of 2022 to 6.9 percent in the 

second quarter of 2023.10 Multifamily property 

values were down 4 percent from March 2020 

and down 16 percent from one year earlier. The 

pace of multifamily construction, which typically brings to market the most modern amenities, 

remains high. This is particularly true in some 

U.S. sunbelt markets that have experienced recent 

population inflows. Completions of multifamily 

units were up 15 percent in September 2023 on 

a year-over-year basis, and the number of multifamily units under construction was up 10.9 

percent from a year earlier. Meanwhile, multifamily starts and permits appeared to be slowing on 

a year-over-year basis.11 Many of these markets 

reported strong rent growth in 2022, but growth 

has slowed in recent quarters. 

The retail sector has been supported by low 

amounts of construction over the last decade and 

robust consumer spending. The retail vacancy 

rate remained low in 2023, except in the shopping mall subsector, which has been impacted by 

changing consumer preferences, including the 

expansion of online shopping. The vacancy rate 

in the shopping mall subsector increased for the 

sixth consecutive year and is more than twice the 

vacancy rate in the rest of the retail sector, driven 

in large part by underperformance in lower-tier 

and obsolete malls. Property values for shopping 

malls were down 15 percent from March 2020 but 

were up 2 percent on a year-over-year basis. 

Recommendations

Elevated interest rates, high costs, and potential 

structural changes in demand for CRE have 

heightened concerns about CRE. Maturing 

loans and expiring leases amid weak demand 

for office space have the potential to strain 

office sector conditions further, which could 

cause stress to spread beyond this segment of 

the CRE market. The Council recommends that 

supervisors, financial institutions, and investors 

continue to closely monitor CRE exposures and 

concentrations, and to track market conditions. 
22 2023 FSOC // Annual Report

wait times for new construction, high home 

prices, and mortgage interest rates above 20-

year highs. As a result, the volume of home 

sales and mortgage originations contracted 

relative to 2022, and the elevated interest 

rate environment continued to discourage 

refinances. Still, delinquencies on existing 

mortgages remained low despite the elevated 

interest rates. MBS valuations reached new 

lows in the Fall of 2023. The decline in MBS 

values weighed on bank balance sheets and 

other investors who purchased MBS during 

the pandemic, when rates were very low. 

Market segments discussed in the following 

sections appear stable yet are vulnerable to 

weakening economic conditions. 

Housing Markets

This year, housing markets were characterized 

by high house prices, elevated mortgage rates, 

and low sales volume. In 2023, national house 

price indexes recovered from moderate 

declines seen in the second half of 2022. From 

March 2020 through August 2023, the FHFA 

national house price index rose by 46 percent 

and the CoreLogic Case-Shiller national 

house price index rose by 43 percent. 

Increases in house prices have slowed this 

year, however, as the indices increased by just 

5.6 percent and 2.6 percent, respectively, 

through August (see Figure 3.1.2.1). Some 

forecasters have predicted a potential housing 

market downturn, but sales prices have 

continued to defy those expectations. 

Mortgage rates increased from around 6.5 

percent at the beginning of 2023 to 7.3 percent 

as of the end of September.13

The pandemic period’s low mortgage interest 

rates, coupled with high household savings,

helped drive home purchases to levels not 

seen since before 2008 and fueled record-setting refinancing volumes during that time. 

This year, home sales declined, and refinancing activity was minimal. Many borrowers 

who purchased or refinanced homes during 

the last couple of years were not interested 

in moving or refinancing out of their low-interest-rate mortgages. Therefore, the housing 

stock available for sale has been particularly 

low. House price growth is largely supported 

by a constrained existing housing inventory. 

Note: Seasonally adjusted. Indexed to 100 as of Jan-2000.

Sources: S&P CoreLogic Real Estate Data, FHFA, Haver Analytics

50

100

150

200

250

300

350

50

100

150

200

250

300

350

2000 2003 2006 2009 2012 2015 2018 2021

FHFA Home Price Index

Case-Shiller Home Price Index

3121 House Price Indexes

Index As of: Aug-2023 Index

3.1.2.1 House Price Indexes
Vulnerabilities, Significant Market Developments, and Council Recommendations 23

The shortage of existing housing available for 

sale fueled the increase in demand for new 

construction in the first half of 2023. The 

National Association of Home Builders/Wells 

Fargo Housing Market Index (HMI) rose for 

the first seven months of 2023, then receded 

in August and September.

14 The HMI survey 

reports that builders reduced prices and 

offered other incentives to bolster sales during 

the second half of 2023.

15 Meanwhile, homebuilders continued to experience a shortage 

of construction workers and materials. Despite frictions in the newly built home market, 

as of September 2023, the share of new home 

sales to all home sales increased to 16 percent,16 which is above the historical average of 

approximately 10 percent (see Figure 3.1.2.2).

Primary Mortgage Market

High interest rates coupled with low housing 

inventory for sale led to fewer home sales and 

lower origination volumes. Origination 

volume of agency loans totaled $201 billion in 

the third quarter of 2023, down 22.4 percent 

from the third quarter of 2022 (see Figure 

3.1.2.3). As mortgage rates approached 

20-year highs, refinancing volume declined to

historic lows during 2023 as borrowers’ 

potential savings from refinancing diminished.

Aggregate credit risk measures on the 2023 

loan originations were consistent with the 

high percentage of purchase mortgages 

relative to refinance mortgage originations 

this year. Relative to the 2021 originations,

when refinances last peaked, the average 

debt-to-income (DTI) ratios and loan-to-value (LTV) ratios were higher (see Figure 

3.1.2.4). Purchase borrowers are generally 

higher-risk than refinancing borrowers 

because they tend to have higher DTI and LTV 

ratios. However, the DTI ratio of newly originated purchase mortgages in 2023 declined 

relative to 2022 purchase originations, while 

the FICO score at origination and LTVs were 

similar among purchase mortgages since 

2022. Among all outstanding mortgage 

vintages, credit performance remained strong, 

owing to a tight labor market and considerable levels of home equity. For example, 89 

percent of all outstanding loans have mark-toNote: Seasonally adjusted annual rate

Sources: U.S. Census Bureau, National Association of Realtors, Haver 

Analytics

3.1.2.2 New- and Existing- Home Sales

Sources: Fannie Mae, Freddie Mac, Ginnie Mae, Recursion

3.1.2.3 Residential Purchase and Refinance Levels

Note: Weekly averages.

Source: Black Knight

3.1.2.4 Average DTI and LTV Ratios at Origination
24 2023 FSOC // Annual Report

Nonbank Mortgage Companies

Nonbank mortgage originators and servicers 

continued to gain market share from banks over 

the last 10 years, with the share of nonbank originations and servicing at record highs. Nonbanks 

service over half of all mortgages, with a servicing 

share of 54 percent as of the second quarter of 

2023, compared with 20 percent in 2013.

21 Additionally, the concentration of nonbank mortgage 

servicers as a percentage of top servicers grew 

substantially over the same time period as the 

number of nonbank servicers in the top 20 doubled from 6 in 2013 to 12 in 2023.22

market LTVs of 80 percent or less, due to accumulated house price appreciation and amortization.

17

The Mortgage Bankers Association (MBA) mortgage delinquency rate increased slightly from the 

second quarter to the third quarter of 2023, rising 

from its all-time lowest reading since the MBA’s 

National Delinquency Survey began in 1979.18

Early-stage delinquencies drove this slight uptick while later-stage delinquencies remained at 

their lowest level since the first quarter of 2020.19

Foreclosures remained low and below pre-pandemic levels, owing to borrowers’ ability to sell 

their property into a low-inventory market. For a 

deeper discussion of household balance sheets 

and loan performance, see Box B: Household 

Finance.

Secondary Mortgage Market

MBS valuations weighed on bank balance sheets 

and other investors who purchased MBS during 

the pandemic. Approximately 80 percent of outstanding MBS remained priced below par in the 

to-be-announced mortgage market throughout 

2023. Most of these MBS were issued at a premium in the period of quantitative easing during 

the COVID-19 pandemic, and if unhedged since 

issuance, they have experienced notable mark-tomarket losses since quantitative tightening began. 

These mark-to-market losses contributed to the 

bank failures this year. With approximately $6.4 

trillion of generic agency MBS with coupons of 4 

percent or less, one path back to par requires loan 

terminations.20

Loan terminations are either voluntary prepayments (such as a sale of the home rate refinances), cash-out refinances, or involuntary prepayments (where the issuer or guarantor of the MBS 

ultimately purchases the loan out of the pool 

at par due to delinquency). Loan terminations 

return principal at par to investors and enable 

them to reinvest at today’s higher rates. The loss 

mitigation pipeline can take months and place 

financial and liquidity stress on mortgage servicers. Although prepayments and delinquencies 

are at historic lows in 2023, higher delinquency 

rates associated with cyclical economic factors 

like unemployment could test mortgage servicers’ 

resilience and benefit MBS investors with involuntary prepayments in below-par securities. 
25

Nonbank single-family mortgage origination 

continued to grow to historic levels, with 

nonbanks originating approximately 70 

percent of loans in the first half of 2023,

compared with 42 percent in 2014 (see Figure 

3.1.2.5). Nonbanks have remained the top 3 

originators since the second quarter of 2021.23

Nonbank originator concentration has also 

increased, with nonbanks making up 7 of the 

10 largest originators as of the second quarter 

of 2023, compared with 2 nonbanks in the top 

10 in 2013.

24

In contrast to the bank lending and servicing 

model, nonbank mortgage companies lack 

access to deposits for short term financing. 

Though their business models vary, most 

nonbank mortgage originators rely on shortterm wholesale funding, the majority of which 

is uncommitted lines that can be quickly 

pulled in times of stress. In addition, nonbanks do not have access to liquidity backstops that could provide bridge funding if traditional lending lines tighten or close. Many 

nonbank mortgage companies have limited 

capital and loss-absorbing capacity while retaining less liquid mortgage-servicing rights.

Servicer financial strength concerns may arise 

if a high percentage of Federal Housing Administration loans securitized in Ginnie Mae 

MBS become delinquent over a long period 

because of the uncapped advance obligation 

of the servicer for these loans. Mortgage servicers could face acute liquidity strains in the 

event of widespread delinquencies. In some 

cases, servicers have an obligation to make 

payments to the investor, regardless of whether the borrower makes a mortgage payment,

and they must repurchase the mortgage out 

of its MBS pool at par. During this period, the 

mortgage servicer must also continue making 

insurance payments while paying taxes and 

occasionally homeowners’ association fees. 

During a crisis, widespread delinquencies 

could threaten the viability of nonbank mortgage servicers, due to the length of time25 that 

nonbank mortgage servicers must forward 

these payments on behalf of nonpaying borrowers before the relevant mortgage guarantor reimburses them.

The rapid rise in interest rates significantly slowed mortgage originations, adversely 

Note: Includes top 100 originators.

Source: Inside Mortgage Finance

3.1.2.5 Mortgage Origination Volumes

Vulnerabilities, Significant Market Developments, and Council Recommendations
26 2023 FSOC // Annual Report

well. Other properties, such as condos, are insured by master policy coverage. When property 

insurance is unavailable or not sufficiently available, loans become ineligible for delivery to the 

Enterprises. 

Once a loan has been delivered to an Enterprise, 

mortgage servicers are responsible for making 

sure that all required property insurance coverage 

is maintained at all times to protect the Enterprise’s interest in the mortgage loan. A servicer 

routinely tracks the presence of property and 

flood insurance to make sure every mortgage has 

the appropriate level of required insurance. If 

a mortgage is found to have a lapse or gap in 

insurance, the servicer notifies the borrower to 

remedy the situation. If the servicer cannot obtain 

evidence of acceptable property or flood insurance for a property securing a mortgage loan, the 

servicer must obtain lender-placed insurance. 

Climate-related impacts and events are expected to increase the risk of property damage and 

loss. See Section 3.1.6: Climate-Related Financial Risks for a more in-depth discussion of the 

important role that property insurance plays in 

absorbing losses stemming from physical risks. In 

2023, multiple insurers announced their intent to 

leave or implement a pause on writing new policies in large markets including Florida, California, 

and Louisiana, due to the increased risk of natural disasters. These announcements portend the 

unfortunate reality that more and more borrowers 

will be faced with renewal concerns or difficulty 

obtaining affordable initial insurance policies 

when they buy a home. As coverage becomes inaccessible or prohibitively expensive in a given location, home values may decline there, and fewer 

loans in the area may be originated or eligible for 

acquisition by the Enterprises.

FHFA and the Enterprises believe that the increasing occurrence of hurricanes, wildfires, or 

other climate-related disasters in a region may 

reduce ownership appeal over time, thus lowering 

home prices, creating other negative impacts on 

the local economy and hurting the Enterprises’ 

financial outcomes. According to the Enterprises, climate-related disasters have yet to cause 

significant losses. The Enterprises’ loss exposure 

is mitigated by having a diverse book of business among different regions, as well as specific 

insurer eligibility and minimum coverage requireimpacting earnings for nonbanks due to their 

monoline business model. Inflationary pressures 

have begun to put pressure on household incomes, which could result in increased borrower 

delinquencies and strain on servicers of loans that 

require payments to investors even when borrowers are delinquent. Given nonbanks’ large market share, stress for these nonbanks could lead 

to larger systemic issues if financing obligations 

are not met or if they fail in their obligations to 

advance payments. In addition, consumer harm 

could result from ineffective loan servicing if nonbank servicers fail. 

Efforts to strengthen the nonbank mortgage 

sector are ongoing. One such example is the 

enhanced minimum seller/servicer financial 

eligibility requirements effective as of the end of 

the third quarter of 2023. Nonbanks that originate or service loans for the Federal National 

Mortgage Association or the Federal Home Loan 

Mortgage Corporation (Fannie Mae or Freddie 

Mac, collectively referred to as the Enterprises), or 

for the Government National Mortgage Association (Ginnie Mae), are subject to these enhanced 

requirements. The requirements include comprehensive liquidity requirements, heightened 

governance standards for the largest nonbanks,

and, for Ginnie Mae issuers, a risk-based capital 

ratio. In addition, state regulators continue to 

adopt enhanced financial condition, corporate 

governance, and risk management requirements 

for nonbank mortgage servicers through model 

regulatory prudential standards. State regulators 

finalized these prudential standards in 2021 to 

ensure that nonbank mortgage servicers maintain 

the financial capacity, governance, and risk management practices to adequately serve consumers and investors and simultaneously enhance 

market stability. Given the multistate operations 

of most nonbank mortgage firms, the states that 

have adopted the prudential standards effectively 

cover 98 percent of the nonbank mortgage market 

by loan count, including, but not limited to, the 50 

largest nonbank mortgage servicers.

Property Insurance Developments 

The Enterprises and other financial institutions 

require homeowners to have property insurance, 

which serves to preserve the collateral for mortgage loans.

26 Some properties, if located in a flood 

zone, are required to have flood insurance as 
27

vant agencies and regulators should ensure that 

the largest and most complex nonbank mortgage 

companies are prepared should delinquencies 

and foreclosures increase or if there is a need for 

the orderly transfer of servicing rights. The Council also recommends that relevant federal agencies and state regulators continue to enhance or 

establish information-sharing protocols to enable 

collaboration and communication in responding 

to distress at a mortgage servicer.

ments. However, FHFA and the federal banking 

agencies recognize that several factors, such as 

the growing threat of floods or fires in various 

parts of the country, changing weather patterns 

affecting heavily populated geographic areas, and 

insurers’ decisions not to renew policies in these 

regions, may increase the Enterprises’ and other 

financial institutions’ exposure to disaster risk. 

These events have prompted FHFA to instruct the 

Enterprises to assess the potential risks associated 

with borrowers securing and maintaining property insurance.

Recommendations

With elevated interest rates and the potential for a 

softening of the housing market if economic conditions were to weaken, the Council recommends 

supervisors and financial institutions continue 

to monitor residential real estate exposures and 

ensure the adequacy of credit loss allowances. 

Federal and state agencies should enhance or 

establish information-sharing protocols to enable 

collaboration and communication in response 

to potential increased credit risk in residential 

real estate and mortgage servicing. The Council 

acknowledges the changing economic environment and encourages member agencies to review 

and evaluate existing loss mitigation options of 

their regulated entities, including assessing the 

affordability and sustainability of available home 

retention solutions, such as forbearance, foreclosure alternatives, and modifications, in a higher 

interest rate environment. The results of such a 

review should inform supervisory responses by 

member agencies.

The Council supports recent actions by FHFA, 

Ginnie Mae, and state regulators to strengthen 

oversight of nonbank companies involved in the 

servicing of residential mortgages. The Council recommends that, where possible, relevant 

federal agencies and state regulators continue to 

coordinate closely to collect data, identify risks, 

and take additional steps available to them within 

their authorities to address the potential risks 

of nonbank mortgage companies. The Council’s 

Nonbank Mortgage Servicing Task Force should 

also identify options to enhance the resilience 

of the sector and to mitigate the risks associated 

with the failure of one or more large, complex 

nonbank mortgage servicers. In addition, releVulnerabilities, Significant Market Developments, and Council Recommendations
28 2023 FSOC // Annual Report

Overall consumer financial health improved 

during the first years of the COVID-19 pandemic, 

which can be largely attributed to the substantial 

assistance programs. Stimulus payments, debt 

forbearance, and payment moratoriums combined with spending reductions led to an improvement in most consumer balance sheets, as 

evidenced by the decline in credit card debt and 

delinquencies and the increase in liquid savings. 

Since 2022, the positive trends in consumer 

financial health have started to reverse. Nevertheless, overall consumer financial health today is no 

worse than in 2019 by most measures. Liquid 

savings remain higher than 2019 levels, household net worth rose by 37 percent between 2019 

and 2022,

27 and household debt servicing ratios 

and overall consumer delinquencies remain 

relatively low. However, savings are falling, overall 

nominal consumer debt balances are at an 

all-time high,28 and credit card and auto loan 

delinquencies are on the rise. Additionally, the 

recent increase in interest rates has pushed 

household debt service payments as a percent of 

disposable income to pre-pandemic levels (see 

Figure B.1).29 These trends, along with the resumption of student loan repayment, may strain 

certain households and increase the likelihood of 

financial distress, particularly for lower-income or 

highly leveraged households.

Note: Gray bars signify NBER recessions.

Sources: Federal Reserve Board, Haver Analytics

8

8.5

9

9.5

10

8

8.5

9

9.5

10

2019 2020 2021 2022 2023

Percent Percent

B.1 Household Debt Servicing to Disposable Income Ratio

As Of: 2023 Q2

B.1 Debt Servicing to Disposable Income Ratio

Household Income and Liquid Savings

Household weekly real earnings increased dramatically during the pandemic but then slowed in 

2021 and 2022 as inflation increased (see Figure 

B.2). As inflation moderated in 2023, real earnings

increased slightly, and as of the second quarter of

2023, real earnings were 2.8 percent higher than

the 2019 level.

While real earnings improved in 2023, high 

inflation can put strain on households to meet 

their debt obligations, reduce liquidity buffers,

and reverse the improvements in financial health 

experienced during the pandemic. According to 

data from the JPMorgan Chase Institute, median 

cash balances in checking and savings accounts 

grew by 60 percent as a result of the pandemic 

era Economic Impact Payments (EIP).30 However, over the two years since the third EIP wave, 

households have drawn down their cash balances. By April 2023, cash balances were just over 10 

percent higher than 2019 levels.

Mortgages and Home Equity Loans

Mortgage delinquency rates remain near two-decade lows as homeowners have benefited from 

near historically low unemployment, low fixed–

interest rate mortgages, and increased home equiNotes: CPI-adjusted dollars (1982-1984), seasonally adjusted. Gray bars signify 

NBER recessions.

Sources: Bureau of Labor Statistics, Haver Analytics

0

2

4

6

8

10

12

0

2

4

6

8

10

12

2019 2020 2021 2022 2023

Percent As Of: 2023 Q3 Percent

B.2 Change in Mean Weekly Real Earnings

Box B: Household Finance
29

ty. The July 2023 overall delinquency rate of 3.2 

percent was approximately flat compared to last 

year and significantly down from both the May 

2020 pandemic peak of 8.1 percent and the June 

2019 pre-pandemic figure of 4.2 percent. Similarly, rates for 30-, 60-, and 90-day-plus delinquencies spiked in early to mid-2020 but have since 

returned to or fallen below pre-pandemic levels as 

borrowers have emerged from their COVID-related forbearance plans (see Figure B.3). Serious 

delinquency rates (90+ days late on monthly 

payments) for home equity loans and lines of 

credit were lower than pre-pandemic levels,

reaching 0.7 percent as of September 2023.31

The increase in mortgage interest rates could 

present risks for some borrowers. Consumers who 

fall behind on their monthly mortgage payments 

may have fewer loss mitigation options when 

interest rates are high. Current loss mitigation options may rely on extending amortization and deferral of past-due amounts, resulting in borrowers 

paying a higher mortgage payment. An economic 

shock, such as an increase in the unemployment 

rate, could lead to increased delinquencies, magnifying the issue. 

Higher mortgage interest rates and home prices have decreased housing affordability overall. 

Moreover, high rates of rent growth have made it 

Note: Gray bars signify NBER recessions.

Sources: Black Knight, Haver Analytics

B.3 National Mortgage Delinquency Rates

more difficult for current renters to save for downpayments to purchase a home. The combination 

of these two factors is particularly problematic 

for low-to-moderate-income borrowers, further 

decreasing housing affordability among these 

households. See Section 3.1.2: Residential Real 

Estate for a discussion of housing market conditions. 

Credit Card Debt

After declining rapidly in 2020 and staying low 

through 2021, credit card debt per cardholder 

increased faster than inflation in 2022 and has 

continued to do so in 2023. Average real credit 

card debt increased from $4,500 in the first quarter of 2022 to roughly $5,500 in the second quarter 

of 2023. Rising credit card balances combined 

with rising interest rates mean higher monthly 

payments for those with variable-rate revolving 

debt. Low-income renters have experienced rapid 

increases in credit card balances as a higher proportion of their income goes to paying increasing 

rents.32 This rise in credit card debt suggests the 

improvement households experienced during the 

pandemic is coming to an end and could be a sign 

of trouble ahead for some borrowers. Credit card 

delinquencies decreased significantly at the onset 

of the pandemic but have been increasing since 

mid-2021 and are now at pre-pandemic levels. Of 

particular concern is the fact that the transition 

from current to 30+ days delinquency has steadily increased, reaching 7.2 percent in the second 

quarter of 2023, a transition rate not seen in over 

a decade.33

Auto Loans

Consumers with auto loans are showing strain 

from payment burdens related to higher interest 

rates and elevated automobile prices. During 

the height of the pandemic, delinquency rates 

dropped to significant lows of 2.75 percent for 30-

day delinquency and 1.1 percent for 60-day delinquency. However, as of the first quarter of 2023, 

average delinquency rates rose above pre-pandemic levels of 4.1 percent for 30-day and 1.75 

Vulnerabilities, Significant Market Developments, and Council Recommendations
30 2023 FSOC // Annual Report

the delinquency and default rates to zero for federally owned loans during that time. During this 

period, 60-day delinquency rates for nonstudent 

loan obligations declined significantly, by nearly 

2 percentage points for consumers with student 

loans, according to a CFPB analysis of consumer 

credit data.36 However, the percentage of student 

loan borrowers delinquent on nonstudent loan 

debt rose above pre-pandemic levels by early 

2022 and has continued to rise, reaching 8 percent 

by the first quarter of 2023. 

In October 2023, the payment pause ended for 

upwards of 30 million consumers, including an 

estimated 7 to 8 million student loan borrowers who left school during the pandemic and 

are entering repayment for the first time.37 The 

Department of Education has fast-tracked the implementation of a new income-driven repayment 

plan that will provide lower monthly payments 

for many borrowers.38 In addition, borrowers who 

miss payments or make late or partial payments 

will not have a delinquency reported to credit-reporting agencies for the 12-month period that 

ends September 30, 2024.39 The protection from 

negative credit reporting, which may mask student loan delinquencies, may help some consumers remain current on their credit cards, car loans, 

and other non–student loan obligations.40

percent for 60-day, according to the CFPB Consumer Credit Panel. This rise was driven largely by 

subprime borrowers. 

Student Loans

At the beginning of 2023, student loan debt 

totaled $1.75 trillion, of which 96.7 percent is 

federally owned. Prior to the start of the pandemic and nearly 10 years after the Great Recession 

ended, delinquency rates for these federal student 

loans remained stubbornly high, especially for 

loans owned by the Department of Education. Of 

the 20.4 million federally owned loan accounts 

in active repayment as of December 31, 2019, 3.2 

million (15.7 percent of the total) were at least 31 

days past due. In addition, 2.8 million government-owned accounts were in forbearance and 

7.7 million were in default.34

At the beginning of the pandemic, the federal government cast a wide safety net under the federally 

owned portfolio, suspending interest accrual, 

pausing payments on loans in active repayment, 

and halting involuntary collection of defaulted 

loans. Due to a series of administrative actions, 

the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) protections were extended 

through August 2023.35 These measures reduced 

Box B: Household Finance (continued)
31

3.1.3 Corporate Credit

Nonfinancial corporate credit markets play an 

important role in supporting business investment, and when functioning well, they facilitate efficient capital formation and allow 

investors to direct capital to fund economic 

growth. U.S. credit markets have grown 

significantly since the 2007–09 financial crisis, 

and nonfinancial corporate debt as a percentage of gross domestic product (GDP) remains 

elevated relative to pre-pandemic levels, 

despite having fallen from its 2020 peak (see 

Figure 3.1.3.1). Financial stability risks can 

arise when unexpected financial or economic 

events negatively affect firms’ ability to service 

or refinance their debt and the financial 

sector cannot absorb losses from associated 

downgrades and defaults. If widespread, 

difficulties in servicing or refinancing outstanding debt can also adversely affect the 

overall health of the economy, while an 

associated reduction in investor risk appetite 

can lead to significant declines in asset prices.

Corporate fundamentals remain solid overall, 

though recent trends have moderately deteriorated because businesses face notably higher 

borrowing costs and profit margins have been 

pressured by slowing economic growth and 

elevated inflation. While the interest coverage 

ratio for all publicly traded firms in the United 

States, as measured by the median ratio of 

earnings before interest and taxes to interest 

expenses, has trended lower in recent quarters, firms’ ability to service their debt obligations remained solid overall, supported in 

part by strong earnings growth (see Figure 

3.1.3.2). That said, corporate earnings growth 

has slowed in recent quarters, with second-quarter earnings for S&P 500 Index firms 

having decreased by 4.1 percent year-overyear. Market expectations for a “soft landing” 

in the United States have risen because 

growth has proven more resilient than feared, 

though lower-income consumers continue to 

pull back on discretionary spending as a 

larger portion of their income goes toward 

covering essential living expenses, like food 

and shelter (see Box B: Household Finance). 

A sharper-than-expected decline in economic 

activity could make it more challenging for 

Note: Gray bars signify NBER recessions.

Sources: Federal Reserve, Haver Analytics

3.1.3.1 Nonfinancial Corporate Debt as a Percentage of GDP

Notes: Federal Reserve Board staff calculations; the interest coverage ratio is calculated as earnings before interest and taxes divided by interest payments of nonfinancial 

publicly-traded firms. Firms with leverage less than 5 percent and interest payments 

less than $500,000 are excluded.

Sources: S&P Global, Compustat, Federal Reserve Board of Governors

3.1.3.2 Interest Coverage Ratios

Vulnerabilities, Significant Market Developments, and Council Recommendations
32 2023 FSOC // Annual Report

some firms to continue servicing their debt 

obligations. This is particularly true of firms 

with below-investment-grade credit ratings, 

whose interest coverage ratios remain below 

their historical median levels.

Corporations have largely managed to weather this challenging environment thus far. 

However, lower-rated firms with higher leverage and a greater share of floating-rate liabilities on their balance sheets, such as issuers in 

the leveraged loan market, have come under 

greater stress than their higher-rated peers, 

given the faster transition to a higher-funding-cost environment. Meanwhile, the growth 

in the private credit market has garnered 

increased attention in the financial press. 

Private credit is a relatively opaque segment 

of the broader financial market that warrants 

continued monitoring. Despite its accelerating growth, private credit still represents a 

relatively small portion of the U.S. economy 

and also presents limited liquidity transformation risks. However, the extent to which the 

private credit market poses financial stability 

risks remains uncertain. Furthermore, private 

credit funds can pose their own distinct risks. 

For example, private credit funds may lend to 

borrowers with risk profiles that differ from 

those to whom traditional corporate credit 

providers typically lend and, as a result, may 

have correspondingly different exposure to 

default risk. Similar to traditional corporate 

credit providers, an unexpected rate of default 

may have a cascading effect across broader 

financial markets, the impact of which may be 

more or less pronounced depending on the 

nexus private credit funds share with other 

market participants, such as fund investors, 

other investment funds managed by shared 

investment advisers, and various counterparties, as well as market participants that may be 

invested in other levels of a particular company’s capital structure.

Corporate Bond Markets

Corporate bond yields have risen markedly 

over the last two years, with both investment-grade and high-yield bond yields well 

above their 20-year averages (see Figure 

3.1.3.3). Yields on comparable-maturity 

Treasury securities have also risen by several 

Note: Dotted lines represent 20-year average.

Sources: ICE Data Indices, LLC, FRED

0

3

6

9

12

0

3

6

9

12

2012 2014 2016 2018 2020 2022

Percent As Of: 30-Sep-2023 Percent

Investment-grade

High-yield

3.1.3.3 Corporate Bond Yields
33

percentage points following the onset of the 

Federal Reserve’s Federal Open Market 

Committee hiking cycle in March 2022, 

resulting in corporate bond spreads remaining near their historical average levels (see 

Figure 3.1.3.4). While borrowing costs on 

newly issued bonds have risen, the increase in 

firms’ interest expenses should be manageable because investment-grade companies 

took advantage of historically low interest 

rates to raise record amounts of debt in 2020 

and high-yield companies did the same in 

2021, extending the maturity of their debt 

outstanding and thus mitigating near-term 

refinancing risks. 

Lower refinancing needs and higher interest 

rate volatility have contributed to a slowdown 

in corporate bond issuance over the last two 

years (see Figure 3.1.3.5). Additionally, the 

broad slowdown in merger-and-acquisition 

(M&A) activity has contributed to lower 

volumes in the high-yield and leveraged loan 

markets. Given increasing corporate fundamental headwinds and more restrictive 

interest rates, market analysts are largely 

expecting corporate default rates to increase 

over the next 18 months (particularly for 

lower-rated issuers in the high-yield market) 

but remain below levels that are typically 

experienced during severe recessions.

Leveraged Loan Markets

The outlook is less sanguine in leveraged loan 

markets, where below-investment-grade 

issuers are more vulnerable to higher rates 

due to the floating-rate structure of their debt. 

These companies may struggle to make 

payments if macroeconomic conditions 

deteriorate and their debt service burden 

increases, especially if they do not hedge their 

interest rate exposure. Also, the credit quality 

of leveraged loans has started to deteriorate in 

recent quarters, as evidenced by the volume 

of credit rating downgrades surpassing the 

volume of upgrades and the large portion of 

the lowest-quality loans on negative outlook. 

Leveraged loan default activity has increased 

from historical lows (see Figure 3.1.3.6), and 

some market analysts expect default rates in 

the leveraged loan market to surpass those in 

the high-yield bond market over the next 18 

Note: Dotted lines represent 20-year average.

Sources: ICE Data Indices, LLC, FRED

3.1.3.4 Corporate Bond Spreads

Notes: Investment-grade and high-yield include all nonconvertible corporate debt, 

MTNs, and Yankee bonds, but they exclude all issues with maturities of one year or 

less and CDs. Leveraged loans include institutional and pro rata loans. 2023 figures 

are through September.

Sources: Refinitiv, SIFMA, LCD Pitchbook

3.1.3.5 Gross Issuance of Corporate Debt

Note: Par amount and percent of Morningstar LSTA Index Loans in payment default or 

bankruptcy.

Source: LCD PitchBook

3.1.3.6 Leveraged Loan Default Rates

Vulnerabilities, Significant Market Developments, and Council Recommendations
34 2023 FSOC // Annual Report

months, given the more immediate transmission of higher borrowing costs. Despite the 

expected increase, default rates are expected 

to remain below levels that would pose a 

systemic risk. At the same time, year-to-date 

new leveraged loan issuance is running 

significantly below average historical levels, 

hindered by higher interest rates, fewer 

leveraged buyouts and M&A deals, and 

greater market volatility. Also, as discussed in 

the next section, private credit is a growing 

segment of nonfinancial business lending and 

provides a source of financing that is an 

alternative to high-yield bonds and bank-originated leveraged loans. 

Nonbank Private Credit

Private credit, defined for the purposes of this 

report as direct lending by nonbank institutions to businesses, has grown significantly as 

an asset class, driven in part by the retreat of 

banks from certain lending activities since the 

2007–09 financial crisis. Global private credit 

funds have experienced substantial growth in 

recent years, with estimated assets under 

management (AUM) of $1.5 trillion as of 

year-end 2022, up from $500 billion at yearend 2015 (see Figure 3.1.3.7). There has been 

strong demand for private credit from institutional investors, who typically receive higher 

yields for assuming greater credit and liquidity risk in this market. At the same time, private 

credit has been attractive from a borrower’s 

standpoint because businesses can benefit 

from private credit’s faster execution, greater 

flexibility and accessibility, and limited 

disclosure requirements relative to bank 

lending and the public markets.

The level of opacity in private credit markets 

can make it challenging for regulators to assess the buildup of risks in the sector. Private 

credit funds form the largest class of lenders 

in the space, followed by business development companies. Investor redemption risks 

in this space appear low because most private 

credit funds have a closed-end structure and 

typically lock up the capital of their institutional and high-net-worth investors for extended periods. While an economic downturn 

could increase funding pressures and cause 

defaults to rise, the private credit market still 

Source: Preqin

0

200

400

600

800

1000

1200

1400

1600

0

200

400

600

800

1000

1200

1400

1600

2000 2003 2006 2009 2012 2015 2018 2021

Billions of US$ As Of: 2022 Billions of US$

Dry powder (committed but uncalled capital)

Unrealized value

3.1.3.7 Global Private Debt AUM
35

nonfinancial and financial firms. Negotiable 

certificates of deposit (NCDs) provide a means 

for banks to obtain short-term unsecured funding in capital markets. As investors tend to buy 

and hold CP and NCDs to maturity, demand for 

secondary-market liquidity in these instruments 

is usually low, and dealers face little incentive to 

intermediate and support secondary markets. 

Therefore, when demand for liquidity rises sharply, as happened during the “dash for cash” in 

March 2020, these markets cannot accommodate 

large volumes of sales requests from investors. At 

the same time, financial institutions that depend 

on these markets as a source of funding may be 

unable to obtain new funding as these shortterm instruments mature. This creates a channel 

for financial instability between the institutions 

seeking funding and the institutional investors 

providing the funds, thus contributing to the 

fragility of the short-term funding markets. Amid 

the market disruptions in March 2020, as investor 

demand for CP plummeted, particularly for terms 

beyond four days, the Federal Reserve established 

a Commercial Paper Funding Facility to ensure 

that firms were able to roll over their CP. This episode illustrated the vulnerability of these funding 

markets and the importance of ensuring that they 

function properly during market stress.

represents a modest portion of the overall commercial lending sector, despite the sector’s recent 

growth.

Recommendations

Higher interest rates and slowing economic 

growth have increased nonfinancial corporate 

credit risk. If credit quality significantly worsens, a 

potential wave of debt defaults could lead to large 

redemptions at investment funds with significant 

liquidity mismatches41 and in turn disrupt bond 

market functioning. Moreover, such defaults 

may also have a cascading effect across broader 

financial markets. The Council recommends that 

member agencies continue to monitor levels of 

nonfinancial business leverage, trends in asset 

valuations, and implications of the potential for 

a sustained period of higher interest rates for the 

entities they regulate in order to assess and reinforce the ability of the financial sector to manage 

severe simultaneous losses. The Council encourages entities exposed to corporate credit risk to 

review their risk-rating methods in light of the uncertain economic environment and, if applicable, 

assess the adequacy of their allowance for credit 

losses. The Council also supports enhanced data 

collection on nonbank lending to nonfinancial 

businesses to provide additional insight into the 

potential risks associated with the rapid increase 

in private credit.

3.1.4 Short-Term Funding Markets

Short-term wholesale funding markets provide 

essential financing for businesses, financial intermediaries, state and local governments, and the 

federal government. These markets are critical for 

implementing monetary policy and supporting 

financial market liquidity. They are also highly 

interconnected with systemically important financial institutions that borrow and lend in these 

markets. In addition, some key intermediaries in 

these markets perform significant liquidity and 

maturity transformation and are vulnerable to 

runs. These features contribute to fragilities in the 

short-term funding markets that can affect financial stability.

Unsecured Lending 

Commercial paper (CP) is an important source 

of unsecured short-term funding used by both 

Vulnerabilities, Significant Market Developments, and Council Recommendations
36 2023 FSOC // Annual Report

The amount of CP outstanding has remained 

relatively stable over the past year and remains well below levels observed in 2007 and 

2008 (see Figure 3.1.4.1). Foreign financial 

firms continue to be the most active issuers in 

the CP market, accounting for 37 percent of 

CP outstanding as of September 2023. The CP 

investor base remains diverse, with money 

market funds (MMFs) accounting for 23 

percent of the market, funding corporations 

accounting for 21 percent, and nonfinancial 

corporations accounting for 18 percent as of 

June 30, 2023 (see Figure 3.1.4.2). CP spreads, 

which can signal stress in short-term funding 

markets, widened notably for lower-rated 

issuers in the aftermath of the failure of 

Silicon Valley Bank (SVB) (see Figure 3.1.4.3).

That said, spreads remained well below levels 

observed in the 2007–09 financial crisis and in 

March 2020, and spreads returned to normal 

ranges in the two weeks following SVB’s 

failure.

Secured Lending 

The repurchase agreement (repo) market is an 

important source of collateralized short-term 

funding, and repo markets play a critical role 

in Treasury market liquidity and monetary 

policy implementation.42 Repos allow one 

firm to sell a security to another firm with 

a simultaneous promise to buy the security 

back at a later date, often the next day, at a 

specified price.43 The repo market consists of 

two main segments: 

1. Tri-party repo, in which settlement occurs 

within the custodial accounts of a clearing 

bank.

2. Bilateral repo, which typically refers to 

all activity not settled within the tri-party 

system. 

Bilateral Treasury repo includes transactions 

cleared through the Fixed Income Clearing 

Corporation (FICC) and those that are not 

centrally cleared. Large bank-affiliated securities dealers serve as significant intermediaries in the repo market by borrowing from 

cash lenders, such as MMFs, and lending to 

entities that employ leverage, such as hedge 

funds. Dealers also borrow in the repo market 

Notes: Not seasonally adjusted. Domestic includes CP issued in the U.S. by entities 

with foreign parents. ABCP represents Asset-Backed Commercial Paper.

Sources: Federal Reserve, Haver Analytics

0.0

0.5

1.0

1.5

2.0

2.5

0.0

0.5

1.0

1.5

2.0

2.5

Jan 2004 Oct 2007 Jul 2011 Apr 2015 Jan 2019 Oct 2022

3.1.4.1 CP Outstanding by Issuer Type

Trillions of US$ As Of: Sep-2023 Trillions of US$

Domestic financial

Domestic nonfinancial

Foreign financial

ABCP

Other

Foreign nonfinancial

3.1.4.1 CP Outstanding by Issuer Type

Sources: Federal Reserve, Haver Analytics

0

20

40

60

80

100

0

20

40

60

80

100

1990 1995 2000 2005 2010 2015 2020

3.1.4.2 CP Investors

Percent As Of: 2023 Q2 Percent

Nonfinancial corporates

State & local governments

Other

Funding corporations

Money market funds

3.1.4.2 CP Investors

Note: Spread to 1-Month Overnight Index Swap (OIS) rate.

Sources: Federal Reserve, Refinitiv, Haver Analytics

-1

0

1

2

3

4

-1

0

1

2

3

4

Jan 2020 Jan 2021 Jan 2022 Jan 2023

3.1.4.3 One- Month CP Interest Rate Spreads

Percent Percent

A2/P2-rated nonfinancial 

AA-rated ABCP

AA-rated financial

AA-rated nonfinancial

As Of: 29-Sep-2023

3.1.4.3 One-Month CP Interest Rate Spreads
37

to finance their own securities holdings. In 

addition, large banks may access repo markets in times of stress to obtain cash without 

liquidating assets. 

Stress in repo markets may affect financial 

stability, given the size of the market and the 

prominent roles played by large financial 

institutions. Firms reliant on overnight or 

short-term repo financing may be vulnerable 

to funding shocks, particularly during times 

of market stress, and they may transmit stress 

to other repo market participants and broader short-term funding markets. For example, 

MMFs and open-end funds, which are net 

lenders in the repo market, may pull back 

from the market during periods of market 

stress to raise cash to meet redemptions. At 

the same time, leveraged investors, such as 

hedge funds and mortgage real estate investment trusts, may face a sudden tightening 

in financing terms or be unable to roll over 

financing. As a result, leveraged investors may 

be forced to sell assets quickly, which can depress asset prices, lead to a further tightening 

in financing terms, and force further deleveraging. Episodes of stress in repo markets in 

September 2019 and March 2020 highlighted 

how supply-and-demand imbalances in the 

repo market can quickly transmit or amplify 

stress in the financial system. 

Over the past year, repo market rates rose 

commensurate with the increases in the 

Federal Reserve’s target range for the policy 

rate. In the overnight Treasury repo market, 

Secured Overnight Funding Rate (SOFR) and 

the Tri-Party General Collateral Rate (TGCR) 

have generally been equal to or slightly below 

the rate on the Federal Reserve’s overnight 

reverse repo facility (ON RRP) (see Figure 

3.1.4.4).

As of June 30, 2023, repo borrowing totaled 

$6.8 trillion, of which non–Federal Reserve 

borrowing represented $4.5 trillion (see

Figure 3.1.4.5).44 Repo trading volumes have 

grown over the past year, as measured by 

volumes used to compute SOFR, especially 

following the March 2023 banking stress (see 

Figure 3.1.4.6). Similarly, the total volume at 

FICC’s sponsored repo service, which is a 

subset of SOFR repo volumes, has increased 

Notes: TGCR = Tri-party General Collateral Rate; SOFR = Secured Overnight Financing 

Rate

Source: Federal Reserve Bank of New York

3.1.4.4 Repo Rates

Note: Federal Reserve repo borrowing primarily consists of ON-RRP facility.

Sources: Federal Reserve, Haver Analytics

3.1.4.5 Repo Borrowing Outstanding

Notes: TGCR = Tri-Party General Collateral Rate; SOFR = Secured Overnight Financing 

Rate

Source: Federal Reserve Bank of New York

3.1.4.6 Repo Volumes

Vulnerabilities, Significant Market Developments, and Council Recommendations
38 2023 FSOC // Annual Report

markedly over the past year, with average 

daily volumes exceeding $730 billion in 

September 2023 (see Figure 3.1.4.7).45 The 

increased volumes at FICC’s sponsored repo 

service can largely be attributed to a growth in 

borrowing volumes, which rose from approximately $160 billion in September 2022 to $470 

billion in September 2023. The growth in 

sponsored repo borrowing is consistent with 

rising hedge fund net repo demand, as is 

typical in the cash-futures basis trade (see

Section 3.3.2: Investment Funds).46

Less is known about the non-centrally cleared 

bilateral repo (NCCBR) market, which was 

estimated by the OFR to stand at approximately $2 trillion.47 In January 2023, the OFR 

published a Notice of Proposed Rulemaking 

to establish an ongoing collection of NCCBR 

transaction-level data, which should, for the 

first time, provide regulators with timely insight into this market. The OFR estimates that 

the rule, which the OFR expects to finalize in 

2024, should cover over 90 percent of NCCBR 

market volume. 

Since the 2007–09 financial crisis, some repo 

markets, particularly the tri-party segment, 

have undergone structural changes that 

have streamlined some repo operations and 

reduced counterparty credit risk.48 However, counterparty credit risk is still significant 

in the NCCBR market. Dealers can mitigate 

counterparty credit risk by requiring a haircut, 

which requires their counterparties to provide 

extra collateral that serves as a cushion to offset losses if a counterparty defaults. For many 

years, tri-party haircuts for Treasury collateral 

typically have been 2 percent. Dealers have 

required counterparties to provide collateral 

worth 2 percent more than the cash the dealer 

lends. Recent data show that for NCCBR, 

dealers frequently require very low or even 

zero haircuts.49 It is possible that some repos 

have zero haircuts because other transactions 

between the dealer and the same counterparty can be netted or because the counterparty 

has other accounts with the dealer that have 

positive equity balances.

The Federal Reserve operates the ON RRP, 

which places a floor under overnight interest 

rates by providing an investment alternative 

Notes: Average daily volume of sponsoring members. Breakdown of repo lending and 

repo borrowing unavailable prior to April 2020.

Source: DTCC

Billions of US$

0

100

200

300

400

500

600

700

800

0

100

200

300

400

500

600

700

800

Jul 2019 Jul 2020 Jul 2021 Jul 2022 Jul 2023

Aggregate

Repo lending

Repo borrowing 

As Of: Sep-2023 Billions of US$

3.1.4.7 Sponsored Repo Activity
39

for eligible counterparties when overnight 

repo rates fall below the rate offered at the ON 

RRP.50 MMFs continue to be the most active 

users of the ON RRP, accounting for 95 percent of ON RRP volume as of September 30, 

2023. Usage of the ON RRP peaked at over 

$2.5 trillion in late 2022 and began steadily 

declining in the Spring of 2023 as MMFs 

invested in higher-yielding short-term assets 

amid a surge in the supply of such assets, 

including Treasury bills (see Figure 3.1.4.8).

Looking ahead, an expected increase in the 

supply of U.S. Treasury securities to private 

sector investors may require greater reliance 

on repo financing. Accordingly, helping to 

ensure robust and smooth functioning in 

repo markets will be critical to maintaining 

liquidity in the market for Treasury securities 

and other financial markets. To achieve 

this end, the SEC proposed changes that 

would enhance risk management for 

central counterparties (CCPs) clearing 

Treasury securities and would require direct 

participants to centrally clear all repo and 

certain cash transactions in Treasuries in 

which they are counterparties. If adopted as 

proposed, these rule changes could reduce 

counterparty risk and result in a smaller 

NCCBR market. 

The Role of Money Market Funds and Other 

Short-Term Investment Vehicles in Short-Term 

Funding Markets

MMFs, which had a combined $6.2 trillion 

of assets under management (AUM) as of 

September 30, 2023, are major lenders in the 

short-term funding markets and contribute to 

funding market vulnerabilities by performing 

liquidity and maturity transformation (see

Section 3.2.2: Investment Funds). In both 

2008 and 2020, prime MMFs experienced 

heavy redemptions that contributed to 

dislocations in the short-term funding 

markets, and in 2020, strains among taxexempt MMFs contributed to stress in 

tax-exempt funding markets. These events 

led to extraordinary policy responses in 

2008, when the Federal Reserve established 

liquidity facilities and the Treasury provided 

a temporary guarantee of MMFs, and in 2020,

Sources: Federal Reserve Bank of New York, Haver Analytics

3.1.4.8 ON RRP Balance

Vulnerabilities, Significant Market Developments, and Council Recommendations
40 2023 FSOC // Annual Report

Additionally, some of these vehicles promise investors a stable net asset value (NAV), which may 

further increase structural vulnerabilities in these 

funds. While these vehicles are typically limited in 

the amount of credit risk they can take, the market 

value of a fund’s shares may fall below the stable 

NAV if the underlying assets lose value. The rising 

possibility of losses in a stable-NAV fund may 

prompt investor concerns and redemptions that 

can cause a fund to sell assets to meet redemptions, potentially straining markets for short-term 

instruments.53

Collectively, these vehicles have more than $1.9 

trillion in assets, including significant exposures 

to unsecured debt instruments that contribute to 

vulnerabilities. Bank-sponsored STIFs had at least 

$310 billion in June 2023, according to sponsoring 

banks.54 Local government investment pools had 

assets of at least $576 billion, according to Fitch 

Ratings. Ultrashort bond funds had assets of at 

least $323 billion, according to Morningstar. Private liquidity funds, for which reporting is lagged, 

had assets of $320 billion as of March 31, 2023, 

according to the SEC’s Form PF Statistics report. 

Offshore MMFs that invest in private dollar-denominated instruments had assets of $385 billion, 

according to CraneData.

Recommendations

The Council supports efforts by financial regulators to strengthen the resilience of short-term 

funding markets and support orderly market 

functioning during periods of heightened market 

stress. The SEC finalized a rule reducing structural 

vulnerabilities in MMFs to make the funds more 

resilient, liquid, and transparent. The Council will 

continue to monitor short-term funding market 

conditions for potential vulnerabilities that may 

warrant additional action and recommends that 

member agencies bolster efforts to make these 

markets more resilient, including efforts to increase the resilience of investment vehicles with 

similarities to MMFs. Where lack of data prevents 

close monitoring, Council members should 

develop proposals to collect the necessary data. 

Examples of such measures are the OFR’s efforts 

to improve collection and transparency of NCCBR 

market data and the SEC’s adoption of Rule 10c1a, which will promote market transparency and 

efficiency by requiring the reporting of certain 

information about securities lending transactions. 

when the Federal Reserve again established 

facilities to stabilize short-term funding markets. 

In August 2023, the SEC issued amendments 

under the Investment Company Act of 1940 

(Investment Company Act) to address problems 

that had been experienced by certain MMFs in 

connection with the economic shock at the onset 

of the COVID-19 pandemic in March 2020.51

Specifically, the amendments were designed to 

reduce the risk of investor outflows from MMFs 

during periods of market stress by removing 

the ability of MMFs to temporarily suspend 

redemptions and by removing the tie between 

liquidity fees and weekly liquid asset thresholds. 

Also, the amendments will increase the minimum 

liquidity requirements for MMFs to provide a 

more substantial liquidity buffer in the event of 

rapid redemptions. To address concerns about 

redemption costs and liquidity, the amendments 

generally will require institutional prime and 

institutional tax-exempt MMFs to impose 

liquidity fees when daily net redemptions exceed 

5 percent of net assets. The amendments will 

also require any nongovernment MMF to impose 

discretionary liquidity fees if the MMF’s board 

determines that imposing a fee is in the best 

interests of the fund.

Other Short-Term Investment Funds

Other short-term investment funds operating as 

lenders in the short-term funding markets include 

dollar-denominated non-U.S.-domiciled MMFs 

(so-called offshore MMFs), bank-sponsored 

short-term investment funds (STIFs), local government investment pools, private liquidity funds, 

and ultrashort bond funds.52 These vehicles share 

many characteristics with MMFs: a lack of federal 

deposit insurance, engagement in liquidity and 

maturity transformation, and the potential to 

contribute to fragilities in the short-term funding 

markets. Additionally, some of these fund types 

have experienced large outflows in times of financial stress. 

Similar to prime MMFs, these vehicles are permitted to invest in assets with credit risk, such 

as CP. As with MMFs, these features could lead 

the investment vehicles to liquidate positions or 

otherwise withdraw from key funding markets in 

certain stress conditions, contributing to disruptions like those in 2008 and 2020. 
41

Source: Bloomberg, L.P.

3.1.5.1 Thirty-Day Volatility for Selected Digital Assets The Council supports efforts to examine and 

consider ways to improve counterparty risk 

management in the NCCBR market given the 

reported prevalence of zero haircuts on collateral. Additional data on dealers’ margining 

practices, including but not limited to the use 

of haircuts, could also improve the Council’s 

ability to monitor risks and evaluate options, 

such as minimum haircuts on repo collateral, 

in these markets.

3.1.5 Digital Assets55

In October 2022, the Council published its 

Report on Digital Asset Financial Stability 

Risks and Regulation.

56 The Digital Asset 

Report detailed several vulnerabilities of the 

crypto-asset ecosystem that may impact traditional financial institutions connected to the 

crypto-asset sector.

Many of the vulnerabilities identified in the 

Digital Asset Report were visible this year. 

While the crypto-asset market is not significant in its size or its connections to the 

traditional financial system, some traditional 

financial firms were affected by shocks in 

the crypto-asset market. At the same time, 

some traditional financial institutions appear 

to remain interested in exploring potential 

efficiencies of distributed or shared ledger 

technology (DLT), which is the technology 

underpinning the crypto-asset ecosystem, 

separate from speculative assets. For example, some institutions are exploring DLT for 

post-trade settlement, payment systems, and 

banking infrastructure like SWIFT. 

Vulnerabilities Inside the Crypto-Asset Ecosystem 

In its Digital Asset Report, the Council noted 

that financial stability vulnerabilities may 

arise from crypto-asset price volatility (see

Figure 3.1.5.1), the market’s high use of leverage, the level of interconnectedness within 

the industry,

57 operational risks,58 and the risk 

of runs on crypto-asset platforms and stablecoins.59 Vulnerabilities may also arise from token ownership concentration,60 cybersecurity 

risks, and the proliferation of platforms acting 

outside of or out of compliance with applicable laws and regulations. For example, as 

Vulnerabilities, Significant Market Developments, and Council Recommendations
42 2023 FSOC // Annual Report

In the crypto-asset ecosystem, it is common for 

crypto-asset platforms to be structured as vertically integrated entities that offer multiple types of 

products and services like issuance, trading, asset 

management, custody, and brokerage services. In 

traditional finance, these products and services 

are usually offered by entities that are separately 

registered and regulated. Such vertically integrated entities may not be in compliance with 

applicable laws and regulations. Additionally, 

many of these crypto-asset entities are centrally 

controlled, even when purporting to operate as a 

decentralized protocol. The provision of multiple 

types of products and services through one entity 

or a group of affiliated entities can create conflicts 

of interest that could cause investor and market 

harm.

69 Potential vulnerabilities arising out of 

vertical integration, as well as the lack of regulatory compliance and oversight, include the absence 

of transparency with regard to corporate structure 

and key function holders, conflicts of interest, 

inappropriate use of clients’ funds, and market 

manipulation. 

To address these issues, regulators have undertaken rulemaking to strengthen existing investor 

and consumer protections. The SEC has proposed 

rule changes to expand the scope of the current 

custody rule for investment advisers to include a 

broader array of client assets, including crypto-assets that are not funds or securities.70 The SEC has 

also reopened the comment period on proposed 

amendments to the definition of “exchange” 

under Securities Exchange Act of 1934 (Exchange 

Act) Rule 3b-16. As part of the reopening, the SEC 

provided supplemental information regarding 

trading systems for crypto-asset securities, including DeFi systems, that already are included in 

the exchange definition and those that would be 

included in the proposed definition.71 CFTC staff 

issued an advisory on clearing of crypto-assets 

by derivatives clearing organizations this year.72

States have also taken action. For example, the 

New York State Department of Financial Services 

(NYDFS) published guidance clarifying its expectations for New York–based virtual currency businesses regarding the custody of customer assets.

73

Council members have also brought actions 

against entities and persons violating applicable federal and state laws. At the state level, for 

example, a multistate task force composed of 10 

state securities regulators issued orders alleging 

reflected in recent crypto-asset related sanctions 

and anti–money laundering cases, crypto-assets 

remain susceptible to misuse by terrorist organizations and other sanctioned individuals’ efforts 

to move funds in support of illicit activities.61

Interactions among crypto-asset vulnerabilities 

can amplify shocks within the crypto-asset ecosystem, which was the case with Curve Finance62

this year. As with many crypto-assets, Curve 

Finance’s native token, CRV,

63 experienced price 

volatility, losing over half of its value in one year.64

On July 30, 2023, the price received a further 

shock after it was reported that $73.5M worth 

of crypto-assets were stolen in a hack of Curve 

Finance.65 CRV lost almost 30 percent of its value 

in the days following the hack.66 At the time of 

the incident, 47 percent of the circulating supply of CRV was used to back loans, according to 

public reports.

67 The drop in CRV’s price reportedly put over $100 million worth of loans taken 

out by Curve Finance’s founder at risk of being 

liquidated on other decentralized finance (DeFi) 

platforms.68 Given that DeFi protocols sell underlying collateral in the market if a user is unable to 

maintain their position, platforms holding CRV as 

collateral were at risk of experiencing significant 

losses if the loans liquidated and the price of CRV 

continually declined. While the DeFi protocols 

holding CRV as collateral have remained stable 

and Curve Finance has been able to recover a 

majority of the funds stolen in the July hack, this 

sequence of events highlights how the aforementioned vulnerabilities within the crypto-asset 

ecosystem can interact and potentially result in 

financial losses.

Investor and Consumer Protection

Speculative crypto-assets and related services 

may pose a range of investor protection and 

market integrity concerns. As the Council has 

previously noted, many crypto-asset firms may 

be acting outside of or out of compliance with 

applicable law and may also lack sufficient risk 

governance and control frameworks. This increases the potential for fraud, illicit finance, sanctions 

evasion, operational failures, liquidity and maturity mismatches, and risk to investors and consumers, as well as contagion within the crypto-asset 

market. 
43

asset-related entities were visible during the 

March 2023 bank stress, when Californiabased Silvergate Bank announced its voluntary 

liquidation.

81 In the last quarterly report it filed 

in 2022, Silvergate noted that substantially all 

of its deposits were derived from crypto-asset 

customers.

82 However, depositors withdrew over 

$8 billion (68 percent of Silvergate’s deposits) 

as stress within the crypto-asset market was 

exacerbated by the shock of the collapse of 

crypto-asset trading platform FTX.83 On January 

4, 2023, Judge John Dorsey, the presiding official 

in the FTX bankruptcy, also ordered the seizure 

of FTX’s funds held at Silvergate. Silvergate’s SEC 

filings show that in response to the outflow, it 

secured a $4.3 billion advance from the Federal 

Home Loan Bank (FHLB) of San Francisco. To pay 

back the FHLB and address remaining liquidity 

issues posed by the decline in deposits, Silvergate 

sold assets at a loss. In a March 1 SEC filing, 

Silvergate disclosed that it might be unable to 

continue as a going concern.84 Silvergate began 

the process of self-liquidation on March 8.85

The disruption created by Silvergate’s self-liquidation made evident the potential for further knockon effects arising from interconnections between 

the crypto-asset ecosystem and traditional 

finance. On March 9, Silicon Valley Bank (SVB) 

experienced a deposit run and was closed by the 

California Department of Financial Protection 

and Innovation the next day, March 10. Signature 

Bank also experienced a run and was closed by 

the NYDFS on March 12. The NYDFS noted in 

its report that in the case of Signature Bank, the 

percentage of crypto-asset customer withdrawals on March 10 was relatively proportional to 

the percentage of crypto-asset customers in the 

deposit base overall. The NYDFS also noted that 

the perceived public association between Signature and the crypto-asset ecosystem, as well as the 

timing of SVB’s failure and Silvergate’s voluntary 

liquidation, were factors in Signature’s failure.

86

Separately, the FDIC noted in its internal review 

that the root cause of Signature’s failure was poor 

management, including its failure to understand 

the risks associated with its reliance on crypto-asset industry deposits and its vulnerability to 

contagion from the crypto-asset industry turmoil 

that occurred in late 2022 and into 2023.87 According to the FDIC’s report, crypto-asset-related 

state securities law violations in relation to a firm’s 

staking rewards programs.74 Federal agencies, 

specifically the SEC and CFTC, have continued 

to bring enforcement actions due to fraud, manipulation, and failure to register with the appropriate agency, among other types of misconduct. 

In fiscal year 2023, the CFTC brought 47 actions 

charging a wide range of violations, including 

fraud, manipulation, failure to register, failure 

to supervise, and lack of adequate know your 

customer and anti-money laundering controls. 

The defendants in these actions included, among 

others, digital asset trading platforms, the operators of DeFi protocols, and a digital asset lending 

platform.75 The allegations in these cases exemplify the consumer and investor risks that arise from 

using unregistered platforms. The SEC brought 

actions this year against companies for operating 

as unregistered exchanges, broker-dealers, and 

clearing agencies.76 The SEC also charged entities 

with the unregistered offer and sale of securities, including the offer and sale of securities in 

connection with staking and lending programs.77

Both the SEC and the CFTC have brought charges 

related to a firm’s failure to comply with anti–

money laundering laws.78

Interconnections Between the Crypto-Asset Ecosystem and Traditional Finance 

The crypto-asset market experiences a higher 

level of volatility than does the traditional finance system and is also prone to shocks that 

may impact traditional financial institutions that 

partner or otherwise interact with the crypto-asset market.79 Such shocks may include the collapse of fraudulent schemes, cybersecurity issues, 

technology-related disruptions, and governance 

or decision-making breakdowns, among other 

events.

Banking

In January and February 2023, the FDIC, OCC, 

and Federal Reserve issued joint statements 

on crypto-asset risks to banking organizations 

and liquidity risks related to the crypto-asset 

market.

80 The statements noted, among other 

things, that the stability of deposits placed by 

crypto-asset-related entities may be influenced by 

vulnerabilities in the crypto-asset sector. 

The risks faced by banks that maintain a high 

concentration of deposit accounts for cryptoVulnerabilities, Significant Market Developments, and Council Recommendations
44 2023 FSOC // Annual Report

paper (CP).

94 The President’s Working Group on 

Financial Markets (PWG), FDIC, and OCC have 

also published an assessment of the risks related 

to stablecoins (2021 PWG Report).95 In the 2021 

PWG Report, the PWG, FDIC, and OCC noted 

that the failure of stablecoins to maintain a stable 

value could expose stablecoin users to unexpected losses and lead to stablecoin runs that damage 

financial stability.96 The 2021 PWG Report also 

flagged that disruptions to the payment chain that 

allow stablecoins to be transferred among users 

could lead to a loss of payments efficiency and, 

depending on the extent to which stablecoins 

are used, undermine functioning in the broader economy.97 Like the Council’s Digital Asset 

Report, the 2021 PWG Report detailed systemic 

concerns related to the potential risk of stablecoin 

arrangements to rapidly scale.

98

In addition to these issues, some stablecoin issuers do not provide adequate or accurate information about their asset holdings and rights of 

redemption.

99 A lack of information about these 

holdings and issuers’ reserve management practices may pose a challenge for accurate market 

analysis of the impact of a stablecoin issuer’s 

holdings, as well as a risk of fraud if the extent of 

the stablecoin’s reserves is misrepresented. The 

lack of information on reserves can contribute 

to outsize market reactions to news about an 

issuer, which can manifest in outsize volatility 

and potential losses. Regulatory requirements 

for reserves, capitalization, and reporting may 

mitigate some of these risks.100 Like the traditional 

payment system, stablecoins, if used as a payment 

instrument, may pose credit risk, liquidity risk, 

operational risk, risks arising from ineffective system governance, and settlement risk.101

Recent Developments

Tokenization

Tokenization, the process of digitally representing 

an existing reference asset on a ledger, involves 

linking a digital token’s price to the value of its 

reference asset. Tokenization that occurs on 

blockchains, a type of DLT, aspires to introduce 

DLT into clearing and settlement processes, as 

well as payment systems.102 This year, some firms 

have offered tokenized products, including digital 

forms of securities.103 To date, the current uses of 

tokenized traditional assets are limited in their 

size and impact.104 The overall value of tokenized 

deposits represented 23.5 percent of total deposits 

at Signature Bank as of September 30, 2022.88

In addition to showing the effects the crypto-asset market could have on the traditional financial 

system, the March bank stress revealed how the 

interconnections between the crypto-asset and 

banking sectors, as well as concentration risk, can 

cause stress in the crypto-asset market. Hours 

after SVB closed on March 10, Circle Internet 

Financial LLC (Circle), the issuer of the stablecoin 

USDC, revealed that $3.3 billion (approximately 

8 percent) of the reserves purportedly backing 

USDC were held at SVB.

89 The news sparked a run 

on USDC, with $1.6 billion of USDC redemptions 

occurring on the same day as Circle’s announcement. Coinbase and Binance announced that the 

platforms would temporarily pause conversions 

between USDC and U.S. dollars as well.

90 Over the 

weekend after SVB’s closure, USDC temporarily 

lost its 1-to-1 peg with the dollar, with the value of 

USDC falling as low as $0.89. By March 15, Circle 

reported that crypto-asset market participants 

redeemed some $3 billion of USDC. Circle’s problems triggered MakerDAO’s DAI stablecoin to depeg over the weekend as well.91 DAI, a stablecoin 

backed by other crypto-assets, relied on USDC for 

approximately 52 percent of the collateral supporting its circulating stablecoins.

92

To help ensure the safety and soundness of the 

banking system as banks explore crypto-asset 

related activities, the Federal Reserve announced 

a novel-activities supervision program in August 

2023. The program will be integrated into the 

Federal Reserve’s existing supervisory process 

to help address risks of novel activities related 

to crypto-assets, DLT, and complex technologydriven partnerships with nonbanks.93

Stablecoins

The Council has previously noted that interconnections between the financial system and the 

crypto-asset trading markets that are created by 

stablecoins could serve as conduits for contagion 

to traditional financial institutions. A stablecoin’s 

impact on the financial system depends on the 

scale of the stablecoin. For example, if a stablecoin were to scale significantly, a run on the 

stablecoin could lead to fire sales of the traditional assets backing the stablecoin like bank deposits, MMFs, Treasury securities, and commercial 
45

recommended that Congress pass legislation to 

close each of these regulatory gaps. The Council 

reiterates its recommendations from last year’s 

Report. The Council urges Congress to pass legislation that provides federal financial regulators 

with explicit rulemaking authority over the spot 

market for crypto-assets that are not securities. 

Congress should also pass legislation that would 

create a comprehensive prudential framework for 

stablecoin issuers that would also address the associated market integrity, investor and consumer 

protection, and payment risks. As the Council has 

previously noted, the Council remains prepared 

to consider steps available to it to address risks 

related to stablecoins in the event comprehensive 

legislation is not enacted.

3.1.6 Climate-Related Financial Risks

In October 2021, for the first time, the Council 

identified climate change as an emerging and 

increasing threat to U.S. financial stability.

107

Broadly speaking, climate-related financial risks 

are grouped into two categories: physical risks 

and transition risks.

Physical risks generally refer to the possibility of 

harm to people and property that can arise from 

acute climate-related weather events such as 

droughts, floods, wildfires, heat waves, and windstorms (including hurricanes), many of which are 

forecasted to increase in frequency and severity; 

or from chronic changes over time, such as higher 

average temperatures, changes in precipitation 

patterns, sea level rise, persistent drought, degradation of arable land, and ocean acidification. 

Transition risks generally refer to the possibility 

of stresses to certain institutions or sectors that 

may arise from changes that cause a shift toward a 

lower greenhouse gas (GHG) economy, including 

changes in law and policy, changes in consumer 

and business sentiment, and technological advances. The impacts of transition risks may result 

in added costs for some firms and communities,

even as they potentially reduce the overall risk 

associated with unmitigated climate change. In 

addition, if the transition toward a lower-GHG 

economy is delayed or disorderly, the impact on 

firms, market participants, individuals, and communities is more likely to be disruptive. 

Climate-related financial risk can manifest as and 

amplify traditional risks, such as credit, market, 

markets is also small relative to the crypto-asset 

market and the traditional financial system.105

The projects announced this year reportedly seek 

to improve efficiency in settlement and payment, 

often by removing intermediaries, promoting 

transparency, and embedding features like 

programmability, and automaticity. At the same 

time, these projects may present some risks. For 

blockchain-based tokenized assets, these risks 

include cybersecurity, privacy, market integrity, 

operational, and intermediation risks, as well 

as consumer protection, illicit-finance, and 

safety and soundness concerns.

106 If the market 

for tokenized assets grows, these risks could 

introduce financial stability vulnerabilities into 

the traditional financial system. The magnitude 

of these risks could vary, however, depending on 

the blockchain’s design such as permissioned 

vs. permissionless, and consensus mechanism, 

among other things. 

Tokenized assets present novel legal and 

regulatory considerations. The economic reality 

of a tokenization structure will determine the 

applicable U.S. law, including whether a product 

or an instrument is a security subject to the 

existing federal securities laws, a commodity or 

derivative subject to the Commodity Exchange 

Act (CEA), and/or another type of asset subject 

to existing federal and state laws. There are also 

remaining ownership issues pertaining to a token 

holder’s rights to the underlying asset and/or 

to the issuer’s assets in the event of a breach of 

contract or bankruptcy.

Recommendations

As indicated above, Council members are enforcing existing rules and regulations applicable 

to crypto-asset activities. Council members have 

also addressed risks posed by the crypto-asset 

ecosystem through agency statements, guidance, 

and rulemaking. The Council recommends that 

agencies continue to enforce existing rules and 

regulations.

In last year’s Annual Report as well as the Council’s 2022 Report on Digital Asset Financial Stability Risks and Regulation, the Council outlined two 

gaps in the regulation of crypto-asset activities 

in the United States: (1) the regulation of spot 

markets for crypto-assets that are not securities 

and (2) the regulation of stablecoins. The Council 

Vulnerabilities, Significant Market Developments, and Council Recommendations
46 2023 FSOC // Annual Report

trade-offs and the need to balance them. Actions 

individual firms take to protect themselves may 

lead to unexpected losses at other firms or hinder 

objectives related to low- and moderate-income 

community development, including fair access to 

credit. For example, more frequent extreme 

weather events in low-income communities may 

cause damage to physical business assets located 

there. If firms consequently choose to move out of 

the area, the resulting job losses could create 

economic instability in those communities.

110 This 

example makes it clear the Council must analyze 

and gain an understanding of the transmission 

channels through which climate risk may affect 

the financial system as a whole (see Figure 

3.1.6.1).

Given the wide variety of transmission channels 

through which climate-related financial risks 

Source: Figure created by FSOC

CLIMATE RISKS

IMPACT ON ECONOMIC 

SECTORS AND 

MACROECONOMY

FEEDBACK LOOP 

THAT MAY 

ADVERSELY 

AFFECT ECONOMIC 

AND FINANCIAL 

STABILITY

IMPACTS ON 

FINANCIAL 

INSTITUTIONS AND 

MARKETS

Transition risks

• Technological changes

• Policy shifts

• Changes in consumer preference

Physical risks

• Chronic (e.g., sea level rise)

• Acute (e.g., hurricanes)

• Damages to property

• Business interruption

• Effects on household and business income

• Feedback across economy through

product and labor markets

• Credit and market risks

• Liquidity risks

• Operational risks

• Legal risks

• Amplification through interconnections

and correlated exposures

3.1.6.1 Transmission Channels Linking Climate Risks to Financial Stability

liquidity, operational, compliance, reputational, 

and legal risks. Climate-related risks may be 

combined with other stresses, such as financial 

crises or pandemics. Climate-related risks may 

also compound nonlinearly with other types of 

shocks. For example, the joint impact of a physical 

climate shock and a pandemic occurring simultaneously could be 50 percent larger than the sum 

of the impacts of the individual shocks,

108 have a 

longer-lived effect, and be propagated via global 

networks.

109 Given the Council’s focus on the 

financial stability of the system as a whole, it is 

important to consider a systemwide approach: 

combining individual firm and market risk 

assessments by taking into account interconnections and spillovers, which may amplify the 

financial effects on individual firms. A systemwide approach may also highlight possible 
47

American homeowners may be increasingly 

aware of these risks. According to a recent survey 

by Redfin, nearly half (48.7 percent) of all people 

who moved in the last year in the U.S. believe that 

home values in their destination area will be affected by the increasing frequency and severity of 

climate-related impacts or events over the next 10 

years.115 Despite this awareness, Redfin’s analysis 

of net migration data from the Census Bureau 

and county-level climate-risk scores show that 

the aggregate net inflow of people to the geographies most prone to flooding, extreme heat, and 

wildfires has increased over the past two years.

116

A survey of the literature conducted by FHFA 

suggests that some of these climate-related risks 

are reflected in real estate pricing, though effects 

may be temporary after a natural disaster and 

may depend on a variety of factors, including type 

of natural disaster and information available to 

purchasers.117

Role of Insurance 

Insurers play an important role in the financial system by absorbing losses stemming from 

physical risks. However, the increasing frequency 

and severity of extreme weather could affect the 

solvency of insurers.

118 It could also affect the cost 

and availability of coverage for homeowners and 

businesses, which could have implications for 

financial stability. See Section 3.1.2: Residential 

Real Estate, Property Insurance Developments 

for a discussion of how changes in property insurance market coverage could affect mortgage 

markets.

In response to rising insured losses, some insurers are requesting significant rate increases, 

increasing policy exclusions, avoiding renewals in 

unprofitable markets, and implementing higher 

deductibles in areas with significant exposure 

to climate-related impacts and events.

119 These 

increases in premiums and changes in market 

coverage are affecting the affordability and availability of insurance coverage.120,121

In some cases, government-sponsored or private 

residual insurance alternatives have stepped in 

where private insurance coverage is insufficient, 

but these programs may also be forced to raise 

rates to remain solvent, affecting the availability 

and affordability of insurance.122 Ultimately, an 

increasing number of properties may become 

could negatively affect the economy, the possibility that climate-related risk could amplify traditional risks, and the potential for feedback loops 

between physical risks and transition risks, work 

is underway to better understand and quantify 

the potential impacts of climate risks on financial institutions and markets. Council member 

agencies are improving their understanding of the 

specific channels through which climate-related 

impacts can manifest as financial risks, and the 

staff-level Climate-related Financial Risk Committee (CFRC) continues to work to build capacity, address data gaps, and improve methodological approaches to risk monitoring (see Section 

4.1: Council Activities).

Recent Developments in Physical Risk, Housing, and 

Property Insurance Markets 

As noted in the Council’s 2021 Report on Climate-Related Financial Risk and the Council’s 

2022 Annual Report, climate-related impacts 

and events are imposing significant costs on the 

public and the economy.111 Through September 

2023, the United States experienced 24 confirmed 

weather and climate disaster events in which losses exceeded $1 billion, up from an annual average 

of 8.1 events per year between 1980 and 2022 and 

also up from a recent five-year annual average of 

18.0 events from 2018 to 2022.112

The effects of physical risk on real estate remains 

a primary area of interest. Climate-related events 

may cause damage that can reduce the value of 

real estate, which could affect households and 

owners of commercial real estate (CRE), and such 

events can also increase the probability of default 

and associated loss.113 As markets factor these 

risks into pricing, real estate (and real estate investment products) exposed to physical risk could 

lose market value, even without direct damage. 

Households with lower socioeconomic status are 

more likely to face greater climate risk,114 which 

could further exacerbate the disparities in housing values already experienced in some regions 

such as low- or moderate-income areas or majority-minority census tracts, thus eroding generational wealth. Additionally, climate risk might 

increase the costs associated with housing such as 

insurance premiums and the frequency and cost 

of repairs, further exacerbating the homeownership challenges for low-income and majority-minority communities.

Vulnerabilities, Significant Market Developments, and Council Recommendations
48 2023 FSOC // Annual Report

uninsurable due to the increasing frequency 

and severity of climate-related events (see 

Figure 3.1.6.2) and the associated changes in 

insurance policies’ structure, pricing, and 

availability. Already, 12 percent of homeowners have chosen to forgo home insurance.123,124

The first half of 2023 saw several high-profile 

developments in the insurance sector, including property and casualty (P&C) insurers 

withdrawing from certain high-risk markets. 

P&C insurers are facing profitability pressures, 

which they attribute to increased loss severity, higher reinsurance premiums, and some 

states’ regulatory restrictions on rate changes,

125 combined with increasing frequency 

and severity of weather-related events.

126 In 

the first half of 2023, property catastrophe 

reinsurers raised rates in the United States 

between 20 percent and 50 percent.

127 In the 

first 6 months of 2023, the U.S. P&C industry 

recorded a $24.5 billion net underwriting 

loss,

128 which almost eclipsed 2022’s annual 

net underwriting loss of $26.9 billion. The 

net underwriting loss of 2022 was the highest 

since 2011.

In response to these profitability pressures, 

many P&C insurers are withdrawing from 

certain high-risk markets, increasing premiums for both residential real estate, commercial real estate, or both.

129 Commercial 

property insurance premiums rose 20.4 

percent in the first quarter of 2023, a record 

rise in quarter-over-quarter growth driven by 

inflation and natural-catastrophe risk,

130 and 

18.3 percent in the second quarter of 2023.

131

In California, the top 35 individual homeowners insurance carriers collectively accounted for 87.6 percent of the $12.46 billion 

in homeowners direct premiums written in 

California in 2022. At least 19 of 35 intend to 

reduce their California homeowners coverage 

through new-business moratoriums, market 

exits, or new restrictions on specific exposures.132 This includes large insurers Allstate 

Corporation and State Farm Insurance, both 

of which announced that they will no longer 

underwrite new homeowners, condominium, 

and commercial P&C policies in California.133

Increases in premiums, cancellations, and 

restrictions are not limited to California. In a 

survey of Louisiana residents, 17 percent of 

Source: NOAA National Centers for Environmental Information (NCEI)

0

50

100

150

200

250

300

350

400

450

0

5

10

15

20

25

30

1980 1985 1990 1995 2000 2005 2010 2015 2020

3.1.6.2 Billion - Dollar Weather and Climate Events

Number of Events As Of: 8-Nov-2023 Billions of US$

` Total cost (right axis)

Number of events (left axis)

3.1.6.2 Billion-Dollar Weather and Climate Events
49

originators, mortgage servicers, securities purchasers, and providers of risk mitigation products. 

Even if a property is mortgage-free and there is 

no direct link to a financial institution, uninsured 

properties can result in lower property values and 

affect collateral valuation. 

There are government programs that may help individuals, families, or businesses that lack insurance to cover their losses; however, these funds 

are typically limited and may not be sufficient to 

return the property to its pre-disaster condition.140

In cases where local, state, or federal government 

programs provide additional assistance, more 

frequent payouts of this aid could create strain on 

these programs and ultimately lead to a greater 

burden on the taxpayer to cover losses. Given the 

potential for increased expenses associated with 

increasingly frequent and severe climate-related 

events and the growing issues with availability 

and affordability of traditional insurance in some 

disaster-prone markets, the losses associated with 

these events could be borne by individual homeowners and the mortgagees, as discussed more 

fully in Section 3.1.2: Residential Real Estate

(see Property Insurance Developments).

Recommendations

The Council welcomes continuing actions to 

improve the availability of data for assessing 

climate-related financial risks, such as FIO’s 

proposed data collection from large writers of 

homeowners insurance on their underwriting 

metrics and related insurance policy information 

and the OFR’s work on the Joint Analysis Data 

Environment.

141 The Council recommends state 

and federal agencies continue to coordinate to 

identify, prioritize, and procure data necessary for 

monitoring climate-related financial risks, including via the Council’s working groups.142

The Council supports efforts to improve assessments of climate-related financial risks and 

vulnerabilities, including the Federal Reserve’s 

pilot climate scenario analysis exercise and the 

final interagency Principles for Climate-Related 

Financial Risk Management for Large Financial 

Institutions issued by the Federal Reserve, FDIC, 

and OCC. The Council recommends that state 

and federal agencies continue to coordinate on 

developing a robust framework to identify and 

assess climate-related financial risks, including 

policyholders said their home insurer canceled 

their coverage last year.134 In Florida, 15 companies have stopped writing new policies in the 

last 18 months.

135 American International Group 

(AIG) also announced in June that it was reducing its homeowners insurance business in 200 

ZIP Codes across the United States, including in 

New York, Delaware, Florida, Colorado, Montana, 

Idaho, and Wyoming.136

In states where private insurance is becoming unaffordable and government-sponsored or private 

residual insurance alternatives exist, homeowners 

are increasingly reliant on such residual plans, 

which generally provide some basic coverage for 

eligible properties but may offer coverage that 

is more limited than the policies it is replacing.

The number of policies and dollar amounts of 

premiums in residual markets have increased in 

recent years.

137 For example, the count of policies 

in force within California’s FAIR plan increased 

107 percent, from 159,095 in September 2019 to 

330,108 in September 2023. To put this increase 

in context, since 2018, California’s FAIR plan has 

increased from about 1.5 percent to about 3.5 

percent of the residential market.

138 Over the same 

period, the residual insurer in Florida experienced a 234 percent increase in the count of policies in force from 421,332 to 1,407,805, and the 

residual insurer in Louisiana experienced a 278 

percent increase in the count of policies in force 

from 37,255 to 140,912.139

Higher insurance costs could drive homeowners 

to underinsure against growing climate-related 

risks. Some homeowners without mortgages 

may even choose to go entirely without coverage. 

Where losses are uninsured or underinsured 

through private or residual markets, they have 

the potential to spill over into other parts of the 

financial system and real economy. In the event 

of an extreme climate-related disaster, insurance 

companies take the first loss net of deductibles if 

the specific peril is covered. Damages to underinsured properties adversely affect borrowers, 

particularly those who are unable to absorb the 

resulting losses. In the 12 states that allow nonrecourse mortgages, borrowers may default on their 

mortgage if they lack the funds to repair their 

home following a disaster, presenting negative financial consequences for banks that lend in those 

states. Any resulting defaults could push losses 

into other parts of the financial system, including 

Vulnerabilities, Significant Market Developments, and Council Recommendations
50 2023 FSOC // Annual Report

of these long-duration assets, which are not fully 

reflected in regulatory capital ratios but are closely monitored by financial markets. Banks are typically positioned to manage this aspect of interest 

rate risk because the majority of bank deposits are 

“sticky”144 and do not earn market interest rates. 

However, some banks also had an outsize reliance 

on uninsured deposits, which are more sensitive 

to changes in bank credit quality. Partly due to 

this, those banks experienced unprecedented 

withdrawals of deposits in just a few days. Ultimately, the mismanagement of interest rate and 

liquidity risk was the key vulnerability behind the 

failures of Silicon Valley Bank (SVB) and Signature 

Bank in March 2023, and of First Republic Bank in 

May 2023.145

The Spring 2023 turmoil posed systemic risk to the 

financial system because after the closure of SVB 

on March 10, other regional banks experienced 

outsize deposit outflows and the risk of additional regional bank failures increased. Meanwhile, 

deposit flows into certain global systemically 

important banks (G-SIBs) grew. The spreading 

contagion could have impaired the ability of 

many more businesses and households to manage their near-term financial obligations, and the 

cascading effects of those payment delays could 

have caused significant disruptions in the economy. The policy responses from the Treasury, the 

FDIC, and the Federal Reserve, including the use 

of the systemic risk exception to protect depositors of the two banks that failed in March and the 

establishment of the Bank Term Funding Program 

(BTFP) by the Federal Reserve, were successful 

at mitigating contagion to the financial system. 

Following the March 2023 events, banks increased 

their cash holdings and borrowing capacity to 

cover potential depositor withdrawals, increased 

their usage of Federal Home Loan Bank (FHLB) 

advances, and accessed the BTFP. These steps 

helped to stabilize liquidity and maintain confidence in the banking system (see Box C: The 

Spring 2023 Turmoil and Policy Responses). 

Unlike in the 2007–09 financial crisis, bank profits 

in 2023 have remained robust, and the credit 

quality of banks’ assets remains sound. Detailed 

regulatory data for large banks suggest that 

average loan-to-value ratios in both commercial 

and residential real estate portfolios are low. 

Data from the April and July 2023 Senior Loan 

Officer Opinion Survey (SLOOS) indicate that 

by iteratively identifying a preliminary set of risk 

indicators.143

Financial regulators should continue to promote 

consistent, comparable, and decision-useful 

disclosures that allow investors and financial 

institutions to better incorporate climate-related 

financial risks in their investment and lending 

decisions. Examples include proposed rules from 

the SEC to enhance and standardize climate-related disclosures for investors and the updated 

Climate Risk Disclosure Survey from the National 

Association of Insurance Commissioners.

The Council recommends enhanced coordination 

of data and risk assessment through the CFRC. 

Given the critical role of real estate in the economy and the financial system and how it affects the 

remits of multiple Council member agencies, the 

Council recommends that agencies collaborate 

on analysis related to the intersection of physical 

risk, real estate, and insurance in particular.

3.2 Financial Institutions

3.2.1 U.S. Banking System

The U.S. banking system remains resilient overall, despite the Spring 2023 turmoil. U.S. banks 

continue to have sound levels of regulatory capital 

and healthy levels of profitability while maintaining ample liquidity buffers. There are, however, 

pockets of vulnerability that warrant close monitoring, given increases in interest rates. Some 

banks with large fair-value declines in their securities portfolios also have above-average reliance 

on uninsured deposits for funding. Meanwhile, 

many regional and community banks have significant concentrations of commercial real estate 

(CRE), which potentially are vulnerable to negative trends in the office market and an erosion in 

high multifamily property valuations.

Between 2020 and 2021, U.S. banks experienced 

a large increase in insured and uninsured deposits, partly supported by COVID-19-related 

government relief programs. In search of yield in 

a low-interest-rate environment, many banks invested much of these deposit inflows to build up 

concentrations in long-term fixed-rate assets such 

as Treasuries and mortgage-backed securities 

(MBS). The rapid increase in interest rates during 

2022 caused meaningful declines in the fair value 
51

banks continued to tighten lending standards on 

commercial and industrial (C&I) and CRE loans 

in the first half of 2023, amid concerns about the 

economic outlook and loan performance.146 In response to a set of special questions in the SLOOS 

about the current level of lending standards, 

banks reported that, on balance, such standards 

are currently on the tighter end of their historical 

ranges for all loan categories. Meanwhile, banks 

reported that demand for most categories of loans 

continued to weaken. Consistent with reported 

credit standards, loan delinquency rates have so 

far remained low. However, delinquency rates for 

consumer and CRE loans, especially those backed 

by office properties, increased in the first half of 

2023 and banks reportedly expect them to continue to increase.

During the financial turmoil that occurred in the 

banking sector this past Spring, the credit union 

system generally remained well capitalized and 

stable. Relative to other depository institutions, 

credit unions tend to have smaller amounts of 

uninsured deposits, which meant that the threat 

of a material deposit flight within the system was 

less severe. Credit unions also have more modest 

amounts of CRE lending, which mitigated risk 

exposures. That said, credit unions have not been 

immune to challenging economic conditions over 

the past year, including the sharp rise in interest 

rates, which augmented liquidity stresses. However, credit unions have access to liquidity through 

the NCUA Central Liquidity Facility, which acts 

as a shock absorber to contain or avert liquidity 

crises before they escalate.

3.2.1.1 G-SIBs and Large Non-G-SIBs147

Banks with greater than $250 billion in assets 

account for more than 60 percent of U.S. banking 

assets.148 Large banks play a critical role in the U.S. 

financial system by performing essential banking 

functions, such as providing credit to retail and 

commercial borrowers, helping firms raise capital 

or hedge risk, and providing asset management 

and custody services. Moreover, these banks play 

a critical role in the global financial system by 

facilitating payments on a global scale and clearing large volumes of transactions in repo markets. As such, their resilience and stability are of 

paramount importance for both the U.S. and the 

global economy.

Vulnerabilities, Significant Market Developments, and Council Recommendations
52 2023 FSOC // Annual Report

Bank Capital and Profitability 

Large banks continue to maintain sound 

levels of capital, and their risk-based capital 

positions are within the range observed in the 

last decade (see Figure 3.2.1.1.1). In the case 

of G-SIBs, the Common Equity Tier 1 Capital 

(CET1) ratio has trended up since early 2022 

and is now on par with the highest levels 

observed in more than 20 years. These higher 

capital levels at G-SIBs reflect more stringent 

requirements that resulted from the 2022 

Federal Reserve Stress Tests and, in some 

cases, a higher G-SIB capital surcharge.

While the effect of higher interest rates on 

bank profits is complex, large banks continue 

to maintain healthy levels of profitability, and 

their return on assets (ROA) remains in line 

with the average level observed in the last 

decade (see Figure 3.2.1.1.2). Large banks 

saw a boost in profitability during 2022, as the 

interest rates they earned on variable-rate 

assets and new investments increased faster 

than interest rates on deposits. However, in 

2023, large banks have had to significantly 

boost their deposit rates to offset competitive 

pressures from higher interest rates on alternative investments (see Figure 3.2.1.1.3). This 

increase in deposit rates has reversed some of 

the previous increase in banks’ profitability. 

Notes: Tier 1 common capital is used as the numerator of the CET1 ratio prior to 

2014:Q1 for G-SIBs and large complex BHCs, and prior to 2015:Q1 for large noncomplex and other BHCs. The denominator is risk-weighted assets (RWA). Shaded areas 

indicate NBER recessions.

Sources: FR Y-9C, Haver Analytics

4

6

8

10

12

14

16

4

6

8

10

12

14

16

2001 2004 2007 2010 2013 2016 2019 2022

Percent of RWA As Of: 2023 Q2 Percent of RWA

G-SIBs

Large non-G-SIBs

Regional banks

3.2.1.1.1 Common Equity Tier 1 Ratios

Note: Gray bars signify NBER recessions.

Sources: FR Y-9C, Haver Analytics

-1

0

1

2

3

-1

0

1

2

3

2010 2012 2014 2016 2018 2020 2022

Percent As Of: 2023 Q2 Percent

G-SIBs

Large non-G-SIBs

Regional banks

3.2.1.1.2 Return on Assets

Note: Gray bars signify NBER recessions.

Sources: FR Y-9C, Haver Analytics

3.2.1.1.3 Bank Funding Rates

0

1

2

3

4

5

6

0

1

2

3

4

5

6

2014 2015 2017 2018 2020 2021 2023

Percent As Of: 2023 Q2 Percent

Fed funds rate

G-SIBs

Large non-G-SIBs

Regional banks
53

Credit Quality and Lending Standards

Overall, large banks’ credit quality remained 

solid in the second quarter of 2023 as delinquency rates across various loan categories 

remained low (see Figure 3.2.1.1.4). Recent 

levels of loan provisioning also suggest that 

banks do not expect a material deterioration 

in credit quality in the near future, but banks 

have been increasing their provisions (see 

Figure 3.2.1.1.5). According to the July 2023 

SLOOS, large banks also continued to report a 

tightening of lending standards across all loan 

categories, which could reduce loan originations further this year. Because the office 

sector is distressed and valuations of other 

types of CRE appear quite elevated, the 

performance of CRE loans should be closely 

monitored.

Liquidity and Funding

G-SIBs’ and other large banks’ overall liquidity positions exhibited a modest decline during 

the second quarter of 2023 but remain sound 

as they continue to hold large amounts of 

liquid assets. This decline in liquidity reflects 

both a reduction in reserves and the loss of 

market value of banks’ securities portfolios 

due to higher interest rates. While most banks 

experienced an outflow of deposits during the 

Spring 2023 turmoil, with some deposits 

leaving the banking system entirely while 

others redeposited into G-SIBs, these deposit 

flows moderated in the second quarter of 

2023 (see Figure 3.2.1.1.6), partly reflecting 

the joint policy responses by bank regulatory 

agencies and the ongoing smooth adjustment 

to higher interest rates. Large banks have been 

able to manage this second quarter of decline 

because of the ample liquidity buffers they 

had going into this period and due to the 

inflow of deposits from smaller banks partially 

offsetting deposit outflows.

3.2.1.2 Regional Banks149

Despite their smaller size compared to large 

banks and G-SIBs, regional banks play a 

critical role in the U.S. financial system by 

performing a host of traditional banking 

functions. These include providing deposits, 

mortgages, and CRE loans, in addition to 

Notes: Includes all loans in foreign and domestic offices. Gray bars signify NBER 

recessions.

Sources: FR Y-9C, Haver Analytics

3.2.1.1.4 Delinquency Rates on Selected Loans

Note: Gray bars signify NBER recessions.

Sources: FR Y-9C, Haver Analytics

3.2.1.1.5 Ratios of Provisions to Total Loans

Notes: Domestic deposits; indexed to 100 as of Q2 2016. Gray bars signify NBER 

recessions.

Sources: Call Report, Haver Analytics

3.2.1.1.6 Total Deposit Growth (2016Q1 = 100)

Vulnerabilities, Significant Market Developments, and Council Recommendations
54 2023 FSOC // Annual Report

commercial and industrial loans. As a result, 

the resilience and stability of these companies 

is of paramount importance to the structure 

and functioning of the domestic U.S. economy. The stresses in the banking sector that 

emerged in Spring 2023 raised concerns about 

some regional banks, although conditions 

have calmed since. This turmoil also highlighted the need to closely monitor uninsured 

deposit levels and further enhance resolution 

planning and preparedness capabilities to 

mitigate similar stresses in the future. 

Although it fundamentally resulted from 

poor risk management and heavy reliance 

on uninsured deposits, the failure of three 

regional banks in Spring 2023 underscored 

that even non-G-SIBs may pose risks to 

financial stability. The Spring turmoil also 

highlighted the need for additional data that 

would allow agencies to closely monitor not 

only uninsured deposit levels but also the 

composition and pricing of those deposits 

and to further enhance resolution planning 

and preparedness capabilities to mitigate 

similar crises in the future. 

Bank Capital and Profitability

CET1 ratios at regional banks are near the 

upper end of the range established during the 

last decade. However, taking into account 

unrealized losses on long-duration assets 

leads to significant reductions in market-adjusted capitalization for many regional 

banks.150 These relatively low market-adjusted 

levels of capital make those banks vulnerable 

to further increases in rates. Figure 3.2.1.2.1

shows that regional and large non-G-SIB 

banks have higher amounts of unrealized 

losses (as a share of total assets) compared to 

G-SIBs. With regard to profitability, ROAs at 

regional banks remain in line with the average 

level observed in the last decade. However, 

further increases in funding costs and declines in lending volumes could put downward pressure on bank profitability.

Liquidity and Funding

Funding risk is a salient vulnerability that is 

being monitored closely because regional 

banks tend to fund themselves via traditional 

deposits and thus can be reliant on uninsured 

Notes: AFS and HTM are securities designated as available for sale or held to maturity, 

respectively; values shown as a percent of total assets. Gray bars indicate NBER 

recessions.

Sources: FR Y-9C, Haver Analytics

-4

-3

-2

-1

0

1

-4

-3

-2

-1

0

1

2017 2019 2021 2023

Percent As Of: 2023 Q2 Percent

G-SIBs

Large non-G-SIBs

Regional banks

3.2.1.2.1 Unrealized Gains (Losses) on AFS and HTM Securities
55

deposits or other credit-sensitive deposits. The 

sudden failure of both SVB and Signature Bank 

raised concerns about the solvency of some banks 

with this type of funding structure, resulting in the 

risk of contagion to other depository institutions 

and damage to the broader banking system. Indeed, regional banks with characteristics similar 

to those of SVB and Signature Bank saw notable 

deposit outflows as households and businesses 

were concerned about maintaining access to 

accounts they routinely use to make payments. 

A number of regional banks experienced notable 

deposit outflows on March 10 and in the following 

days, including First Republic Bank, an institution 

supervised by the FDIC with $213 billion in assets 

at the end of 2022, which ultimately failed on May 

1. This concern over broader contagion led to

sizable declines in bank stock prices (see Box C:

The Spring 2023 Turmoil and Policy Responses,

Figure C.1).

Credit Risks151

Delinquencies for most loan categories remain at 

or below pre-pandemic levels; however, regional banks tend to have a greater concentration of 

CRE loans. In particular, risks for loans backed 

by nonfarm nonresidential CRE properties have 

increased as hybrid work arrangements have reduced demand for office space (see Section 3.1.1: 

Commercial Real Estate). A sustained reduction 

in demand for office space suppresses the income 

potential for these properties and their prices,

lowering the collateral values of office properties 

and retail properties that surround them. Compared to large banks, regional banks tend to carry 

higher exposures to all CRE loans, which could 

translate into greater losses in the event of a drop 

in CRE valuations. Higher interest rates also put 

pressure on a borrower’s ability to repay debt and 

the ability of a property to generate cash flow. 

Vulnerabilities, Significant Market Developments, and Council Recommendations
56 2023 FSOC // Annual Report

tration of uninsured deposits and significant 

declines in the fair value of fixed-rate assets in a 

rising-rate environment. Concerns over broader 

contagion led to sizable declines in bank stock 

prices (see Figure C.1) and notable deposit 

outflows. In contrast, the largest banks saw 

significant deposit inflows.

In response to the market turmoil in early March 

2023, the Federal Reserve, together with the 

FDIC and the Treasury, took decisive actions 

to reduce stress across the financial system by 

supporting financial stability and minimizing the 

effects on businesses, households, taxpayers, and 

the broader economy.

Specifically, on Sunday, March 12, the Federal 

Reserve, the FDIC, and the Treasury announced 

two actions designed to support all bank 

depositors and the continued flow of credit to 

households and businesses. After receiving a 

recommendation from the boards of the FDIC 

and the Federal Reserve, and after consulting 

with the President, the Secretary of the Treasury 

approved a systemic risk exception (SRE), 

enabling the FDIC to complete its resolution 

of Signature Bank and SVB in a manner that 

protected both insured and uninsured depositors. 

Depositors were given full access to their accounts 

on the Monday following the announcement. In 

contrast to depositors, shareholders and certain 

unsecured debt holders were not protected, and 

senior management at these banks was removed. 

Signature Bank was successfully resolved and 

sold one week after its failure, and SVB was 

successfully resolved and sold two weeks after 

its failure. The losses to the Deposit Insurance 

Fund arising from actions taken under the 

SRE to protect the uninsured depositors, later 

estimated by the FDIC to be $16.3 billion, will 

not be borne by taxpayers and will be recovered 

by a special assessment on banks, as required by 

law. Remaining losses of $2.4 billion from insured 

deposits will be recovered through regular deposit 

insurance assessments.

152

Note: Data are indexed daily to 100 as of Feb 1, 2023.

Source: Bloomberg, L.P.

0

20

40

60

80

100

120

0

20

40

60

80

100

120

Mar 8

Index As Of: 21-Apr-2023 Index

Feb 1 Feb 15 Mar 2 Mar 16 Mar 30 Apr 14

First Republic

Silicon Valley Bank

Signature Bank

Credit Suisse

KBW Nasdaq 

Bank Index

KBW Nasdaq Regional 

Banking Index 

S&P 500 Index

C.1 Bank Stock Prices and Stock Indexes

On the afternoon of Wednesday, March 8, 2023, 

Silicon Valley Bank (SVB), an institution supervised by the Federal Reserve with $209 billion in 

assets at the end of 2022, announced a $1.8 billion 

loss on securities sales, along with its intent to 

raise $2.25 billion in equity capital and $15 billion 

in debt. These announcements led to a loss of 

confidence in the bank, as reflected in the sharp 

decline in SVB’s stock market price and unprecedented deposit withdrawals from customers, 

totaling $42 billion in a single business day on 

Thursday, March 9. On the morning of Friday, 

March 10, with the bank expecting as much as 

$100 billion in additional deposit withdrawals, the 

Department of Financial Protection and Innovation of the State of California declared SVB insolvent, took possession of the bank, and appointed 

the FDIC as receiver. 

Following the announcement of SVB’s closure on 

March 10, Signature Bank, an institution supervised by the FDIC with $110 billion in assets at the 

end of 2022, suffered a run of 20 percent of deposit balances. On Sunday, March 12, Signature Bank 

was closed by the New York State Department of 

Financial Services (NYDFS) when it became clear 

that the bank did not have sufficient liquidity to 

meet mounting wire requests. The speed and 

magnitude of the runs on deposits at SVB and 

Signature Bank generated broader concerns 

about the resilience of banks with a large concenBox C: The Spring 2023 Turmoil and Policy Responses
57

and businesses in a manner that promotes strong 

and sustainable economic growth. Additional 

funding sources like the BTFP bolster the capacity 

of the banking system to safeguard deposits and 

help ensure the ongoing provision of money and 

credit to the economy. This additional funding to 

eligible depository institutions will continue to 

serve as an important backstop against further 

bank stresses and support the flow of credit. 

In international markets, Credit Suisse came 

under renewed pressure, and on Sunday, March 

19, UBS agreed to merge with it. The merger 

included a deal that involved the write-off of a 

certain type of contingent capital instrument,

and it also involved liquidity support and loss 

sharing from the Swiss government. On Sunday, 

March 19, the Federal Reserve, together with the 

Bank of Canada, Bank of England, Bank of Japan, 

European Central Bank, and Swiss National Bank,

announced measures to mitigate the effects of 

strains on global funding markets via the standing 

U.S. dollar liquidity swap line arrangements. 

The network of swap lines among these central 

banks is a set of available standing facilities and 

serves as an important liquidity backstop to ease 

strains in global funding markets, thereby helping 

mitigate the effects of such strains on the supply 

of credit to U.S. households and businesses. To 

improve the swap lines’ effectiveness in providing 

U.S. dollar funding, these central banks agreed 

to increase the frequency of seven-day maturity 

operations from weekly to daily through the end 

of April 2023. Despite all these efforts, problems 

lingered at certain banks. First Republic Bank, 

an institution supervised by the FDIC with $213 

billion in assets at the end of 2022, experienced 

notable deposit outflows between March 10 and 

March 16; outflows moderated over the ensuing 

weeks but resumed when First Republic Bank 

reported first-quarter earnings. The California 

Department of Financial Protection and 

Innovation took possession of First Republic Bank 

before markets opened on Monday, May 1, and 

appointed the FDIC as receiver, which sold the 

bank on the same day.153

At the same time, on Sunday, March 12, with 

approval from the Secretary of the Treasury, the 

Federal Reserve announced the establishment 

of the Bank Term Funding Program (BTFP), 

making additional funding available to eligible 

depository institutions. The BTFP offers loans 

of up to one year in length to federally insured 

depository institutions (including banks, 

savings associations, and credit unions) and 

to U.S. branches and agencies of foreign banks 

that are eligible for primary credit. New loans 

can be requested under the BTFP until at least 

March 11, 2024. To borrow from the BTFP, eligible 

institutions can pledge any collateral eligible for 

purchase by the Federal Reserve in open-market 

operations, such as U.S. Treasury securities, U.S. 

agency securities, and U.S. agency mortgagebacked securities (MBS) that were owned by the 

borrower as of March 12, 2023. The BTFP extends 

loans against the par value of eligible collateral, 

equal to the face amount of the securities, without 

giving effect to any declines in fair value. With 

approval of the Treasury Secretary, Treasury has 

committed to make available up to $25 billion 

from the Exchange Stabilization Fund as a 

backstop for the BTFP. The Federal Reserve does 

not anticipate that it will be necessary to draw on 

these backstop funds. 

Following the acute banking stresses in early 

March and the announcements on March 12, 

primary credit extended through the discount 

window increased from less than $5 billion to 

more than $150 billion during the first week 

and then quickly fell back to about $70 billion. 

Meanwhile, credit extended through the BTFP 

increased steadily by smaller increments and 

stabilized in a range between $70 billion and 

$80 billion. 

The Federal Reserve is prepared to address 

any liquidity pressures that may arise. It is 

also committed to helping ensure that the U.S. 

banking system continues to perform its vital 

roles of ensuring that depositors’ savings remain 

safe and providing access to credit to households 

Vulnerabilities, Significant Market Developments, and Council Recommendations
58 2023 FSOC // Annual Report

Nevertheless, the failures of three large U.S. 

regional banks demonstrate the risks that banks, 

even those that are not G-SIBs, can pose to financial stability. Federal banking regulators have 

proposed a series of rulemakings and guidance 

to enhance resolution planning and preparedness, particularly for large insured depository 

institutions. This includes three complementary 

proposals:

1. An interagency proposal among the Federal 

Reserve, FDIC, and OCC to require long-term 

debt at certain insured depository institutions 

(IDIs) to serve as a gone-concern resource 

that can provide additional loss protection for 

depositors (including the DIF) and general 

unsecured creditors, among others, in 

resolution.

2. A comprehensive revision and improvement 

to the requirements for IDIs to submit 

resolution plans and information to the FDIC 

for the IDIs’ resolution under the FDI Act.157

3. Further refinements to guidance to large 

foreign and domestic banking groups for the 

development of resolution plans under Title I 

of the Dodd-Frank Act. 

Finally, the FDIC published a comprehensive 

study to address the broader questions about the 

role of deposit insurance to promote financial stability and prevent bank runs, as well as to examine additional policies and tools that may complement changes to deposit insurance coverage.

158

Recommendations

The banking system faces a challenging environment that includes higher interest rates and 

concerns about the economic outlook and credit quality. The Council recommends banking 

supervisors, including credit union supervisors, 

continue to ensure that banks maintain adequate 

capital and liquidity, sound interest rate risk 

management practices, and well-developed operational resilience plans. The Council supports 

the continued use of stress testing in large bank 

holding companies (BHCs) and G-SIBs to assess 

risks, noting that banking agencies and financial 

institutions should ensure that their stress-testing 

methodologies adequately account for plausible 

tail risks, given the current economic environLessons Learned

A common theme in the failures of SVB, Signature 

Bank, and First Republic Bank was poor interest 

rate and liquidity risk management, in the context 

of rapid growth and concentration of risk. However, the failure of these institutions demonstrates 

the need to strengthen supervision and assess 

current regulatory standards. Supervision of these 

firms was not sufficiently forceful and urgent, 

even when supervisors identified critical vulnerabilities that threatened these individual firms. 

The federal banking agencies are also considering numerous regulatory changes, and several 

of those proposed rulemakings are detailed in 

Section 4.2.1: Enhanced Capital and Prudential 

Standards and Supervision.

154

Another lesson from these bank failures is that 

highly concentrated deposits, widespread social 

media use, and easy access to digital banking 

technology enable depositors to instantly spread 

solvency concerns about a bank and make immediate deposit withdrawals, which may have fundamentally increased the speed of bank runs.

A third lesson is that banking agencies did not 

take sufficient steps to adequately monitor uninsured deposits to effectively anticipate the associated risks because, in part, supervisors had very 

little timely comprehensive information on those 

uninsured deposits.

Lastly, based on multiple federal and state internal reviews, a fourth lesson learned is that supervisors need to improve the effectiveness of the 

oversight program along several dimensions.

155

These include shifting the culture of supervision 

toward a greater focus on inherent risk by challenging bankers’ risk judgments with a precautionary perspective.

Enhancing Resolution Preparedness

The regional bank failures in the Spring of 2023 

were successfully resolved without bailouts of 

shareholders or bondholders, using longstanding 

tools under the Federal Deposit Insurance (FDI) 

Act, such as bridge depository institutions. Resolution costs were borne entirely by the banking 

industry and not the taxpayers. In addition, excess 

costs to the Deposit Insurance Fund (DIF) arising 

from the protection of uninsured deposits at both 

SVB and Signature Bank will be recovered by the 

FDIC via a special assessment.156
59

The Council also supports efforts to reexamine 

the existing deposit and share insurance systems 

to promote financial stability while mitigating 

moral hazard and excessive risk taking. In May, 

the FDIC issued a report on the current deposit 

insurance system that includes several options for 

reform of the system, and the Council commends 

the FDIC for its engagement on this critical issue. 

The Council also supports additional work by 

agencies to consider approaches to help ensure 

that appropriate liquidity is available to financial 

institutions when needed. 

The Council recommends that banking agencies 

closely monitor uninsured deposit levels and 

depositor composition and collect additional 

data as necessary. The Council also recommends 

that banking agencies monitor banks’ reliance 

on uninsured deposits or other credit sensitive 

deposits to further enhance resolution planning 

and preparedness capabilities and mitigate future 

stresses in the banking sector.

3.2.2 Investment Funds

Investment funds play a critical intermediary role 

in the U.S. financial system, promoting economic 

growth through efficient capital formation and 

providing vital funding to the U.S. economy. 

While recognizing these benefits, the Council has 

identified certain vulnerabilities related to investment funds, whose assets have increased significantly over the past decade. More specifically, the 

Council has identified potential risks to financial 

stability stemming from the use of leverage by 

certain hedge funds and the liquidity and maturity transformation that money market funds 

(MMFs), open-end mutual funds, and collective 

investment funds engage in. 

Hedge Funds

Hedge funds continue to play a prominent role 

in certain U.S. financial markets. During the 

past five years, the hedge fund industry has 

grown from $7.5 trillion as of the first quarter 

of 2018 to $9.5 trillion as of the first quarter of 

2023.159 Hedge funds’ use of on- and off-balance 

sheet leverage to enhance returns can increase 

systemic risks by potentially magnifying losses 

in a market downturn.160 The effects of such 

loss magnification can contribute to market 

dislocations if a distressed fund liquidates its 

ment. The Council also encourages efforts to 

complete the Basel III reforms to further enhance 

the resilience of the banking system. Because the 

office sector is distressed and valuations of other 

types of CRE appear quite elevated, the Council 

recommends that banking supervisors closely monitor the performance of CRE loans. The 

Council also recommends that banking agencies 

continue monitoring bank exposures to nonbank 

financial institutions (NBFIs), including assessing 

how banks manage their exposure to leverage 

or liquidity mismatch in the nonbank financial 

sector.

The recent bank failures underscore the importance of effective prudential supervision to 

identify risks and ensure that supervised institutions take the steps needed to adequately mitigate 

identified risks in a timely fashion. The Council 

also supports member agencies’ efforts to review 

and strengthen their supervisory processes and 

culture. As described in reports by the Federal 

Reserve, FDIC, OCC, and states, it is important 

for supervisors to evaluate risks rigorously and 

consider a broader range of potential vulnerabilities posed by the activities of the supervised 

institution. The Council supports banking agencies’ efforts to improve the agility of supervision 

to be more responsive to institution-specific risks, 

while also recognizing the benefits associated 

with adjusting the supervisory approach based on 

varying risk profiles across the banking sector. 

The Council supports member agency efforts to 

examine how recent events can inform potential 

modifications to the regulatory framework for 

regional banks. The Council is encouraged by 

member agencies’ review of existing liquidity and 

interest rate management rules and guidance 

for banks. It supports member agencies’ plans to 

review whether capital measures appropriately 

reflect an institution’s ability to absorb losses. 

The Council also supports proposed measures to 

improve resolvability at large, complex, or interconnected banks, such as by requiring long-term 

debt and improved resolution plans. In addition, 

the Council is supportive of regulators’ assessment of incentive compensation requirements for 

bank leadership to ensure they are appropriately 

aligned with risk management obligations at supervised institutions.

Vulnerabilities, Significant Market Developments, and Council Recommendations
60 2023 FSOC // Annual Report

positions in a disorderly manner. Additionally, 

the effects can be transmitted to the fund’s 

counterparties if the distressed fund is unable or 

unwilling to meet margin or collateral calls.

At the aggregate level, hedge fund leverage 

appears modest. As of the first quarter of 2023, the 

median gross notional exposure (GNE) to net 

asset value (NAV) ratio for qualifying hedge funds 

stood at 2.0x, and the median gross asset value 

(GAV) to NAV ratio stood at 1.1x.161 However, the 

amount and type of leverage that funds use varies 

among asset classes and with the underlying 

volatility of the assets. Relative value, global 

macro, and multi-strategy funds typically use 

more leverage than other types of funds. In the 

first quarter of 2023, relative-value strategy funds 

reported an asset weighted average GNE/NAV 

ratio of 23.1x and a GAV/NAV ratio of 5.8x, global 

macro strategy funds reported a GNE/NAV ratio 

of 38.4x and a GAV/NAV ratio of 5.1x, and 

multi-strategy funds reported a GNE/NAV ratio of 

14.1x and a GAV/NAV ratio of 3.6x (see Figures 

3.2.2.1 and 3.2.2.2). In addition, leverage is 

concentrated among a small number of large 

multi-strategy, relative value, and macro hedge 

funds. According to the SEC’s Form PF Statistics 

report, 25 funds accounted for 57 percent of 

Source: SEC Private Fund Statistics Report

0

10

20

30

40

0

10

20

30

40

Macro Relative

Value

Managed 

Futures/

CTA

Multi

Strategy

Inv. In

Other

Fund

Other Credit Equity Event 

Driven

Leverage Leverage As Of: 2023 Q1

3.2.2.1 Hedge Fund Leverage Ratios: GNE/NAV

Source: SEC Private Fund Statistics Report

0

2

4

6

8

0

2

4

6

8

Macro Relative

Value

Managed 

Futures/

CTA

Multi

Strategy

Inv. In

Other

Fund

Other Credit Equity Event 

Driven

Leverage Leverage As Of: 2023 Q1

3.2.2.2 Hedge Fund Leverage Ratios: GAV/NAV
61

hedge fund derivatives value and 51 percent 

of hedge fund borrowing in the first quarter of 

2023 (see Figure 3.2.2.3).

Leveraged funds are highly interconnected with the broader financial system. The 

types of leverage that such funds use include 

secured financing transactions (such as repo 

and securities lending) and derivatives (which 

may be either centrally or bilaterally cleared). 

Hedge funds typically obtain this funding from U.S. and foreign G-SIBs, and fund 

distress can lead to material counterparty 

losses, as was evident in Archegos’s failure162

in March 2021. The aggregate level of hedge 

fund borrowing has increased significantly 

in recent years. As of the first quarter of 2023, 

hedge fund borrowing totaled $3.8 trillion, up 

from $2.6 trillion five years prior. The recent 

growth in borrowing has been driven primarily by repo borrowing, which nearly doubled 

from $780 billion as of as of the first quarter 

of 2018 to $1.4 trillion as of the first quarter of 

2023. Over this same period, prime brokerage borrowing grew from $1.4 trillion to $1.7 

trillion.163

Based on the Treasury market disruptions 

in March 2020, the Council’s Hedge Fund 

Working Group (HFWG) has been examining 

the risks associated with haircutting practices in the non-centrally cleared bilateral repo 

(NCCBR) market. The working group found 

that relative value and other leveraged funds 

commonly obtain Treasury repo funding with 

low or zero haircuts. These favorable funding 

terms allow funds to take large and highly 

leveraged positions in the Treasury market 

that can amplify the effects of exogenous 

macroeconomic and financial shocks and 

provide a channel through which such shocks 

can spill over into other financial entities, 

such as the funds’ counterparties. The effect of 

this channel was evident in what transpired in 

the Treasury market in March 2020 as a result 

of the COVID-19 shock. That shock led to an 

unusually large demand for liquidity by market participants, including, but not limited to, 

leveraged hedge funds. When the COVID-19 

shock disrupted the historical relationship between the prices of Treasury futures contracts 

and the underlying cash bonds, basis-trading 

funds sought to rapidly unwind their positions 

Note: Values represent the aggregate industry concentration of top hedge funds 

sorted by each category.

Source: SEC Private Fund Statistics Report

3.2.2.3 Hedge Fund Industry Concentration

Vulnerabilities, Significant Market Developments, and Council Recommendations
62 2023 FSOC // Annual Report

against the backdrop of the unusually large 

demand for liquidity. 164

Over the same period, qualifying hedge funds’ 

presence in short-term funding markets and 

the U.S. Treasury market have also markedly 

increased as the Treasury cash-futures basis 

trade has become more attractive.

165 That 

trade relies on a long cash Treasury position 

and a short position in the Treasury futures 

contract. Hedge funds have increased their 

net short Treasury futures positions, with the 

notional amount outstanding rising to over 

$700 billion in September 2023 (see Figure 

3.2.2.4).166 The pace and level of the recent 

increase is comparable to that observed from 

April 2018 to March 2020. At the same time, 

repo volumes and primary dealers’ inventories of Treasury securities have risen considerably over the past year, which may indicate 

that dealers are warehousing the increased 

issuance of Treasury securities in the repo 

market and facilitating the Treasury cash-futures basis trade (see Figure 3.2.2.5). Form PF 

data, which are reported with a longer lag, 

show a similar increase in funds’ Treasury 

exposures and repo borrowing. Although 

hedge funds’ contribution to the March 2020 

dysfunction was likely exacerbated by the 

unique infrastructure and operational challenges associated with the rapid shift to 

remote work, a disorderly unwinding of 

leveraged funds’ cash-futures basis positions 

in the current economic environment could 

pose a risk to financial stability if fund liquidations impair market functioning, as they did 

in March 2020.167

The HFWG has also identified gaps in the 

availability of data related to hedge funds, 

and Council member agencies continue to 

make progress in addressing those gaps. In 

August 2022, the SEC and the CFTC proposed 

amendments to Form PF, the primary regulatory data source on the private fund industry. In May 2023, the SEC announced a new 

requirement that certain advisers to hedge 

funds make timely reports of information 

about events that indicate significant distress 

at a fund. This reporting requirement enhances the SEC’s ability to assess possible risks 

emanating from distressed hedge funds in a 

Sources: CFTC, Haver Analytics

Billions of US$

3.2.2.4 Treasury Futures Positioning

-200

0

200

400

600

800

-200

0

200

400

600

800

2013 2015 2017 2019 2021 2023

Billions of US$

Asset managers (net long)

Leveraged funds (net short)

As Of: 26-Sep-2023

3.2.2.4 Treasury Futures Positioning

Notes: Overnight Treasury repo volume includes published volumes for SOFR; Treasury inventory excludes FRNs and TIPs.

Sources: Federal Reserve Bank of New York, Haver Analytics

Billions of US$ As Of: 27-Sep-2023

3.2.2.5 Repo Volumes & Primary Dealer Treasury Inventory

0

100

200

300

400

600

900

1200

1500

1800

2018 2019 2020 2021 2022 2023

Treasury inventory (right axis)

Repo volume (left axis) 

Billions of US$

3.2.2.5 Repo Volumes & Primary Dealer Treasury Inventory
63

timelier fashion. Also, the OFR is continuing 

to develop its NCCBR data collection (see 

Section 3.1.4: Short-Term Funding Markets). These data will shed light on an important source of leverage for hedge fund Treasury 

trades, including the basis trade, and they will 

close an important data gap. The currently 

available data on the tri-party and cleared 

repo market segments do not fully reflect the 

activities of funds engaged in the basis trade.

Finally, the HFWG continues to coordinate 

its work with the Interagency Working Group 

on Treasury Market Surveillance (IAWG) 

and is considering policy options to mitigate 

the identified risks that complement other 

agencies’ proposals, such as the SEC’s centralclearing proposal.

Money Market Funds

MMFs serve as intermediaries between 

investors seeking daily liquidity with limited 

principal volatility and entities with shortterm funding needs. There are three main 

MMF types:

1. Government and Treasury MMFs,

which invest in obligations of the U.S.

government and federal agencies and

repos backed by government securities.

2. Prime MMFs, which primarily invest in

a variety of taxable short-term corporate

and bank debt securities, as well as repos

and asset-backed CP.

3. Tax-exempt MMFs, which primarily

invest in obligations of state and local

governments and pay interest that is

generally exempt from federal income tax

for individual taxpayers.

As of September 30, 2023, U.S. MMF assets 

totaled $6.2 trillion, up 21 percent from a year 

earlier (see Figure 3.2.2.6). As in previous 

monetary policy tightening cycles, investors 

this year have reallocated toward MMFs as 

cash management vehicles because MMFs’ 

yields are more sensitive to changes in policy 

rates compared with bank deposit rates.168

Prime MMFs, which experienced sizable 

inflows in the second half of 2022 and early 

Sources: SEC Form N-MFP, OFR Analysis

3.2.2.6 MMFs Total Net Assets by Fund Type

Vulnerabilities, Significant Market Developments, and Council Recommendations
64 2023 FSOC // Annual Report

2023, experienced modest outflows during the 

March 2023 banking stress as investors 

reallocated toward less credit-sensitive 

products such as Government and Treasury 

MMFs. Flows into prime MMFs have since 

resumed, totaling $297 billion over the 12 

months ended September 30, 2023.169 Prime 

MMF assets, which now stand at $1.3 trillion, 

are at their highest level since 2016. 

The asset composition of MMFs continued 

shifting toward repo in early 2023. MMFs’ 

repo investments peaked at $3.4 trillion, or 58 

percent of total assets in May 2023, before 

falling to approximately $2.9 trillion, or 48 

percent of assets, as of September 30, 2023 

(see Figure 3.2.2.7). MMF investment in the 

Federal Reserve’s overnight reverse repo 

facility (ON RRP) peaked at over $2.3 trillion 

at year-end 2022 and has since declined to 

approximately $1.5 trillion, or 24 percent of 

assets, as of September 30, 2023.170 At the 

same time, MMFs have started extending the 

weighted average maturity (WAM) of their 

portfolios from historically low levels. Nevertheless, WAMs remain well below their 

2020–21 highs (see Figure 3.2.2.8). 

MMFs provide liquidity to investors by offering redemptions on demand. As discussed 

in Section 3.1.4: Short-Term Funding Markets, the liquidity mismatch in certain funds 

can incentivize investors to be the first to 

redeem during periods of market stress. This 

first-mover advantage can lead to runs on 

certain MMFs and dislocations in short-term 

funding markets, as was evident at the onset 

of the COVID-19 pandemic. In August 2023,

the SEC issued amendments to certain rules 

that govern MMFs under the Investment 

Company Act that are designed to reduce the 

risk of investor runs on MMFs during periods 

of market stress (see Section 4.3.4: Securities 

and Asset Management). 

Open-End Funds: Mutual Funds and Exchange-Traded Funds

Open-end funds allow daily redemptions; 

however, some types of open-end funds 

may invest in assets that may not be easily 

liquidated, resulting in a potential structural 

liquidity mismatch. In times of market 

Sources: SEC Form N-MFP, OFR Analysis

0

20

40

60

80

100

0

20

40

60

80

100

2013 2015 2017 2019 2021 2023

Percent As Of: Sep-2023 Percent

Other repo

Government & Agency repo Other non-repo investments

Treasury repo

3.2.2.7 MMFs Asset Composition

Sources: SEC Form N-MFP, OFR Analysis

0

10

20

30

40

50

60

0

10

20

30

40

50

60

2018 2019 2020 2021 2022 2023

Days As Of: Sep-2023 Days

Treasury

Government

Prime retail

Prime institutional

3.2.2.8 MMF Weighted Average Maturity
65

stress, this mismatch can contribute to and 

amplify stress in the U.S. financial system. 

In these periods, open-end-fund investors 

may have an incentive to redeem quickly to 

avoid further losses, to obtain cash in times 

of uncertainty, or to obtain a potential firstmover advantage by avoiding anticipated 

trading costs and dilution associated with 

other investors’ redemptions. Significant 

investor outflows could lead to an increased 

volume of underlying asset sales, which 

in turn could stress asset values and lead 

to large price declines, possibly leading to 

further redemptions and additional asset 

sales. During periods of market stress, this 

liquidity spiral could amplify price declines, 

lead to significant investment losses for other 

investors, and potentially impair market 

functioning. 

Mutual funds continue to be prominent 

investors in equity and fixed-income markets, 

with assets under management (AUM) 

totaling $18.1 trillion as of September 2023 

(see Figure 3.2.2.9). Although U.S. mutual 

funds have seen investor outflows of approximately $784 billion for the twelve months 

ended September 30, these funds remain 

important investors in the U.S. markets. 

Equity mutual funds continued to record 

sizable outflows in late 2022 and 2023 (totaling $545 billion for the twelve months ended 

September 30, 2023), while bond mutual 

funds saw outflows of $122 billion and hybrid 

funds saw outflows of $117 billion over the 

same period (see Figure 3.2.2.10). Bank loan 

funds, which hold assets that often take longer 

to settle asset sales than the redemption 

period offered, experienced steady outflows 

totaling $28 billion (or 29 percent of net 

assets) during the 12 months ended September 30, 2023.171

Exchange-traded funds (ETFs) have continued to rise in popularity in 2023, and ETF 

AUM totaled $7.1 trillion as of September 

2023, compared with $3.7 trillion in September 2018 and only $1.5 trillion in September 

2013 (see Figure 3.2.2.11). The growth of the 

ETF industry has been supported by both 

capital appreciation and investor inflows, and 

inflows into ETFs totaled $524 billion for the 

twelve months ended September 30 (see 

Sources: ICI, Haver Analytics

3.2.2.9 Mutual Fund AUM

Note: Net fund flows.

Sources: ICI, Haver Analytics

3.2.2.10 Monthly Mutual Fund Flows

Sources: ICI, Haver Analytics

3.2.2.11 ETF AUM

Vulnerabilities, Significant Market Developments, and Council Recommendations
66 2023 FSOC // Annual Report

Figure 3.2.2.12). Investors continued to 

reallocate assets away from actively managed 

mutual funds toward passively managed 

ETFs, which often have lower management 

fees compared with mutual funds and provide 

intraday liquidity for a wide range of investors. 

This trend is particularly well pronounced in 

the equity fund sector, and aggregate equity 

ETF inflows totaled $330 billion for the twelve 

months ended September 30, 2023. Bond 

ETFs also recorded sizable inflows of $207 

billion through September 30, 2023.

To enhance open-end fund resilience in 

periods of market stress, in November 

2022, the SEC proposed amendments to 

better prepare open-end funds for stressed 

conditions and to mitigate the dilution of 

shareholders’ interests. The rule and form 

amendments would enhance how funds 

manage their liquidity risks, and would 

also require mutual funds to implement 

more consistent liquidity measurement 

and management practices and provide 

more timely and detailed reporting of fund 

information. The proposed amendments 

are designed to make mutual fund liquidity 

management practices more attuned to 

severe market stress events, address perceived 

“liquidity mismatch” in mutual funds, and 

reduce the potential “dilutive” effect on 

nontransacting shareholders when mutual 

funds purchase and sell portfolio holdings in 

response to shareholder inflows and outflows. 

The proposed rules, if adopted as proposed, 

would limit fund manager discretion in 

liquidity classifications; potentially modify the 

investment liquidity classification, likely with 

fewer investments classified as highly liquid 

and more classified as illiquid; and potentially 

make it more difficult for fund sponsors to 

offer certain investment strategies in openend fund structures that offer daily liquidity to 

shareholders.

Collective Investment Funds

Collective investment funds (CIFs) are bankand trust-administered funds that hold 

pooled assets of bank fiduciary accounts. CIFs 

typically are limited to common trust funds 

for personal trusts and collective investment 

trusts offered to tax-qualified retirement 

Note: Net fund flows

Sources: ICI, Haver Analytics

-100

-50

0

50

100

150

200

-100

-50

0

50

100

150

200

2017 2018 2019 2020 2021 2022 2023

Fixed income

Hybrid

Billions of US$ As Of: Sep-2023 Billions of US$

Equity

Commodities

3.2.2.12 Monthly ETF Fund Flows
67

plans.172 In addition, some CIFs are short-term 

investment funds (STIFs), which, like many 

MMFs, invest in high-quality, short-term debt 

instruments and seek to maintain a stable 

NAV. While there are limited data on the size 

of the entire CIF industry, estimates (based on 

a limited subset of sponsors that file FDIC call 

reports) put it at more than $4 trillion as of 

year-end 2022 (see Figure 3.2.2.13).173

CIFs are pooled investment vehicles that are 

managed collectively in accordance with a 

common investment strategy. To the extent 

that CIFs are managed in accordance with 

investment strategies similar to those used 

to manage open-end funds, they may have 

liquidity, leverage, and investment risks that 

are similar to those of open-end funds and 

may also present similar financial stability 

risks. The Council has previously recognized 

that open-end funds can create risks to 

financial stability. For example, in 2022, the 

Council’s Open-end Fund Working Group 

presented findings that open-end funds were 

significant contributors to the financial system 

disruptions experienced in March 2020. 

CIF AUM has grown in recent years, 

largely as investment options in qualified 

retirement plans, especially 401(k)s and other 

participant-directed plans, have expanded. 

The funds may be growing in part due to 

their different cost structure, which is based 

on their different regulatory requirements.174

For example, compared to open-end funds, 

CIFs face fewer restrictions on illiquid assets 

and the use of leverage and have more 

limited requirements to make disclosures 

to their investors. Potential new open-end 

fund regulations, including the open-end 

minimum-liquidity requirements discussed 

above, could increase the difference in 

regulatory cost and structure between CIFs 

and open-end funds.

Pension Funds

Defined benefit (DB) pension plans promise 

a regular retirement income based on factors 

such as age, tenure, and final salary. To fund 

these promises, plan sponsors invest in and 

set aside financial assets such as fixed income, 

equity, and alternative investments, including 

Note: Limited to funds managed by institutions reporting CIF and CIT assets on Call 

Report Form RC-T.

Source: FFIEC Call Report

3.2.2.13 Collective Investment Funds AUM: by Sector

Vulnerabilities, Significant Market Developments, and Council Recommendations
68 2023 FSOC // Annual Report

Recommendations

The Council supports the initiatives by the SEC 

and other agencies to address risks in hedge 

funds, including data collection improvements 

for Form PF. The Council also supports the 

ongoing work of the relevant banking supervisors 

to improve banks’ counterparty credit risk 

management practices with respect to hedge 

funds. The Council will continue to review the 

findings of the HFWG as they are developed. 

The Council recommends that the SEC and 

other relevant regulators consider whether 

additional steps should be taken to address these 

vulnerabilities.

The Council supports the SEC’s continued 

engagement regarding potential reforms of openend funds, including the liquidity framework 

enhancements proposed in late 2022 that govern 

open-end fund liquidity risk management, swing 

pricing, and fund reporting. The Council looks 

forward to reforms that robustly address the 

financial stability risks from SEC-registered openend funds. 

In July 2023, the SEC finalized reforms for MMFs 

that increase the minimum liquidity requirements 

for these funds, prohibit the use of temporary 

redemption gates, and institute a mandatory 

liquidity fee framework for institutional nongovernmental MMFs. The Council supports 

the SEC’s efforts to improve the resilience and 

transparency of MMFs and strengthen shortterm funding markets. The Council will continue 

to monitor initiatives relating to MMF reforms. 

These reforms will be considered in the broader 

context of regulatory efforts to strengthen shortterm funding markets and support orderly market 

functioning. 

The Council recommends that both state and 

federal regulators consider requirements 

for greater transparency and more detailed 

and timely regulatory reporting by CIFs that 

would enable both banks and regulators to 

better understand market trends and monitor 

for potential risks. Additionally, the Council 

encourages state and federal regulators to 

consider whether any reforms in the CIF market 

would be appropriate to mitigate these risks, 

particularly given the proposed changes to openend funds. 

hedge funds, private equity (PE), real assets, 

and private credit. When plan assets exceed the 

present value of future liabilities, a plan is said to 

be fully funded.

DB plans continue playing an important but 

declining role in the U.S. retirement system. DB 

plan assets totaled $11.3 trillion in the second 

quarter of 2023, amounting to 42 percent of total 

retirement assets.175 Only 21 percent of DB assets 

are in private-sector DB plans, with the remainder 

in state, local, and federal DB plans.176

Interest rate changes affect the present value 

of pension assets and liabilities by influencing 

the discount rate used to value pension plans’ 

long-term liabilities. Recent interest rate rises 

have substantially lowered the present value of 

these promised benefits. Private and public plans 

use differing discounting methodologies, with 

private plans using lower and more conservative 

discount rates. 

Private and public plans also differ in their 

investment allocations. State and local DB 

pension funds tend to have more aggressive 

investment allocations, often with a significant 

exposure to alternative investments including PE 

and private credit. Private DB plans tend to invest 

more conservatively with a heavier allocation to 

debt securities.

Debt investments are especially attractive to 

private plan sponsors considering eventually 

terminating the plan or entering into a pension 

risk transfer (PRT) transaction with an insurer. 

In a PRT transaction, the insurer assumes the 

plan’s pension payment obligations in exchange 

for a fixed one-time payment. By doing this, the 

pension plan also transfers to the insurer plan 

risks such as market value fluctuations, interest 

rate risk, and longevity risk. This also permits the 

plan to lessen or eliminate premium payments 

to the Pension Benefit Guaranty Corporation. 

PRTs have become increasingly attractive to 

pension plans in recent years, and PRT sales 

hit a record high of $16.2 billion in the second 

quarter of 2023.177 PRT assets, which totaled $258 

billion as of the second quarter of 2023, represent 

approximately 2 percent of total retirement fund 

assets.

178
69

•	 providing independent and standardized 

valuation of open positions and collateral on 

deposit, 

•	 monitoring the creditworthiness of the 

clearing member firms, and

•	 establishing a mutualized default fund that 

can be used to cover losses that exceed a 

defaulting member’s collateral on deposit. 

An integral aspect of a CCP’s risk management 

framework involves collecting initial margin and 

default fund contributions from members and 

monitoring the ongoing creditworthiness of its 

clearing members. These measures are in place 

to safeguard the CCP, should a clearing member 

lack the ability to satisfy its clearing obligations 

and thus be declared in default. It is customary for 

CCPs to adapt their initial margin requirements 

in accordance with shifts in market dynamics. 

For instance, heightened price volatility might 

prompt a CCP to raise initial margin requirements. Other significant elements within a CCP’s 

risk management strategy are the mark-to-market 

of all cleared positions and the exchange of variation margin, which takes place at least daily. This 

margin counterbalances alterations in existing 

exposures that stem from and account for fluctuations in market prices.

In cases when a clearing member defaults, CCPs 

implement their predefined default procedures, 

which often involve liquidating the defaulting 

member’s positions and using the member’s 

posted collateral to offset any losses that might 

be incurred from the liquidation. If losses from a 

clearing member’s default surpass the defaulter’s 

available resources, the CCP can turn to its mutualized default fund to cover those losses and then 

levy special assessments on its clearing members 

if default fund resources are exhausted. However, 

the use of some of these tools in the case of a systemic stress event may have knock-on effects and 

potentially material adverse impacts on financial 

stability.

U.S. CCPs 

In the United States, the Fixed Income Clearing 

Corporation (FICC)179 and the National Securities 

Clearing Corporation (NSCC), which are subsidiaries of the Depository Trust & Clearing Corporation (DTCC), are the providers of clearing services 

The Council encourages pension regulators and 

the Financial Accounting Standards Board (FASB) 

to improve the quality, timeliness, and depth 

of pension financial statements and portfolio 

holdings disclosures.

3.2.3 Central Counterparties

Following the 2007–09 financial crisis, there has 

been a notable increase in the use of central 

counterparties (CCPs). This positions CCPs as 

pivotal entities within the global financial framework. Central clearing involves the engagement 

of parties in a financial agreement, which leads to 

the creation of two corresponding contracts with 

the CCP, wherein the CCP acts as the buyer to the 

seller and the seller to the buyer. These contracts 

effectively offset each other, with the CCP assuming responsibility for overseeing the fulfillment of 

outstanding agreements. While central clearing 

serves as a safeguard against potential defaults 

among counterparties that might jeopardize 

financial stability, it also concentrates risk.

Consequently, despite the substantial advantages CCPs offer in terms of market efficiency and 

standardization of contracts, CCPs also introduce 

prospective hazards into the financial system. The 

inability of a CCP to meet its obligations stemming from either the default of one or more clearing members or losses due to operational failures 

has the potential to strain both the remaining CCP 

members and, on a broader scale, the entire U.S. 

financial system. The magnitude of strain exerted 

on the financial system hinges on various factors, including the size of the CCP, the resources 

available to the CCP to cover obligations, and the 

CCP’s level of interdependence with other financial institutions.

In the event of a member default, CCP risk management frameworks are structured to utilize a 

variety of resources to cover the defaulting member’s liabilities. A CCP reduces settlement risks by 

netting offsetting transactions between multiple 

counterparties, and it reduces financial risk by: 

•	 requiring initial margin deposits and the 

exchange of variation margin deposits among 

clearing members,

Vulnerabilities, Significant Market Developments, and Council Recommendations
70 2023 FSOC // Annual Report

for cash securities. Required contributions to 

the FICC’s Mortgage-Backed Securities 

Division (MBSD) and NSCC’s clearing funds, 

which spiked at the onset of the COVID-19 

pandemic, remained elevated through the 

second quarter of 2023 relative to pre-pandemic levels, though both have come down 

from prior highs. Notably, required contributions to the FICC’s Government Securities 

Division (GSD) have increased since the 

second quarter of 2022 as Treasury yields 

have risen, and Federal Reserve monetary 

policy has increased rates. As of June 30, 2023, 

clearing fund requirements across DTCC’s 

three clearing services totaled $57.9 billion, 

up $17.7 billion from June 30, 2022 (see 

Figure 3.2.3.1).

Most U.S. exchange-traded derivatives are 

cleared through the Chicago Mercantile 

Exchange (CME), ICE Clear U.S., and the 

Options Clearing Corporation. CME provides 

clearing services for swaps, futures, and 

options on futures; ICE Clear U.S. provides 

clearing services for futures and options on 

futures; and the Options Clearing Corporation 

mainly provides clearing services for exchange-traded equity options transactions. 

The initial margin posted against exchange-traded remains elevated relative to 

pre-pandemic levels, with the margin at 

Options Clearing Corporation, CME, and ICE 

Clear U.S. totaling $287 billion, though it is 

down $7.4 billion from June 30, 2022 (see 

Figure 3.2.3.2). 

Sources: PFMI Quantitative Disclosures, Clarus Financial Technology

0

10

20

30

40

50

60

0

10

20

30

40

50

60

2016 2017 2018 2019 2020 2021 2022 2023

Billions of US$ Billions of US$

FICC: MBSD

NSCC

FICC: GSD

As Of: 2023 Q2

3.2.3.1 DTCC Clearing Fund Requirements

Notes: Initial margin required as reported in quantitative disclosures; includes house 

and client accounts.

Sources: PFMI Quantitative Disclosures, Clarus Financial Technology

0

100

200

300

400

0

100

200

300

400

2016 2017 2018 2019 2020 2021 2022 2023

Billions of US$ Billions of US$

ICE Clear US

Options Clearing Corp.

CME

As Of: 2023 Q2

3.2.3.2 Initial Margin: U.S. Exchange-Traded Derivatives
71

Within the cleared-swaps markets, most U.S. 

dollar interest rate swaps (IRS) are cleared 

through London-based LCH Ltd. or CME, 

while most credit default swaps (CDS) are 

cleared through ICE Clear Credit or Paris-based LCH SA. The required initial margin 

for IRS and CDS totaled $325 billion as of June 

30, 2023, up $25 billion from the prior year 

(see Figure 3.2.3.3). Most of the increase is 

attributable to increased interest rate volatility 

as central banks increased target rates. This 

can be observed through increased initial 

margin account breach likelihoods seen at IRS 

CCPs, where the variation margin payment in 

a day is greater than the initial margin held 

against the account, which is indicative of a 

possible need to increase the margin held 

against the account (see Figure 3.2.3.4).

CCP-Related Market Events 

Bank estimates of CCP default probability, as 

reported in the Federal Reserve’s Comprehensive Capital Analysis and Review (CCAR), provide indicators of the adequacy of CCP stress 

management.180 These estimates, which are 

uncertain, spiked at the onset of the pandemic before declining through mid-2021. However, the default estimates have again been 

on the rise for a variety of CCPs, including 

those with significant exposure to commodity 

markets.

The recent rise in risk perceptions may be, in 

part, a response to the serious stresses that occurred on the London Metal Exchange (LME), 

which is a CCP not registered in the United 

States. On March 8, 2022, the LME suspended 

trading in the nickel market following unprecedented price increases in the 3-month nickel 

contract. LME did this because there were 

serious concerns about market participants’ 

ability to meet margin calls, raising the significant risk of multiple defaults.181

This incident highlighted several risk factors 

that apply to CCPs more generally. Operating 

business as usual can have pro-cyclical 

effects, both through elevated margin calls 

and forced asset sales. There can also be 

hidden concentration risk: members can split 

their positions among multiple CCPs and 

may also have entered into uncleared OTC 

bilateral contracts, which limits the ability of 

Notes: Initial margin required as reported in quantitative disclosures; includes house 

and client accounts. Interest rate swaps margin includes LCH Ltd. and CME. CDS 

margin includes CME, ICC, ICEU, and LCH SA. CME and ICEU ceased clearing CDS in 

March 2018 and October 2023, respectively.

Sources: PFMI Quantitative Disclosures, Clarus Financial Technology

3.2.3.3 Initial Margin: Centrally Cleared OTC Derivatives

Notes: Eurex is a Germany-based derivatives clearing organization registered with the 

CFTC. JSCC is a Japan-based clearinghouse exempt from registration with the CFTC 

as a derivatives clearing organization.

Sources: PFMI Quantitative Disclosures, Clarus Financial Technology

3.2.3.4 Initial Margin Account Daily Breach Likelihood at IRS 

Central Counterparties

Vulnerabilities, Significant Market Developments, and Council Recommendations
72 2023 FSOC // Annual Report

It is particularly important for regulators to have 

a more complete picture of clearing members’ 

exposures among different CCPs, to help the regulators assess concentration risks. Additionally, 

the existence of cross-default agreements among 

market participants creates potential spillover 

effects in which a member’s default at one CCP 

can lead to it being declared in default at multiple 

CCPs. The magnitude of these spillover effects 

can, in certain cases, only be assessed by substantial cooperation and sharing of information 

among different jurisdictions. 

Recommendations 

CCPs can reduce the risk that bilateral defaults 

may impact the stability of the financial system. 

Given the interconnected and international nature of financial markets, CCP oversight requires 

coordination among national agencies, international counterparts and standards-setting bodies. 

The Council supports the CFTC, Federal Reserve, 

and SEC’s continued efforts to enhance their 

oversight over CCPs designated by the Council 

as systemically important FMUs. It is important 

for the relevant agencies to consistently assess 

whether the current CCP standards effectively 

mitigate threats to financial stability arising from 

both default and nondefault losses. For each 

contract that is cleared, CCPs replace bilateral risk 

between market participants with a direct exposure between each of those participants and the 

CCP, and that exposure is collateralized by requiring those market participants to provide cash and 

other eligible collateral. Consequently, CCPs mitigate credit risk in the financial system but create 

liquidity risk, with potentially pro-cyclical effects. 

Regulatory bodies overseeing clearing members 

should continue evaluating the liquidity risk 

management practices and capabilities of these 

firms. It is crucial for supervisory agencies to work 

alongside and strengthen information-sharing 

agreements with the FDIC to facilitate resolution 

planning and improve resolvability for CCPs.

The Council supports continued monitoring and 

assessment of interconnections among CCPs, 

their clearing members, and other financial 

institutions. CCPs need to be fully capable of 

managing risks stemming from abrupt volatility, 

and participants should be prepared to meet their 

liquidity needs for handling higher margin calls 

during stressful periods. Additionally, cross-dea given CCP to fully assess the concentration risk 

posed by its members. A related issue is that CCP 

members often have cross-default agreements 

with other CCPs, which specify that a default at 

one of them triggers a default at all of them. These 

arrangements can contribute to systemic risk by 

exacerbating price moves when the positions of a 

defaulting member have to be liquidated.

CCP Resolution 

While historical instances of CCP failures have 

been infrequent, the possibility of future CCP 

failure demands thorough resolution planning 

and readiness to ensure the continuous operation 

of essential functions and the preservation of U.S. 

financial stability. Consequently, the Council has 

designated five CCPs, CME, FICC, NSCC, ICE 

Clear Credit, and Options Clearing Corporation,

as systemically important financial market utilities (FMUs), due to their potential to jeopardize 

financial stability if they were to fail or experience 

disruptions in their functioning. These systemically important CCPs have taken measures, 

overseen by regulators, to bolster their preparedness to manage extreme-stress scenarios, such 

as engaging in recovery and orderly wind-down 

planning. The failure of these plans, if activated, 

could create serious financial stability concerns 

for the United States.

Additionally, 13 CCPs from 10 different jurisdictions, including 3 from the U.S - CME, ICE Clear 

Credit, and Options Clearing Corporation - are 

considered to be systemically important CCPs 

in more than one jurisdiction (SI>1 CCPs). Regulators have taken steps for these SI>1 CCPs to 

enhance their preparedness for a potential resolution event, such as setting up crisis management 

groups with cooperation agreements to support 

resolution planning and resolvability assessments. Regulators continue to consider the need 

for dedicated resources and tools for CCP resolution and have contributed to a Financial Stability 

Board (FSB) consultation report on the topic. 

Additionally, the SEC and CFTC have proposed 

revisions to their recovery and wind-down plan 

rules that would require additional information to 

aid the FDIC in resolution planning and improve 

resolvability for these institutions. These measures and further engagement between regulators 

on information sharing could enhance readiness 

for a potential CCP resolution event.
73

valuations of fixed-income securities. In addition 

to declining equity valuations, the P&C sector 

was adversely affected by increased loss severity 

from claims inflation, natural and climate-related 

catastrophes, and higher reinsurance costs. The 

P&C sector’s loss ratio stood at a 10-year high for 

2022 and has continued to deteriorate into 2023. 

The first half of 2023 saw continued downward 

pressure on the L&H sector’s capital and surplus 

from asset valuation issues, while the P&C sector’s 

surplus recovered somewhat as unrealized losses 

abated; nonetheless, the industry’s combined 

capital and surplus remained below the year-end 

2021 level. 

Despite the challenges presented over the last two 

years, the two sectors continued to maintain the 

financial strength to support their policyholder 

and financial commitments. However, recent solvency and liquidity issues at other financial institutions have heightened focus on insurers’ liquidity risk management, asset/liability management, 

and capital management, particularly in the L&H 

sector. The many structural changes occurring 

in the L&H sector, including the involvement of 

large asset management companies and private 

equity (PE) firms, evolving investment strategies, 

reliance on nontraditional funding sources, and 

life insurers’ increasing use of offshore reinsurance, warrant increased supervisory focus.

Interest Rate Implications 

Book of Business

Rising interest rates have different implications 

for new business versus in-force business. For 

in-force business with guaranteed rates, a rapidly 

rising yield environment means portfolio yields 

supporting the in-force business will lag behind 

new business that can be offered at current higher 

yields. If the difference between in-force yield 

and new-business yield is sufficient to overcome 

barriers such as contractual provisions, market 

value adjustments, surrender fees, and tax implications, then some lines of businesses at life 

insurers may see customer attrition and increased 

policy surrenders due to preferential yields on 

noninsurance or new-money products offered by 

competitors. In the life insurance market, such 

a trend in consumer behavior is termed a lapse. 

These dynamics are similar to those experienced 

by banks in a rising-interest-rate environment, 

except that most insurance products have confault agreements create a potential for the default 

of one CCP’s member to spill over into other 

CCPs, including those in other jurisdictions and 

time zones. Therefore, it is important to encourage greater transparency of clearing members’ 

clearing obligations across CCPs.

Council member agencies should continue to 

collaborate with international counterparts and 

standards-setting bodies to identify and address 

any areas of concern, including potential threats 

or risks to financial stability that could be related 

to or mitigated through CCPs. The Council supports ongoing engagement with foreign regulators 

to address the potential inconsistencies in regulatory requirements or supervision that might 

negatively impact U.S. financial stability. This collaborative approach should extend to overseeing 

and regulating systemically important CCPs and 

determining appropriate resources for resilience, 

recovery and resolution for such institutions. Coordination in designing and executing supervisory stress tests for these entities should also remain 

a priority.

3.2.4 Insurance Sector

The U.S. is the world’s largest single-country insurance market, with a 44 percent share of global 

direct insurance premiums written as of year-end 

2022.

182 The U.S. insurance industry has shown 

positive year-over-year growth in direct premiums written since 2013. Following a 10 percent 

increase in 2022, net premiums, annuity considerations, and deposits for the life and health 

(L&H) sector increased by 11 percent during the 

first half of 2023. Similarly, property and casualty 

(P&C) sector direct premiums written increased 

9 percent in 2022, followed by a 10 percent gain 

over the first half of 2023. Inflationary pressures, 

combined with market volatility and monetary 

tightening, affected the financial performance of 

the L&H and P&C sectors in 2022 and continued 

to do so through the first half of 2023. In 2022, the 

L&H and P&C sectors combined experienced a 

contraction in surplus for the first time since 2008, 

largely driven by unrealized capital losses on 

equity securities and other investments that are 

marked-to-market in statutory accounting.183 With 

the L&H sector’s investments composed of longer-duration assets to support long-tailed liabilities, the rapid rise in rates in 2022 led to decreased 

Vulnerabilities, Significant Market Developments, and Council Recommendations
74 2023 FSOC // Annual Report

tractual provisions that reduce the likelihood of 

large systemic lapses. At the present time, there 

is a larger-than-average volume of writers of fixed 

annuities whose policies are no longer in the surrender charge period and could be most at risk of 

policyholder fund withdrawals. Conversely, new 

sales of interest-sensitive products are increasing, 

which could offset liquidity issues with new premiums coming into the business. These dynamics 

of in-force versus new business are being closely 

monitored in light of sudden changes in the rate 

environment in the life insurance industry. 

Investments

Rising interest rates have numerous potential 

impacts on insurers’ investment portfolios. While 

the interest rate environment affects both P&C 

and L&H insurers, the L&H insurance sector is 

more sensitive to interest rate risk than the P&C 

sector, due to its longer-term bond holdings 

and the long-tailed nature of its liabilities, some 

of which also carry guaranteed returns. On the 

asset side, the pace of interest rate increases after 

March 2022 resulted in significant realized and 

unrealized losses in the fixed-income portfolios 

of a majority of U.S. insurers by the end of 2022, 

with some larger life insurers exhibiting negative 

interest rate maintenance reserves (IMR) as a 

result of the effects of realized losses from rising 

rates. However, the general ability of insurers to 

hold fixed-income investments to maturity may 

allow them to avoid some degree of realized 

losses on investments. Also, statutory accounting 

generally does not penalize unrealized losses on 

most fixed-income securities or negatively affect 

insurers’ statutory capital position.184

Similarly, a higher-interest-rate environment 

evokes concerns over exposures to rate-sensitive 

investments and credit risk. The changes in the 

macroeconomic environment, including rising 

interest rates, higher-than-average inflation, and 

consumer trends such as more work-from-home 

policies, have led to lower occupancy rates that 

have significantly slowed the commercial real 

estate (CRE) transaction market. L&H insurers 

have meaningful exposure to CRE via mortgage 

loans, mortgage-backed securities (MBS), and 

direct equity investments. The risks of CRE 

exposures are mitigated by a greater weight 

toward higher-quality CRE mortgages and securities, a lower overall CRE weight in investment 
75

portfolios, and repositioning toward segments 

such as industrial and multifamily from office 

and retail. Maturity walls looming185 amid 

rising-rate environments, with a need for 

close monitoring of implications due to 

refinancing risks, are an area of concern for 

this sector. Although the majority of life 

insurers’ commercial mortgages remain in 

good standing, unrealized losses and impairments are on the rise.186 Insurance exposures 

are also well diversified among property types 

and geographies (see Figure 3.2.4.1).

187

Although as of year-end 2022, life insurers’ 

share of uninsured commercial mortgages 

held in office was approximately 22 percent, 

the insurers have reduced their exposures to 

offices and retail relative to total year-end 

2022 holdings.188

In the corporate bond markets, trends continue to indicate a rise in investment holdings of 

public BBB-rated corporate bonds in life 

insurer portfolios, relative to the pre-pandemic period (See Figure 3.2.4.2). In contrast to 

public corporate bond exposures, trends in 

private corporate bond markets indicate life 

insurers may have rotated some allocations 

into higher-quality private corporate credits 

in 2022, relative to 2021. Nevertheless, in a 

period of a rapid rise in interest rates together 

with headline inflationary risks and late-credit-cycle economics, such trends in allocations 

to lower-quality public credits may expose 

some of these portfolios to elevated risks of 

credit migration and default.

The landscape of L&H sector investment 

portfolios has been changing for a number 

of years. Because insurers are shifting away 

from traditional investments toward alternative and other nontraditional investments to 

enhance yields, their investment portfolios reflect increased allocations to relatively illiquid 

investments such as bank loans, private-label 

securities, and other structured securities like 

collateralized loan obligations (CLOs) and 

other asset-backed securities. Additionally, 

allocations to affiliated investments have been 

growing. With the exception of 2018, the L&H 

sector has expanded its holdings of affiliated 

cash and investments each year over the last 

10 years. Due to the more illiquid nature of 

affiliated holdings, significant growth in them 

Source: S&P Capital IQ

3.2.4.1 Insurance Sector CRE Exposure by Property Type

Source: S&P Capital IQ

3.2.4.2 L&H Insurance Sector BBB-Rated Bond Exposure

Vulnerabilities, Significant Market Developments, and Council Recommendations
76 2023 FSOC // Annual Report

may have the potential to adversely affect an 

insurer’s liquidity and capital base.

Asset Management Involvement, Including 

Private Equity

The influence of PE firms and other 

alternative asset managers in the L&H 

insurance sector continues to grow. Today, 

the PE-owned L&H insurance market 

encompasses some of the largest providers 

of fixed annuities and pension risk transfers 

in the sector. A substantial amount of assets 

is also held by PE-owned or PE-affiliated 

offshore life reinsurance entities that mostly 

reinsure U.S. business. PE-owned reinsurers 

are significant sources of reinsurance for 

U.S.-domiciled affiliates and unaffiliated U.S.

insurers.

Private Debt

The past decade’s ultra-low-interest-rate 

environment led to the emergence of private 

debt as a new frontier for institutional credit 

investors in search of yield and as the next 

strategic growth area for many PE firms (See 

Figure 3.2.4.3). Private debt offers investors 

the potential for excess spread return, generated by exposure to increased liquidity and 

complexity risk. For PE credit businesses, an 

L&H insurance entity can play an important 

role in establishing and growing such businesses’ private debt ecosystems while also 

providing exposure to underlying demographic trends in the retail channel. As large 

institutional investors, L&H insurers’ typical 

cash flow patterns enable PE private debt 

managers to scale quickly. The PE-owned or 

PE-managed L&H insurance vehicle can also 

be a significant source of fee-related earnings. 

If done using a balanced and measured approach, with appropriate regulatory oversight 

and insurer risk management, these investment activities could help to diversify insurer 

portfolios, provide better yields, and reduce 

the duration mismatch in insurer balance 

sheets. Those outcomes could support insurer resilience and the long-term interests 

of annuitants and policyholders. However, 

a greater and still increasing concentration 

of such assets on the books of insurers also 

elevates liquidity and complexity risks and 

Source: S&P Capital IQ

0.0

0.4

0.8

1.2

1.6

20

25

30

35

40

45

50

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Percent As Of: 2022 Billions of US$

Private bonds (right axis)

Private bonds / total bonds (left axis)

3.2.4.3 L&H Insurance Sector Private Credit Exposure
77

and state regulators are addressing a variety of 

concerns related to the increasing number of U.S. 

insurance companies that are owned by PE firms. 

The NAIC has adopted 13 primary regulatory considerations applicable to PE-owned insurers.

190

Though not exclusive to PE-owned insurers, the 

list of 13 considerations intends to examine the 

evaluation of affiliate investment arrangements, 

including the use of offshore reinsurers and sidecar vehicles.191 Moreover, the influence of PE firms 

is extending to the behaviors of traditional insurers that are acting in similar fashion to keep pace 

by establishing offshore captive reinsurers, buying 

private credit providers, and moving into illiquid 

or more complex assets in search of yield.

The NAIC Macroprudential Initiative

In view of the current macroeconomic backdrop 

and the foregoing discussion of recent developments in the insurance sector, it is important to 

assess and monitor the progress the NAIC has 

made on its Macroprudential Initiative (MPI), 

which was developed in 2017. In particular, there 

are five key areas being implemented by the 

NAIC and the states: (1) liquidity risk, (2) capital 

stress testing, (3) recovery and resolution, (4) 

counterparty exposure and concentration, and 

(5) a catch-all or “Other” category.192 The current

environment demonstrates the need for the states

to constantly evaluate the adequacy and effectiveness of their tools and their preparedness to

identify and address potential events and circumstances that may cause or expand financial stress.

For example, the ongoing transformation in the

L&H sector is presenting new regulatory challenges as insurers divest subsidiaries or legacy blocks

of businesses through sales or reinsurance risk

transfer transactions to new entrants, such as PE

firms, that utilize business models that differ from

traditional ones in the insurance space. Another

area of focus is on increased investment allocations by insurers to complex structured securities,

such as CLOs, and assessing whether regulators

have the proper tools, as well as a supervisory and

capital framework, in place to effectively protect

policyholders from insurers’ investment risk.

Property & Casualty (P&C) Insurance

See Section 3.1.2: Residential Real Estate, Property Insurance Developments for a discussion of 

how changes in P&C insurance market coverage 

raises questions about the quality of assets that 

are increasingly composing surplus and backing 

policyholder obligations. 

Cross-Border Reinsurance

The growth of the segment of L&H insurance 

liabilities supported by Bermuda reinsurers is 

leading to an increased dependency on offshore 

capital to support the U.S. L&H insurance market, while introducing complexities into group 

structures. An increasing amount of U.S. L&H 

business has been moving offshore, often with PE 

involvement, to reinsurers in other jurisdictions. 

This trend continued in 2022. Several motivating 

factors for this growing trend have been reported,

including tax advantages and accounting rules 

more favorable than those under U.S. insurance 

statutory accounting. U.S. business being reinsured offshore has intensified recently, with a 

concentration observed in Bermuda. Life insurance and annuity reserves transferred offshore 

rose to $0.8 trillion at year-end 2022, amounting 

to about 40 percent of the $2 trillion in total reserves ceded. PE-backed reinsurers accounted for 

35.3 percent of all of the cedant life and annuity 

reserve credits and modified coinsurance reserves associated with reinsurance arrangements 

at year-end 2022.

189

In cross-border reinsurance transactions, the 

U.S. ceding insurer or cedent transfers risk to 

a reinsurer, thereby reducing the U.S. insurer’s 

reserves, releasing surplus capital, and potentially 

lowering risk-based capital (RBC) requirements. 

Additionally, some types of reinsurance, such as 

modified coinsurance, may not be arm’s-length 

transactions. Such arrangements may also involve 

affiliated offshore reinsurers, making the balance 

sheets of life and annuity companies less transparent. If those assets and liabilities had remained 

in the United States, they would potentially have 

revealed additional stresses to capital. Because of 

the complexity and opacity of offshore affiliated 

reinsurance, regulators and policymakers remain 

focused on its use, with the aim of making sure 

that U.S. policyholders and annuitants are protected.

In response to life liabilities being reinsured to 

other jurisdictions and not entirely captured 

in the leverage metrics analyzed, the National 

Association of Insurance Commissioners (NAIC) 

Vulnerabilities, Significant Market Developments, and Council Recommendations
78 2023 FSOC // Annual Report

could affect mortgage markets. Refer to Section 

3.1.6: Climate-Related Financial Risks, Role of 

Insurance for a complementary discussion of 

the important role insurance plays in absorbing 

losses stemming from physical risks.

Recommendations 

The macroeconomic environment and structural changes occurring in the L&H sector present 

challenges for both insurers and regulators. The 

transformational trends in the L&H sector discussed above may raise concerns related to (1) 

growth of private credit and alternative assets to 

support policyholder obligations, (2) growth in 

risk appetite for CRE exposures and increased 

proportion of lower credit quality in corporate 

bond portfolios over the last decade, (3) growth in 

the use of offshore reinsurance, which is intended 

to facilitate risk transfer of capital-intensive legacy 

blocks and to build capacity in insurers’ balance 

sheets through release of reserves and opportunistic evaluation of liabilities, and (4) the growing influence of new entrants in life insurance, 

such as private equity and other alternative asset 

management firms. Such regulatory challenges 

suggest the need to enhance supervisory, credit 

analysis, risk management, and capital frameworks to ensure that policyholders are protected 

from attendant heightened risks. Liquidity stress, 

counterparty risk, credit risk, and ratings migration could arise in a period of rapidly rising rates 

or deteriorating economic conditions or from the 

failure of one or more offshore reinsurers. The 

Council recommends that FIO, along with the 

NAIC, work with member agencies to evaluate the 

potential impact of these trends on systemic risk 

and associated financial stability considerations. 

The Council supports FIO’s work on these issues, 

as well as NAIC’s efforts to advance its macroprudential initiative and supervisory considerations 

for insurers that are owned by, or in strategic 

arrangements with, private equity firms or other 

alternative asset managers.
79

3.3 Financial Market Structure, Operational Risk, and Technological 

Risk

3.3.1 Treasury Markets

The Treasury market plays a critical role in 

financing the federal government, supporting 

the broader financial system, and implementing monetary policy. The Treasury market 

remains the deepest and most liquid market 

in the world and a central component of the 

financial system. Daily trading volumes 

averaged around $750 billion in 2023, but 

secondary-market liquidity was nevertheless 

challenged at times by heightened rate 

volatility and macro uncertainty, most notably 

amid the regional banking concerns in March 

(see Figure 3.3.1.1). The Treasury market 

successfully weathered this market shock, and 

liquidity has since improved (see Box D: 

Treasury Market Resilience During March 

2023). Liquidity conditions remained relatively stable over the summer, when increased 

term premium led to a significant rise in 

nominal yields. Nevertheless, periodic bouts 

of volatility continue to illustrate the need to 

consider policies that enhance Treasury 

market resilience (see Figure 3.3.1.2).

The debt limit served as an additional source 

of strain during 2023. On January 19, the 

Treasury began using extraordinary measures 

to continue meeting the federal government’s 

obligations. Over time, increasingly binding 

constraints on issuance led to a precipitous 

decline in the balance of the Treasury General 

Account (TGA), from $456 billion on January 

19 to only $23 billion just before the Fiscal 

Responsibility Act of 2023 became law on 

June 3. The latter figure is far below Treasury’s 

prudent policy level, which equates to a level 

of cash generally sufficient to cover at least 

one week of outflows (both net fiscal outflows 

and the gross volume of maturing marketable 

debt) from the TGA. Meanwhile, some 

investors reduced, or avoided adding to, their 

exposure in securities that might be at risk for 

delayed payment. For example, in late May, 

short-dated cash management bill auctions 

stopped-out at discount rates as high as 6.20 

Notes: Implied interest rate volatility = MOVE Index; Treasury liquidity = Bloomberg US 

Govt Securities Liquidity Index.

Source: Bloomberg, L.P.

3.3.1.1 Interest Rate Volatility & Treasury Liquidity Indexes

Notes: 5-day moving average. Intraday volatility calculated as daily high yield minus 

daily low yield on 10-year Treasury notes. Percentiles based on January 2005–September 2023.

Source: Bloomberg, L.P.

3.3.1.2 Intraday Volatility for 10-Year Treasury Yields

Vulnerabilities, Significant Market Developments, and Council Recommendations
80 2023 FSOC // Annual Report

percent, which was more than 100 basis 

points above prevailing SOFR levels at the 

time. These periodic debt limit impasses also 

leave Treasury more at risk from a potential 

interruption in market access, whether 

resulting from natural disasters or emerging 

threats such as potential cyberattacks. 

Over the subsequent three months between 

June 5 and August 31, Treasury borrowed on 

net from private market participants a total of 

$1.2 trillion, of which $1.0 trillion was in bills, 

both to meet the government’s obligations 

and to rebuild the balance of the TGA. When 

evaluating FY 2023 as a whole, Treasury’s net 

privately held marketable borrowing needs 

increased by nearly $900 billion year-overyear, from $1.8 trillion to $2.7 trillion. Much of 

this borrowing was achieved through issuance 

of $1.7 trillion in Treasury bills, thereby 

capitalizing on the growing market demand 

for short-dated, high-quality liquid assets. 

Looking to the years ahead, projections for 

Treasury’s borrowing needs in FY 2024–25 

have also increased by a cumulative $1 trillion 

since October 2022, according to the median 

primary dealer estimate from Treasury’s 

quarterly refunding survey. 

During FY 2023, nominal Treasury yields 

increased by 81 basis points in the 2-year and 

94 basis points in the 30-year (see Figure 

3.3.1.3). The Treasury yield curve, which was 

inverted at the start of the year, steepened as 

long-term Treasury yields rose more than 

short-term yields (see Figure 3.3.1.4). In 

aggregate, debt service costs on Treasury 

securities increased by $237 billion year-overyear.

Source: U.S. Department of the Treasury

Percent

0

1

2

3

4

5

6

0

1

2

3

4

5

6

2018 2019 2020 2021 2022 2023

As Of: 29-Sep-2023 Percent

2-year

10-year

30-year

3.3.1.3 U.S. Treasury Yields

Source: U.S. Department of the Treasury

Basis Points

-200

-100

0

100

200

300

-200

-100

0

100

200

300

2018 2019 2020 2021 2022 2023

As Of: 29-Sep-2023 Basis Points

30-year – 3-month spread

30-year – 2-year spread

30-year – 5-year spread

3.3.1.4 U.S. Treasury Curve Spreads
81

In March 2023, the Treasury market experienced 

a significant shock in volatility that was driven by 

regional banking concerns, which sparked broader financial market stress and a sharp repricing 

of market-implied monetary policy expectations. 

For example, two-year nominal yields declined 

over 100 basis points over a three-business-day 

period starting on Thursday, March 9, when 

worries began to emerge regarding Silicon Valley 

Bank (SVB). Volatility in short-end yields persisted for several weeks, as swaption-implied volatility in the 2-year Treasury spiked to levels above 

what prevailed during the COVID-19 crisis. Longend yields also experienced significant volatility, 

though not as severe as the volatility experienced 

by short-end yields.

Amid the spike in volatility, Treasury market 

liquidity conditions were challenged as bid-ask 

spreads widened, market depth declined, and 

price impact increased. However, when adjusting 

for volatility, the decline in liquidity measures did 

appear broadly in line with recent history (see 

Figure D.1 and D.2). There did not appear to be 

other factors, such as reduced market functioning, amplifying the decline in liquidity conditions. 

Moreover, market participants generally noted 

that the market continued to function and trading 

was orderly. This contrasts with the disruption in 

market functioning that occurred in March 2020,

at the onset of the COVID-19 pandemic, when 

liquidity conditions deteriorated more notably 

when adjusted for volatility. 

Notes: UST Liquidity Index is based on the average of 3-year rolling z-scores for 

bid-ask spreads, depth, and price impact; volatility is implied by 3-month into 

2-year swaptions.

Sources: U.S. Department of Treasury, Bloomberg L.P.

D.1 U.S. Treasury (UST) Liquidity Index vs. Implied Volatility: 

2-Year Tenor

Notes: UST Liquidity Index is based on the average of 3-year rolling z-scores for 

bid-ask spreads, depth, and price impact; volatility is implied by 3-month into 

10-year swaptions.

Sources: U.S. Department of Treasury, Bloomberg L.P.

D.2 U.S. Treasury (UST) Liquidity Index vs. Implied Volatility:

10-Year Tenor

Box D: Treasury Market Resilience During March 2023

Vulnerabilities, Significant Market Developments, and Council Recommendations
82 2023 FSOC // Annual Report

Box D: Treasury Market Resilience During March 2023 (continued)

The Treasury market was also remarkably resilient, considering the tremendous amount of 

activity that cleared through the market during 

this period. According to Trade Reporting and 

Compliance Engine (TRACE) data, weekly average daily trading volumes in the secondary 

market reached record levels since the data 

collection began in 2017 (see Figure D.3). In addition, principal trading firms (PTFs) increased 

their share of activity during the period of volatility, potentially helping the market absorb this 

latest shock. In previous periods of market stress, 

PTF share has increased in some cases (such as 

October 2014) and decreased in others (most 

notably, March 2020) (see Figure D.4).

Overall, this latest event was an example of how 

the Treasury market can remain resilient and be 

a source of stability, rather than an amplifier of 

market shocks. However, as seen in the recent 

past, the Treasury market may still be vulnerable 

during other types of market events. The official 

sector can therefore draw important lessons by 

comparing and contrasting how and why the 

Treasury market functioned differently during 

different market shocks. For example, it can study 

why PTF liquidity provision was more resilient 

this March than in March 2020, and why end-users and intermediaries may respond differently. 

These lessons should help inform the official sector about how to appropriately calibrate policies 

to improve Treasury market resilience across a 

wide range of potential market shocks.

Source: FINRA

D.3 Total TRACE U.S. Treasury Average Daily Volume by Week

Note: Activity based on TRACE U.S. Treasury interdealer electronic market 

volume over the last five days.

Source: FINRA

D.4 Daily Share of Participant Activity in the Interdealer

Electronic Market
83

reports that include additional volume and 

pricing information; and 

• in November 2023, FINRA filed with the SEC

a proposal to allow FINRA to publicly release

in an end-of-day file on-the-run nominal

coupon transaction information, with trade

size caps on large transactions and a historical

file with a six-month lag that includes

uncapped trade sizes.

In May 2023, Treasury announced plans to implement a regular program in 2024 for liquidity 

support buybacks and cash management buybacks. The liquidity support buybacks will provide 

a regular opportunity for investors to sell back to 

Treasury off-the-run nominal and TIPS securities across the curve. These buyback operations 

should improve investor confidence and increase 

dealers’ willingness to intermediate, leading to a 

more liquid and therefore resilient Treasury market. Cash management buybacks are intended to 

reduce volatility in Treasury’s cash balance and 

bill issuance, which could also lead to smoother 

functioning in domestic money markets.

Recommendations

While the Treasury market showed resilience to 

stress in 2023, the history of other disruptions 

to market functioning and the critical role of the 

Treasury market in the financial system demand 

continued focus on improving resilience for the 

future. In addition, growth of Treasury debt outstanding could make the Treasury market more 

vulnerable to shocks, especially if intermediation 

liquidity provision is not sufficient in meeting 

liquidity demand during a period of market stress. 

The Council supports the work of the IAWG, 

particularly in the area of data transparency, and 

recommends that member agencies continue to 

make progress on studying and implementing 

policies to improve the resilience of the Treasury 

market. 

The Council is also supportive of Treasury’s efforts 

to implement Treasury buybacks for liquidity 

support and cash management purposes. The 

Council believes buybacks can reduce Treasury 

market vulnerabilities by improving Treasury 

market liquidity.

Treasury Market Resilience

Despite heightened market volatility for most of 

2023, the Treasury market has continued to show 

resilience, even when liquidity conditions were 

most challenged during the regional banking 

concerns in March 2023. The Treasury market’s 

resilience over the last year further supports the 

assertion that the market remains the deepest and 

most liquid market in the world. However, it is important that the official sector continues to make 

progress in its efforts to improve Treasury market 

resilience, given the critical role of the Treasury 

market.

In November 2023, the Interagency Working 

Group on Treasury Market Surveillance (IAWG), 

which includes staff from the Treasury, Federal 

Reserve, SEC, CFTC, and Federal Reserve Bank 

of New York (FRBNY), released its third staff 

progress report in as many years on enhancing 

Treasury market resilience.193 The report provides 

an update on the important steps that the official 

sector has made toward refining and implementing many of the policies that the member agencies introduced in prior years. These policies have 

focused on five workstreams: 

1. Improving resilience of market

intermediation.

2. Improving data quality and availability.

3. Evaluating expanded central clearing.

4. Enhancing trading venue transparency and

oversight.

5. Examining the effects of leverage and fund

liquidity risk management.

In addition, the report outlines key policy areas 

where further considerations are ongoing. 

There have been important developments related 

to transparency. For instance:

• in January 2023, the OFR proposed a rule to

establish a data collection of non-centrally

cleared bilateral repo (NCCBR) transactions;

• in February 2023, the Financial Industry

Regulatory Authority (FINRA) replaced

its weekly report on aggregate Treasury

transaction data with daily and monthly

Vulnerabilities, Significant Market Developments, and Council Recommendations
84 2023 FSOC // Annual Report

mentation of the G20 commitment for mandatory 

exchange trading of liquid swaps for alternative 

reference rates.

Without adequate preparation, the cessation of 

LIBOR would have caused widespread disruptions to the financial system. The ARRC estimated that USD LIBOR was used in $223 trillion of 

financial contracts as of 2021, and it was also used 

extensively in nonfinancial contracts. Prior to the 

ARRC’s development of more robust contractual fallback language for cash products and the 

International Swaps and Derivatives Association’s 

(ISDA) development of similar language for uncleared derivatives, many contracts referencing 

LIBOR did not have workable fallbacks. Widespread adoption of the ARRC and ISDA fallbacks 

in more recent LIBOR cash products and in derivatives helped to ensure a smooth transition. However, incorporating more robust fallbacks into 

legacy LIBOR contracts with contractual amendments was difficult or unfeasible, and federal legislation195 passed in 2022 was needed to address 

the risk posed by those legacy contracts covered 

under U.S. law. The legislation established a clear 

and uniform process, on a nationwide basis, for 

replacing LIBOR in existing contracts when the 

terms do not provide for the use of a clearly defined or practicable replacement benchmark rate.

The legislation does so without affecting the ability of parties to use any appropriate benchmark 

rate in a new contract, among other reforms to 

preclude litigation and address LIBOR references 

in existing contracts and federal law. The UK FCA 

has required publication of nonrepresentative 

“synthetic” versions of LIBOR through September 

2024, to provide more time to remediate those 

legacy contracts that are outside of U.S. law. 

Since 2013, the Council has known that using the 

LIBOR as a reference rate is a key risk to financial 

stability, safety and soundness, and market integrity. Council members have worked over the past 

decade in conjunction with the Alternative Reference Rates Committee (ARRC) and other private 

sector participants to successfully resolve these 

risks. With the end of the last remaining representative U.S. dollar (USD) LIBOR rates in June 2023, 

the final steps in the transition from USD LIBOR 

to more robust rates, such as the ARRC’s recommended replacement, the Secured Overnight 

Financing Rate (SOFR), have been completed. 

In August 2022, the CFTC updated its interest rate 

swap (IRS) clearing requirement to remove the 

existing requirement to clear IRS by referencing 

LIBOR and certain other interbank offered rates.

CFTC then fully implemented a new requirement 

to clear IRS by referencing overnight, nearly riskfree reference rates, including SOFR. The implementation of these new IRS clearing rules was 

phased in as a way of aligning with changes to IRS 

clearing mandates in Japan, the United Kingdom 

(UK), and the European Union. The new rules 

were fully implemented effective June 30, 2023, to 

align with the cessation of USD LIBOR. Furthermore, the CFTC approved a made-available-totrade (MAT) determination for certain USD SOFR 

overnight index swaps (OIS) and Pound Sterling 

(GBP) Sterling Overnight Index Average (SONIA) 

OIS. These swaps are therefore now subject to the 

trade execution requirement under the Commodity Exchange Act (CEA) section 2(h)(8). Similarly, 

the UK Financial Conduct Authority (FCA) determined that certain GBP SONIA OIS are subject to 

the derivatives-trading obligation under article 28 

of UK Markets in Financial Instruments Regulation (MiFIR).194 These actions represent the impleBox E: Successful Implementation of Alternative Reference Rates
85

If market participants wish to use a rate 

other than SOFR, then they should conduct a 

comprehensive evaluation before adopting that 

rate. The Council has previously noted that such 

an evaluation would, at a minimum, review how 

fit the alternative rate is for the purpose for which 

it is being used, ensure that the rate is based on an 

active market with sufficient transaction volumes, 

assess how adequately the rate represents the 

underlying interest in that market, and evaluate 

the resilience of the rate during times of stress. 

In conducting its review of potential markets and 

rates, the ARRC warned that it believed wholesale 

unsecured borrowing markets were too thin to 

base a robust rate upon them. The International 

Organization of Securities Commissions (IOSCO) 

has now conducted its own review of several 

credit-sensitive rates and has come to a similar 

conclusion, asking that the administrators of 

certain benchmarks based on these markets 

refrain from stating that they are compliant with 

IOSCO’s Principles for Financial Benchmarks. 

In light of IOSCO’s conclusion, individual 

institutions using these alternative rates should 

review whether such rates continue to fit into 

their internal risk management guidelines, 

remain appropriate for their business strategies 

and risk appetites, and are appropriate for their 

customers. 

The LIBOR transition has also underscored the 

importance of appropriate contractual fallbacks. 

The Council continues to encourage market 

participants to include sufficiently robust fallback 

language wherever interest rate benchmarks are 

referenced.

Successful transition from LIBOR required identifying an alternative rate that does not share the 

weaknesses inherent in LIBOR, and it also required making sure that this alternative is sufficiently liquid. The ARRC spent several of its early 

years analyzing a range of potential markets and 

rates, and it consulted widely with market participants before it selected SOFR as its recommended benchmark. The ARRC’s subsequent efforts 

to promote the voluntary use of SOFR helped to 

steadily build liquidity. The move away from LIBOR to SOFR required firms to implement extensive model and technical changes. SOFR is now 

the dominant interest rate benchmark in derivatives and is referenced in almost all floating-rate 

capital products and consumer loans. Term SOFR 

rates, which are based on SOFR derivatives markets, are now used in most business loans. 

The end of the last remaining representative 

LIBOR rates passed without incident, as a result 

of a decade-long effort to prepare for it. The 

scale and complexity of that effort should serve 

as a reminder of the systemic importance of 

interest rate benchmarks, and of the financial 

stability risks that can ensue when these 

benchmarks are used inappropriately. The 

Council has encouraged market participants to 

consider the use of SOFR, and Council members 

have emphasized that derivatives and capital 

markets should use SOFR, given its robustness. 

The Council has also endorsed the ARRC’s 

recommendation that the use of Term SOFR 

rates should be limited to supporting business 

lending, and the Council strongly welcomes the 

decision of CME Group (the administrator of 

the Term SOFR rates) to incorporate the ARRC’s 

recommendations directly into its license 

agreement for use of these rates. 

Vulnerabilities, Significant Market Developments, and Council Recommendations
86 2023 FSOC // Annual Report

mised data integrity can have severe consequences and could result in the loss of confidence in 

financial firms and financial systems.

Finally, an incident that disrupts the availability 

or operations of financial institutions such as central banks, domestic and international exchanges, 

Global Systemically Important Banks (G-SIBs), 

and sovereign and sub-sovereign entities (including U.S. state and local governments, custodian 

banks, and payment-clearing and settlement 

systems) could have direct short-term contagion 

effects, destabilize the U.S. economy and financial system, and cause material disruption of the 

business and operations of private and publicly 

traded companies. Also, a disruption resulting in 

a severe curtailment of the availability of critical 

services, such as the services of fund administrators, pricing or other data providers, specialty 

software providers, and cloud service providers, 

could potentially threaten the stability of the U.S. 

financial system. Two incidents that occurred in 

2023 underline this point.

• As discussed in Box H: ION Case Study,

a cybersecurity incident earlier this year

at a global financial software and data

firm disrupted its customers’ abilities to

process cleared derivatives transactions and

prompted many financial institutions to

initiate cybersecurity and disaster recovery

reviews.

• Additionally, on November 8, 2023, the U.S.

broker dealer subsidiary of Industrial and

Commercial Bank of China, which provides

clearing services for Treasury securities

transactions, served as another example

of the type of event that has the potential

to disrupt the functioning of the financial

system. The event itself was not immediately

communicated to additional regulators or

industry participants outside of the core

affected parties (e.g., small investment

management firms and trade, clearance

and settlement venues). The first Core

Executive Response Group (CERG) meeting

was not called until nearly 12 hours after the

ransomware attack was identified and started

impacting processing. This raises a number of

issues related to timing, impact, awareness,

escalation, and cross industry coordination

3.3.2 Cybersecurity

The complexity and interconnectedness of information technology systems used by U.S. financial-sector firms to support their customers make 

those companies increasingly vulnerable to cyber 

incidents. Such incidents include ransomware 

and other malware attacks, denial-of-service 

attacks, and data breaches and involve software 

and hardware that are not created and shipped 

with secure settings by default. Malicious state 

actors, legacy systems, and weak security and 

change management practices can contribute to 

the exploitation of such vulnerabilities. If firms do 

not remediate these vulnerabilities, attackers can 

exploit them and potentially affect the financial 

services sector’s continued operations. That may 

result in losses to both the firms and their customers, due to disruption of operations, theft, and 

recovery costs.

Cyber Incident Impacts on Financial Services Sector 

Stability

A weakness in any aspect of the confidentiality,

196

integrity,

197 and availability198 (commonly referred 

to as the CIA triad) of financial systems or data 

could lead to an incident that could potentially 

threaten the stability of the U.S. financial system. 

An incident that causes a loss of customer confidence in the confidentiality, reliability, and safety 

of their data, assets, and transactions at a financial 

institution could lead to significant withdrawals 

of assets, resulting in market losses. Additionally, 

a cybersecurity incident involving the theft or unauthorized disclosure of sensitive data has privacy implications for consumers and could lead to 

identity theft and fraud.

A cybersecurity incident could also compromise 

the integrity of critical data. Accurate and usable 

data is essential to ensure the stable functioning 

of financial firms and systems. A cybersecurity 

incident that corrupts, damages, or alters data on 

a significant scale could disrupt the functioning of 

the financial system and cause financial firms to 

lose their credibility. Additionally, corrupted and 

unreliable data, especially at a trade repository,

depository, clearinghouse, transfer agent, intermediary, or similar system of record, could create 

uncertainty and possible ownership disputes. 

Also, market participants could lose confidence 

and cease trading activities. Therefore, compro-
87

Killnet, Anonymous Sudan, and REvil threatened 

to attack European financial institutions over the 

two days following the issuance of the threat.

202

Shortly after that, Killnet, a Russian hacktivist 

group, claimed to have conducted a cyberattack 

on the European Investment Bank.203

Russia is not the only foreign government seeking 

to disrupt the U.S. financial sector to achieve geopolitical goals. China is a prevalent actor in this 

space, often using the financial sector as a vehicle 

for gathering information. For example, in May 

2023, Microsoft reported that Chinese threat actor 

VOLT TYPHOON had been operating since mid2021.204 China was targeting critical communications infrastructure linking the United States and 

Asia. CISA, the National Security Agency (NSA), 

the Federal Bureau of Investigation (FBI), and the 

Five Eyes partners subsequently published a Joint 

Cybersecurity Advisory to help security practitioners identify and remediate the threat.205

Ransomware

Ransomware is a constant and costly threat as 

ransomware attacks on financial firms continue 

to grow in scope, scale, and volume.

206,207 Ransomware as a service (RaaS) is a cybercriminal business model that has contributed to the increase 

in ransomware attacks, due to the distribution 

of out-of-the-box software packages to affiliates.

RaaS attackers only need to possess minimal 

technical skills and knowledge to be able to 

encrypt, exfiltrate, and use data as leverage in 

blackmail schemes.

208,209 RaaS has helped more 

cybercriminals deploy ransomware attacks by 

making the technology needed for such attacks 

more accessible and by providing a revenue-sharing model and anonymity.210 In October 2023, 

the Joint Ransomware Task Force issued a new 

#StopRansomware Guide.211

As financial firms have sought to strengthen 

their security controls to mitigate the risk of data 

encryption, data exfiltration, and operational 

disruptions from ransomware events, many such 

firms have also turned to cyber insurance as a tool 

to mitigate financial losses from ransomware attacks.

212 Financial services firms with cyber insurance have been more likely to recover encrypted 

data than those without cyber insurance.213

The White House–led Counter Ransomware Initiative (CRI) has worked to increase the resilience 

that need to be reassessed to improve incident 

responsiveness.

Foreign Conflicts

The health of the global financial services 

ecosystem depends on the ability of the sector 

to operate seamlessly among the many existing 

financial centers. Attacks on any of these centers, 

without appropriate mitigation or response 

management, may result in operational risks 

cascading through the entire global system. 

Active engagement with international partners 

in order to better understand the challenges that 

may affect normal operations can help prevent 

systemwide disruptions of U.S. financial systems 

and the U.S. economy as a whole.

The Treasury’s Office of Cybersecurity and Critical 

Infrastructure Protection (OCCIP) serves as both 

the co-chair and the co-secretariat for the G7 Cyber Expert Group (CEG), as well as the Sector Risk 

Management Agency for the financial services 

sector. These functions serve the goal of enabling 

stronger domestic and international financial 

cybersecurity and resilience. To increase information sharing, OCCIP hosts both classified and 

unclassified threat briefings for members of the 

Financial and Banking Information Infrastructure 

Committee (FBIIC) and Financial Services Sector 

Coordinating Council (FSSCC) on various threats 

targeting the financial services sector. Additionally, OCCIP has produced a “Lessons Learned” 

series to discuss best practices to support cybersecurity resilience in the financial sector. These 

programs have helped public- and private-sector 

financial institutions adopt a heightened cybersecurity posture by focusing on key all-hazard 

threats.

In its war against Ukraine, Russia has thus far 

focused its cyber warfare attacks on Ukraine 

itself. However, there has been an increase in the 

number of cyberattacks against the United States 

by pro-Russian groups.199,200 There have been few 

successful cyberattacks against the U.S. financial 

system or its international partners, and any disruption caused by these attacks has proven to be 

negligible.201 U.S. cyber defenses were bolstered 

by the Department of Homeland Security (DHS) 

Cybersecurity and Infrastructure Security Agency 

(CISA) “Shields Up” program and the ongoing efforts of the G7 CEG. In June 2023, hacking groups 

Vulnerabilities, Significant Market Developments, and Council Recommendations
88 2023 FSOC // Annual Report

Recommendations 

Maintaining and improving the cyber resilience of 

the financial system requires continuous assessment of cyber vulnerabilities and close coordination across firms and governments within the U.S. 

and internationally. The Council recommends the 

FBIIC, FSSCC, and Financial Services Information 

Sharing and Analysis Center (FS-ISAC) continue 

to promote information sharing related to cyber 

risk and undertake additional work to assess and 

mitigate cyber-related financial stability risks. 

The Council supports the ongoing partnerships 

between state and federal agencies and private 

firms, including FBIIC, the FSSCC, and FS-ISAC. 

Sharing timely and actionable cybersecurity 

information can reduce the risk of cybersecurity 

incidents that could potentially affect the financial services sector’s continued operations and 

mitigate the impacts of those that do occur. In 

light of the disruptive ransomware attacks on 

financial services firms that occurred over the last 

year, the Council recommends that the relevant 

government agencies conduct a thorough review 

of those cyber incidents to gain a greater understanding of the potential vulnerabilities that led 

to the incidents and the processes that firms and 

agencies took to respond to and contain them. 

The Council encourages FBIIC to continue working closely with federal and state agencies, DHS, 

law enforcement, and industry partners to conduct regular cybersecurity exercises that take into 

account interdependencies with other non-financial sectors. The Council recommends that 

member agencies carefully consider how to share 

information among themselves, including confidential supervisory information and classified 

information to the extent legally permissible. 

The Council supports the domestic efforts of the 

FBIIC Technology Working Group, which examines how financial institutions are using emerging 

technologies such as AI that may introduce new 

cyber vulnerabilities into critical financial services 

infrastructure. The Council also supports the G7 

Cyber Expert Group’s international efforts to help 

financial institutions better understand cybersecurity risks and improve the cyber resilience 

of the financial system through preparedness, a 

consensus understanding of the threat landscape, 

and a shared approach to mitigating risk.

of CRI partners, disrupt cybercriminals’ activities, 

counter illicit finance, build private sector partnerships, and cooperate globally to address ransomware.214 This work has been carried out under 

the auspices of five working groups: resilience 

(co-led by Lithuania and India), disruption (led 

by Australia), counter illicit finance (led by the 

United Kingdom and Singapore), public-private 

partnership (led by Spain), and diplomacy (led 

by Germany).215 This demonstrates the scale and 

scope of the international response to this issue.

Insider Threats

Insider threats continue to be a significant 

concern to the financial sector that can lead to 

financial loss, operational disruption, reputational damage, and regulatory fines.

216 The motives 

for malicious insider threats can be financial gain 

and personal use, plus emotional issues (grievances or the desire to be respected) and political 

and ideological objectives.

217,218,219 However, financial institutions also must account for the fact that 

a lack of cybersecurity training, compromised 

accounts, and poor software design and configuration can lead to unintentional insider threat 

incidents caused by unwitting employees or 

customers.

220,221 Also, with the increase in attacks 

involving malicious insiders, social engineering 

attacks targeting unmalicious and accidental 

insiders remain common. As a result, the financial sector has paid more attention to developing 

insider threat mitigation programs, often mirroring the core components of the National Institute 

of Standards and Technology (NIST) Cybersecurity Framework: Identify, Protect, Detect, Respond, 

and Recover.222,223 As explained in the Securities 

Industry and Financial Markets Association 

(SIFMA) Insider Threat Best Practices Guide, 

“every component in an insider threat mitigation 

program should have a distinctly human element. 

While external cybersecurity threats can often be 

prevented or detected primarily with technological tools, those tools are insufficient to prevent 

many insider threats. In many cases, the only signals of an impending insider attack are commonly exhibited human behaviors that foreshadow 

the attacker’s intent.”224 Thus, protecting against 

insider threats requires a holistic approach that 

involves “technology, legal advice, policy development, physical security, risk awareness and 

training, and counterintelligence resources.”225
89

tion (DTCC) entities processed approximately 

$2.5 quadrillion of securities in 2022, including 

$2.1 trillion cleared daily by National Securities 

Clearing Corporation (NSCC) in broker-to-broker transactions for over 50 exchanges and 

trading venues. 228 The NSCC plays a prominent role in providing clearance, settlement, 

and central clearing (CCP) services for nearly 

all broker-to-broker equity and corporate and 

municipal debt trades and other equity trading 

venues. Shortening the standard settlement cycle 

can promote investor protection, reduce risk, and 

increase operational and capital efficiency.

First, shortening the standard settlement cycle 

to T+1 will result in a reduction in the number 

and total value of unsettled trades that exist at 

any point in time. Assuming that trading volume 

remains constant, shortening the standard settlement cycle to T+1 should also decrease the total 

market value of all unsettled trades in the U.S. 

clearance and settlement system. For example, 

holding average dollar volumes constant, the aggregate notional value of unsettled transactions is 

estimated to fall from nearly $88 billion to approximately $44 billion at the NSCC. This reduction in 

the number and total value of unsettled securities 

transactions should result in a reduction in market participants’ overall exposure to market risk 

that arises from such transactions.

Second, shortening the standard settlement cycle 

to T+1 should reduce a CCP’s exposure to credit, 

market, and liquidity risk arising from its obligations to its participants, promoting the stability 

of the CCP and thereby reducing the potential for 

systemic risk to transmit through the financial 

system. Reducing these risks to the CCP should 

enable the CCP to reduce the overall size of the 

financial resources that it requires of its participants. This should lower costs to the CCP’s participants and potentially to their customers as 

well. Also, in periods of market stress, liquidity 

demands imposed by the CCP on its participants, 

such as in the form of intraday margin calls, can 

produce procyclical effects that reduce overall 

Technological advances have long fueled innovation and evolution in financial markets.226

In 2023, there have been several technological 

developments related to the speed of financial 

transactions and information transmission that 

offer the promise of significant benefits to the 

financial system, households, and businesses. 

As the SEC’s rulemaking to shorten the standard 

securities transaction settlement cycle indicates, 

speed can reduce risk in the financial system 

and increase economic efficiency. Peer-to-peer 

payment services provide consumers with convenient digital services, and the availability of 

instant retail payments offers an opportunity for 

financial institutions to provide new and more 

convenient services to their customers. However, 

to help ensure the full realization of these benefits, financial market participants and regulators 

must assess and mitigate the potential risks of a 

transition to increasing speed of transactions and 

information transmission. In the case of faster securities settlement, coordination among financial 

market participants across a variety of functions 

will be critical to a successful transition. The move 

to faster payments via growing use of peer-to-peer 

payment services may drive a need for increased 

risk management related to fraud detection and 

consumer protection. Widespread social media 

use increases the speed of information transmission and, as evidenced by this Spring’s banking 

system turmoil (see Section 3.2.1: Banking 

System), may increase the potential for contagion across institutions or markets and thus may 

require new dimensions of risk monitoring and 

liquidity assumptions. 

The Transition to T+1 Securities Settlement

The SEC recently adopted rule changes to shorten the standard settlement cycle for most broker-dealer transactions from two business days 

after trade date (T+2) to one (T+1).227 The T+1 

standard settlement date is scheduled to take 

effect on May 28, 2024. To give an indication of 

the size of the markets that may be affected by 

the rule, Depository Trust & Clearing CorporaBox F: Speed of Financial Transactions and Information Transmission 

Vulnerabilities, Significant Market Developments, and Council Recommendations
90 2023 FSOC // Annual Report

Box F: Speed of Financial Transactions and Information Transmission (continued)

ing gifts, splitting a restaurant check, or paying 

rent. Total P2P dollar volume, across banks and 

nonbanks, quadrupled between 2018 and 2022.230

Last year, transaction volume among all service 

providers was estimated at approximately $893 

billion, and is forecasted to reach nearly $1.6 trillion by 2027.231 Over three-quarters of U.S. adults 

have used at least one type of payment app.232

Younger consumers’ adoption of these services is 

especially prevalent.233

Nonbank payment companies are heavily reliant 

on banks and can thus be exposed to heightened 

risk from individual bank failures or broader 

banking industry stress. Nonbank P2P platforms 

do not have direct access to the payments system, so they partner with banks to settle transactions on behalf of customers using their apps 

to transfer funds. Nonbank payment companies 

must also maintain permissible investments that 

meet or exceed the aggregate amount of all their 

outstanding money transmission obligations for 

regulatory purposes, and funds deposited at a 

bank are considered permissible investments.234

A nonbank payment company may have sizeable 

deposit balances, as a reserve, operating account, 

or other type of account, to cover these obligations. However, all the nonbank company’s corporate deposits at a bank are subject to the deposit 

insurance limit of $250,000 in aggregate, putting 

a substantial portion of the company’s deposits at 

risk if its bank were to fail.

Innovations in Interbank Retail Payment Systems

On July 20, 2023, the Federal Reserve implemented the FedNow®Service, a new interbank payment 

system to support smaller-value (commonly 

referred to as “retail”) instant payments. Instant 

payments are those that are conducted in real 

time, any time of the day, any day of the week, 

with immediate funds availability for receivers. 

A similar service, RTP®, operated by The Clearing 

House, was implemented in 2017. The FedNow 

Service and the RTP network augment other innovations in legacy retail payment systems that have 

market liquidity. Reducing the CCP’s liquidity 

exposure by shortening the settlement cycle can 

help limit this potential for procyclicality, enhancing the ability of the CCP to serve as a source of 

stability and efficiency in the national clearance 

and settlement system.

The lessons learned highlighted in Box E: Successful Implementation of Alternative Reference Rates could prove instructive in underscoring the importance of preparation, industry 

coordination, contingency planning, and implications for institutional risk management. 

To prepare for the transition to T+1, market participants will need to adjust their operations and 

business practices to ensure timely settlement 

in a T+1 environment. Issuers, asset managers, 

broker-dealers, global custodians, vendors, service bureaus, transfer agents, exchanges, clearing 

firms, buy-side firms, and depositories are among 

the market participants who will be impacted by 

the transition. 229 Market participants may need to 

adjust their business practices to address potential mismatches between the T+1 settlement cycle 

for U.S. securities transactions and settlement 

cycles in different markets, such as the standard 

T+2 settlement cycle for foreign exchange transactions. Some market participants have already 

taken significant steps toward identifying the industry requirements and timelines for moving to 

a T+1 settlement cycle and have made substantial 

progress in terms of planning such a move. SEC 

staff and other U.S. authorities are conducting 

monitoring and oversight to ensure a successful 

transition in May 2024. 

Peer-to-Peer Payments Services

Recent trends in payments and deposits pose new 

risks and opportunities for consumers. As the 

desire for the speed and convenience of sending 

payments digitally has grown, so too has consumers’ adoption of online payment methods. 

Consumers utilize peer-to-peer (P2P) payments 

services for a variety of purposes, such as send-
91

3.3.3 The Use of Artificial Intelligence in Financial Services

Artificial intelligence (AI) is a set of technologies 

that has been around for decades. However, its use 

in financial services has increased in recent years,

thanks to more advanced algorithms, increased 

volumes of data, data storage and processing 

power improvements, and cost reductions among 

many of these dimensions. AI has the potential 

to increase efficiency and innovation, but it also 

introduces certain risks. Monitoring these rapidly 

emerging technologies will continue to be increasingly important, given the potential risks and benefits of their use in the financial services system. 

There are a variety of definitions of AI, which 

generally entail machines doing things previously thought to require human intelligence.

238

For example, one type of AI is machine learning, 

which focuses on the ability of computers to learn 

from provided data without being explicitly programmed how to solve for a particular task. Given 

this broad definition of AI, it is not surprising that 

there is significant variety in AI methodologies 

and uses and that there is not always a stark difference between AI and more traditional quantitative modeling. For instance, some regression analysis techniques that have been used for decades 

could arguably be considered a form of AI. 

AI offers potential benefits, such as reducing costs 

and improving efficiencies, identifying more complex relationships, and improving performance 

and accuracy. Financial institutions currently use 

AI for various tasks, including fraud prevention 

and detection, customer service, document review, and retail credit underwriting. Some institutions use AI extensively, while others take a more 

limited approach. Even within a single institution, 

AI may be used to varying degrees in different 

areas. 

The use of AI, however, can introduce certain 

risks, including safety-and-soundness risks like 

cyber and model risks. Other potential risks include consumer compliance risks, which can be 

exacerbated by certain characteristics of many AI 

approaches, such as difficulty in explaining the 

model or understanding how it functions. Some 

AI approaches operate as “black boxes,” which 

can create challenges in explaining how the technology produces its output. This lack of “explainbeen implemented in recent years to speed up 

retail payment transactions, including the implementation of same-day settlement of automated 

clearing house payments. 

The FedNow Service and the RTP network are 

examples of the global wave of new instant-payment systems that support the growing demand 

for fast and convenient transaction capabilities 

needed in today’s digital economies. Using this 

infrastructure, which may be gradually adopted 

by banks and credit unions of all sizes across the 

country in the coming years, financial institutions 

will be able to provide new services for instant 

payments to their consumer and businesses 

customers. Compared with some other countries, 

instant-payment systems in the United States are 

nascent, and it will likely take several years for the 

over 9,000 financial institutions in this country to 

implement new instant-payments infrastructure.

The Speed of the Spring 2023 Bank Runs

The bank runs in March 2023 were the fastest in 

recent history.235 The 1984 failure of Continental 

Illinois and the 2008 failures of Washington Mutual and Wachovia took place over 7–15 business 

days. These failures involved deposit outflows 

of 30 percent of deposits from Continental Illinois, 10 percent from Washington Mutual, and 4 

percent from Wachovia. In contrast, Silicon Valley 

Bank and Signature Bank failed with outflows of 

20 percent within 1 day; and First Republic Bank 

lost nearly 60 percent of its deposits in 5–7 business days. 236 Regulatory reviews have noted the 

role of advances in digital banking technology 

and the transmission of information through social media as factors affecting the speed of these 

bank runs.237 While the failure of these institutions 

was fundamentally the result of inadequate risk 

management, the speed of the deposit outflows 

exacerbated concerns related to contagion to 

other regional banks. This experience highlights 

the importance of understanding the potential 

impact of technological advances in assessing and 

mitigating classic risks, such as a bank run. 

Vulnerabilities, Significant Market Developments, and Council Recommendations
92 2023 FSOC // Annual Report

quantitative modeling, but they can be of particular concern when it comes to using AI. For models 

that are internally built and run, it is important 

to establish controls on the provenance of and 

legal permission to use the data used to train the 

model. When receiving data from or sharing data 

with external parties, data controls239 are critical 

to protecting sensitive customer or business data 

provided to seed240 models established and run by 

a third-party.

Generative AI, which has captured broad attention in 2023 within the financial services sector, is 

a machine learning model that is trained on large 

data sets and is capable of rendering human-like 

text, software code, images, sound, video, and 

other media. These models identify patterns in 

large datasets and use those patterns to generate 

new content. An example is generative language 

models that produce narratives in response to 

queries. Generative AI is a rapidly emerging AI 

that can introduce opportunities as well as risks 

for financial sector firms, particularly in data 

security, consumer protection, and other areas of 

regulatory compliance.

There can also be complicating factors related to 

the use of generative AI. For example, generative 

AI can produce output that is erroneous or flawed 

but that is still in the form of a convincing narrative or presentation. Given the possibility that 

such “hallucinations” may appear in output that 

is nuanced, assessing the performance of output 

may not be straightforward and may require an 

expert to properly evaluate the output’s accuracy. Also, certain generative AI may not produce 

consistent responses over time, even when posed 

the same or similar prompts. With some generative AI models, users may not know the sources 

used to produce output or how such sources were 

weighted, and a financial institution may not have 

full understanding of or control over the dataset 

being used, meaning that employing proper data 

governance may not be possible. 

In January 2023, the National Institute of Standards and Technology (NIST) released the AI 

Risk Management Framework (AI RMF 1.0). In 

collaboration with the private and public sectors, 

NIST developed the framework to better manage 

AI-associated risks to individuals, organizations, 

and society. The framework is intended for voluntary use and to improve the ability to incorporate 

ability” can make it difficult to assess the systems’ 

conceptual soundness, increasing uncertainty 

about their suitability and reliability. A particular 

concern is the possibility that AI systems with 

explainability challenges could produce and possibly mask biased or inaccurate results. This could 

affect, but not be limited to, consumer protection 

considerations such as fair lending. While there 

are a variety of techniques to address explainability challenges, they have their own strengths and 

weaknesses. It is the responsibility of financial 

institutions using AI to address the challenges 

related to explainability and monitor the quality 

and applicability of AI’s output, and regulators 

can help to ensure that they do so. In addition, 

specific requirements to prevent discrimination 

or bias that apply to tools, models, or processes used in consumer compliance also apply to 

AI. This is an important consideration because 

without proper design, testing, and controls, AI 

can lead to disparate outcomes, which may cause 

direct consumer harm and/or raise consumer 

compliance risks. Errors and biases can become 

even more difficult to identify and correct as AI 

approaches increase in complexity, underscoring 

the need for vigilance by developers of the technology, the financial sector firms using it, and the 

regulators overseeing such firms. 

When using AI, the underlying data can impact 

results in different ways than when using more 

traditional quantitative methods. This is because 

of the high volume of data typically involved 

when using AI and because data often play a more 

significant role in driving the model specification. 

Determining which variables are to be included 

and how they are included in traditional quantitative modeling is typically determined by a human 

prior to data analysis. Data used for AI may come 

from a wider variety of sources and may be less 

structured, such as a collection of documents 

instead of a formal dataset. With AI, data may also 

have to be processed at higher frequencies. Thus, 

data controls like data quality, suitability, security, 

privacy, and timeliness are vital to sound AI use. 

Additionally, given AI’s designed ability to identify 

complex relationships, some AI models can be 

overfit, which means they may adhere too closely 

to the data on which they were trained and may 

not apply well or generalize to new conditions. 

Controls on the use of internal and external data 

are important when using data for any type of 
93

trustworthiness considerations into the design, 

development, use, and evaluation of AI products, 

services, and systems. In March, NIST launched 

the Trustworthy and Responsible AI Resource 

Center, which will facilitate implementation of 

and international alignment with the AI RMF 1.0.

Existing requirements and guidance also apply 

to AI, despite the rapid development and evolution of the technology. These include general 

risk management requirements that would apply 

to any technology used by financial institutions, 

plus domain-specific use cases like fair lending 

that already have established rules to which AI 

(and any other approach used) must conform. 

Additionally, President Biden issued an Executive Order241 on October 30 that established new 

standards to enhance the safe, secure, and trustworthy development of AI in various aspects of 

society. Monitoring the rapid developments in AI, 

including generative AI, will be essential to helping ensure that oversight structures keep up with 

or stay ahead of risks posed by AI adoption, while 

facilitating efficiency and responsible innovation 

that promotes benefits and minimizes risks.

Recommendations

Financial institutions have rapidly adopted innovative technologies in recent years, and the use of 

AI in financial services has increased. The Council 

recommends monitoring the rapid developments 

in AI, including generative AI, to ensure that 

oversight structures keep up with or stay ahead 

of emerging risks to the financial system while 

facilitating efficiency and innovation. To support 

this effort, the Council recommends financial 

institutions, market participants, and regulatory 

and supervisory authorities further build expertise and capacity to monitor AI innovation and 

usage and identify emerging risks. The Council 

notes existing requirements and guidance may apply to AI. These include general risk management 

requirements that would apply to any technology 

used by financial institutions and to domain-specific use cases like fair lending that already have 

established rules to which AI must conform. 

The Council also supports the G7 Cyber Expert 

Group’s international efforts to coordinate cybersecurity policy and strategy across the eight G7 

jurisdictions and address how emerging technologies, such as AI and quantum computing, affect 

the global financial system.

Vulnerabilities, Significant Market Developments, and Council Recommendations
94 2023 FSOC // Annual Report

The stable functioning of a financial institution 

heavily depends on the confidentiality, integrity, and availability of the institution’s internal 

information and the information the institution 

receives from its counterparties. Firms’ operational systems employ cybersecurity protocols 

to securely transmit, store, and process sensitive data. For the most part, such protocols rely 

on public-key cryptographic schemes based on 

mathematical problems that are believed to be 

impossible to solve in a reasonable period of time 

by current conventional computers. Such protocols secure data against adversaries with limited 

conventional computer power. However, computers constructed based on quantum mechanics, 

so-called quantum computers, could potentially 

solve these mathematical problems significantly 

faster and thus pose a critical threat to current 

encryption mechanisms and underlying data. 

Unlike conventional computer systems that store 

and process information in the form of a standard 

bit242 that corresponds to binary information, 

quantum computers consist of quantum bits, or 

qubits, as basic units of quantum information. 

There are several proposed technologies for the 

physical realization of qubits. However, the main 

challenge has proven to be the ability to assemble many qubits that can preserve their quantum 

mechanics properties while reliably processing 

information. In addition to its ability to break 

public-key cryptography, an ideal quantum 

computer is theoretically capable of significantly 

higher performance on well-known optimization 

and search problem algorithms, when compared 

with conventional computers. Such advancement 

in computational complexity and computing 

power has the potential to transform some of 

the financial sector’s major functions, including 

high-frequency trading, risk analysis, stress testing, portfolio optimization, fraud prevention, and 

derivative pricing. 

Recently, there has been a surge in both public 

and private investment in quantum technology.243

China leads public investment with $15.3 billion, 

followed by the European Union, which plans 

to spend $7.2 billion. On the private-investment 

side of quantum technology, the United States 

leads the way, followed by the United Kingdom. 

According to a 2022 global survey of the adoption 

rate of quantum computing by firms, 74 percent 

of Fortune 500 companies have begun adopting 

quantum computing or have plans to do so within 

one year.244 More than 70 percent of these firms 

have quantum computing budgets exceeding $1 

million per year. According to the National Institute of Standards and Technology (NIST), developing a functioning quantum computer or hybrid 

computer is no longer considered a long-term 

feat, as a computer capable of cracking public-key 

cryptography can be developed within 10 years.245

While it takes time for firms to inventory assets 

and assess which could be the most vulnerable to 

threats posed by quantum computing, firms need 

to be able to handle impending threats as soon as 

possible, and they should be immediately concerned with data exfiltration. In addition, there 

are at least three factors that make this a vulnerability worth addressing for some firms today: 

1. The number of years that information should

remain protected.

2. The number of years required to effectively

migrate all systems to a quantum-safe cryptography scheme.

3. The potential for cyberattackers to steal

encrypted data and decrypt them later with

quantum computing.

Not only are financial institutions required to 

protect their customers’ personally identifiable 

information for substantial periods of time, efforts 

to effectively migrate legacy systems are also time 

consuming. There is also concern that cyberattackers will steal conventionally encrypted data 

today in hopes of decrypting them with quantum 

computing in the future. Given the previousBox G: Quantum Computing
95

3.3.4 Third-Party Service Providers

Third-party service providers continue to play 

a large role in the financial services sector. Financial institutions engage with third parties to 

provide a range of different services under different types of arrangements. More recently, some 

financial institutions have entered into third-party 

relationships with some financial technology 

(fintech) companies, under increasingly complex 

structures and features in which the third-party 

fintech facilitates the provision or distribution of 

the financial product or service to the end customer. 

The use of third parties can offer financial 

institutions “significant benefits, such as access 

to new technologies, human capital, delivery 

channels, products, services, and markets. 

However, the use of third parties can reduce a 

financial institution’s direct control over activities 

and may introduce new risks or increase existing 

risks, such as operational, compliance, and 

strategic risks,” including potential financial 

stability risk.247 The Council has identified the 

financial services sector’s reliance on third-party 

service providers, such as cloud service providers 

(CSPs), as a potential risk to financial stability 

because of the significant role these entities serve 

in the financial sector.

Cloud Service Providers

Financial institutions rely on third-party service 

providers for, among other things, videoconferencing, collaboration software, core banking 

platforms, and data storage. Increasingly, many of 

these services are deployed through cloud solutions. As a result, the Council has identified this 

reliance on CSPs as a potential risk to financial 

stability.

According to the most current information from 

the 2023 Cloud Security Alliance’s State of Financial Services in Cloud report, 98 percent of financial services sector organizations use some form 

of cloud computing. That represents a 7–percentage point increase from 2020.248 Additionally, 59 

percent of these organizations store or process 

regulated banking information within cloud platforms.249

As cloud adoption and use are on the rise, there 

are a variety of cloud security risks posed by 

ly referenced concerns about integrity of and 

confidence in critical data to maintain financial 

firms’ credibility, and recognizing that protecting 

critical data may involve more than complying 

with requirements to protect personally identifiable information, the scope of legacy systems 

to be addressed may expand significantly. Such 

an undertaking would require the development 

and deployment of hardware and software solutions and the establishment of broadly accepted 

standards. 

Since 2016, NIST has been leading the effort 

to establish quantum-safe cryptography standards through its Post-Quantum Cryptography 

Standardization project. In an important step in 

advancing this effort, the Cybersecurity and Infrastructure Security Agency (CISA), National Security Agency (NSA), and NIST released a fact sheet 

for quantum-safe algorithms246 in August 2023 

and announced plans for NIST to publish the first 

set of post-quantum cryptographic standards in 

2024. Firms are encouraged to follow NIST developments and can take the following steps for a 

more efficient migration to these standards and 

to ensure orderly and robust risk management as 

quantum computing evolves: 

1. Make an inventory of their and their service

providers’ critical data and internal and external data movements, including the timeline

over which information should be protected.

2. Identify and make an inventory of all internal

and external standards and cryptographic

technologies incorporated into their and their

service providers’ algorithms, systems, and

tools, especially instances of public-key algorithm use in their network.

3. Prioritize internal systems and external services for replacement.

4. Develop a strategic plan for migration.

Vulnerabilities, Significant Market Developments, and Council Recommendations
96 2023 FSOC // Annual Report

tor institutions and regulators, stakeholders are 

collectively working toward a new balance in the 

shared-risk model, one that places less pressure 

on cloud customers and asks CSPs to take more 

responsibility for the security of those customers.

Complex Fintech Partnerships

Some financial institutions are entering into 

third-party relationships with financial technology firms (fintechs), where the fintech may interact directly with the end customer and serve as 

the distribution channel in the provision of the 

financial product or service to the end customer. 

In such relationships, the financial institution and 

the fintech may have varying degrees of interaction with the end customers. For example, the 

financial institution may provide the financial 

product or service through the fintech, without 

directly interacting with the end customers. Financial institutions participating in such relationships could potentially face a number of risks, 

including compliance, financial, operational, 

and reputational risks. Such arrangements could 

potentially scale rapidly, potentially posing risks 

to the stability of the financial system. 

Many fintech service providers are not subject 

to the same compliance requirements as financial institutions, such as requirements related to 

consumer protection and anti-money laundering. These fintechs therefore may lack the mature 

compliance systems to help ensure that financial 

institutions meet their own obligations relative 

to the financial products or services they provide 

and the end customer. Financial institutions 

could potentially be responsible for compliance 

failures that take place at the fintech, and depending on their visibility into the third party’s 

systems, financial institutions may have limited 

ability to manage that risk. Similarly, if the fintech 

does not have strong operational risk management controls but does have access to the financial institution’s infrastructure, vulnerabilities at 

the fintech, such as to cyberattacks, could affect 

the financial institution or its customers. Certain 

types of third-party relationships can also lead to 

increased financial risk, such as potential liquidity 

risk. For example, in certain complex bank-fintech relationships, in which the fintech distributes 

the financial services to the end customers, the 

relationship could serve as a significant source of 

funding to the financial institution. In such relathese activities. Misconfigurations, for example, 

are some of the most common causes of security 

breaches in the cloud. In 2019, Gartner estimated that up to 95 percent of cloud breaches occurred due to human errors such as configuration 

mistakes.250 Misconfigurations of cloud systems 

can lead to insufficient access control measures, 

improper or inadequate system backup processes, 

and incorrect or inadequate storage and security 

of data. Misconfigurations can also be exploited 

by malicious actors to negatively affect the confidentiality, integrity, or availability of the services 

used by some or all customers of the CSP. Cloud 

computing supports an increasing amount of the 

financial services sector’s most critical financial 

institutions and functions. To address this maturation, Treasury published a white paper on the 

Financial Services Sector’s Adoption of Cloud 

Services251 that identified and sought to consider 

areas for collaboration on cloud services implementation among the financial services sector, 

regulators, and CSPs. The six thematic challenges 

identified in the report were as follows: 

1. Insufficient transparency to support due 

diligence and monitoring by financial institutions. 

2. Gaps in human capital and tools to securely 

deploy cloud services.

3. Exposure to potential operational incidents, 

including those originating at a CSP. 

4. Potential impact of market concentration in 

cloud service offerings on the financial sector’s resilience. 

5. Dynamics in contract negotiations, given 

market concentration. 

6. International landscape and regulatory fragmentation. 

Shortly after the release of the report and in 

light of the aforementioned challenges, Treasury launched a Cloud Executive Steering Group 

(CESG) that reports to the Council. The CESG 

established eight workstreams for public/private 

partnership. Each workstream is tied to specific 

gaps identified in the report; for example, one 

workstream seeks to define what the financial 

services sector views as cloud concentration risk. 

By bringing CSPs into the fold with private sec-
97

dinate third-party service provider examinations, 

work collaboratively with states, and identify 

additional ways to support information sharing 

among state and federal regulators. 

Toward that end, the Council also supports the 

ongoing work of the CESG, and its focus on closing gaps identified in Treasury’s February 2023 

white paper entitled The Financial Services Sector’s Adoption of Cloud Services. This work aims 

to increase the security and transparency of the 

services and security that the CSPs and third-party vendors are providing to financial sector firms.

The authority to supervise third-party service 

providers varies among financial regulators. To 

further enhance third-party service provider 

information security and address other critical 

regulatory challenges, the Council recommends 

that Congress pass legislation that ensures that 

the FHFA, NCUA, and other relevant agencies 

have adequate examination and enforcement 

powers to oversee third-party service providers 

that interact with their regulated entities.

tionships, an unexpected decision by the fintech 

to transfer deposits to another institution could 

pose heightened liquidity risk to the financial 

institution.

Supply Chain

The past year has also continued to highlight 

the importance of reviewing the resilience of 

the financial sector’s supply chain. As financial 

institutions continue to expand their reliance on 

third-party providers, they will remain attractive 

targets that could allow a threat actor to gain 

administrative access to the banking system. Financial firms are becoming increasingly attuned 

to the notion that their supply chains and trusted 

vendors can introduce vulnerabilities into their 

networks. In May 2023, CL0P ransomware group 

exploited a vulnerability in Progress Software’s 

managed file transfer software MOVEit. Progress 

Software disclosed the attack in June,

252 and in 

the following months, over 1,000 organizations 

around the world (including financial institutions) that had used the software were compromised.253,254 The impact was significant due to the 

supply chain vulnerabilities that propagated to 

other organizations. In some cases, third-party 

vendors who used MOVEit were affected, which 

resulted in the data and networks of the organizations they served being compromised.

255

In November 2023, the Cybersecurity and Infrastructure Security Agency (CISA), National 

Security Agency (NSA), and partners released 

new guidance on the security of the software 

supply chain.256 The sector should remain vigilant, 

thoroughly vet its supply chain, and be ready to 

respond immediately to new threats.

Recommendations

The Council supports the ongoing collaboration 

of member agencies to examine and address the 

risks posed by third-party service providers and 

the services they provide to the financial system. 

Member agencies continue to enhance their 

supervisory programs for cyber-related controls 

in key areas such as core processing, payment 

services, and cloud computing. 

The Council supports continued risk identification associated with service providers’ roles in the 

financial sector and their potential impacts on 

financial stability. The Council also recommends 

that federal banking regulators continue to coorVulnerabilities, Significant Market Developments, and Council Recommendations
98 2023 FSOC // Annual Report

ION Group (ION) is an Ireland-based, privately held global financial software and data firm. 

ION’s product offerings include software used by 

many futures commission merchants (FCMs) to 

process cleared derivatives transactions. Its XTP 

and XTP Clearing software modules (XTP) give 

FCMs a front-to-back trade processing capability, 

which includes trade execution, trade matching, 

trade allocation, trade settlement and clearing, 

and margin calculation, plus exchange, regulatory, and customer reporting. 

On the evening of January 30, 2023, ION became 

a victim of a LockBit ransomware attack that 

affected XTP. The next morning, FCMs that were 

customers of ION and relied upon XTP services 

were unable to use those services to process 

cleared derivatives transactions. Most of ION’s 

services were not restored until February 19, 2023. 

In those intervening three weeks, CFTC staff had 

daily calls with FCMs, CCPs, exchanges, and ION 

to monitor ION’s mitigation efforts and the varying levels of difficulty related to trade processing 

experienced by affected FCMs. 

In the early hours of the attack, ION hired two 

vendors to collect, surveil, and diagnose information needed to identify malicious code and to 

determine if data had been exfiltrated. ION and 

the vendors concluded that no data had been 

exfiltrated. 

Of the approximately 60 FCMs registered with the 

CFTC, 16 FCMs used XTP, although the severity 

of the impact varied across affected FCMs. WithBox H: ION Case Study

out XTP, the FCMs had to manage the following 

challenges:

1. Trade feeds from exchanges were no longer

being received.

2. Trade matching, allocation, settlement, and

clearing had to be done manually.

3. Position management, risk management, and

margin calculations had to be done manually.

4. Exchange, CCP, regulatory, and customer

reporting had to be provided manually.

The CFTC’s weekly Commitments of Traders report, which is closely watched by market participants, was also delayed because the disruption affected some clearing members’ ability to provide 

the CFTC with timely and accurate trade data. 

As a result of required FCM disaster recovery 

procedures and planning, effective manual 

workarounds, and assistance by CCPs (which do 

not use XTP) in helping FCMs in front-to-back 

processing, FCMs and market participants met 

margin obligations in a timely and compliant 

manner. Although many disruptions occurred 

during the three weeks following the attack, no 

defaults occurred. 

Following this incident, many CCPs, FCMs, and 

market participants in the cleared derivatives 

market space initiated cybersecurity and disaster 

recovery reviews of their internal and vendor systems and related policies and protocols.
Council Activities and Regulatory Developments 99

assess climate-related financial risk, and it is also 

identifying a preliminary set of risk indicators 

for banking, insurance, and financial markets. In 

addition, the CFRC has identified the intersection 

of physical risk, real estate, and insurance as a 

particular priority for future analysis.

The CFRAC, which was established by the Council 

in October 2022, provides the Council with 

information on and analysis of climate-related 

financial risks from a broad array of perspectives. 

The CFRAC’s members include stakeholders 

from a wide range of backgrounds, including the 

financial services industry, nongovernmental 

research institutions, climate-related data-andanalytics providers, nonprofit organizations, and 

academia. Committee members with expertise 

in climate data and analysis support the Council 

and its member agencies in their efforts to 

translate climate-related risks into economic and 

financial impacts. The CFRAC hosted its first three 

meetings in 2023.

Nonbank Financial Intermediation 

The Council continues to evaluate the 

vulnerabilities posed by nonbank financial 

institutions (NBFIs). The Council’s Hedge 

Fund Working Group has developed a riskmonitoring system to assess hedge fund–related 

risks to U.S. financial stability. In addition, 

the Council’s Nonbank Mortgage Servicing 

Task Force, a working group including staff 

from member agencies and other government 

agencies such as the Department of Housing and 

Urban Development, is facilitating interagency 

coordination and additional market monitoring of 

the risks that nonbank mortgage servicers pose to 

U.S. financial stability. 

Digital Assets 

As part of its responsibility to identify emerging 

risks to U.S. financial stability, the Council has 

monitored and discussed developments in the 

evolving crypto-asset ecosystem. In October 2022, 

the Council published its Report on Digital Asset 

Financial Stability Risks and Regulation, which 

4.1 Council Activities

4.1.1 Risk Monitoring and Regulatory Coordination

The Dodd-Frank Act charges the Council with 

the responsibility to identify risks to U.S. financial 

stability, promote market discipline, and respond 

to emerging threats to the stability of the U.S. 

financial system. The Council also has a duty to 

facilitate information sharing and coordination 

among member agencies and other federal and 

state agencies regarding financial services policy 

and other developments. 

The Council regularly examines significant market 

developments and structural issues within the 

financial system. This risk-monitoring process is 

facilitated by the Council’s Systemic Risk Committee (SRC), whose participants are primarily 

member agency staff in supervisory, monitoring, 

examination, and policy roles. The SRC serves as 

a forum for member agency staff to identify and 

analyze potential risks that may extend beyond 

any individual agency’s jurisdiction.

Climate-Related Financial Risk 

The Council recognizes the critical importance of 

continuing to assess climate-related risks to the 

financial system and promote the resilience of the 

financial system to those risks. In October 2021, 

the Council published a Report on Climate-Related Financial Risk, which recommended the 

formation of two committees: (1) a staff-level 

Climate-related Financial Risk Committee (CFRC) 

and (2) an external Climate-related Financial Risk 

Advisory Committee (CFRAC).

The CFRC, which began meeting regularly in 

February 2022, serves as an active forum for 

interagency information sharing, coordination, 

and capacity building. In July 2023, the CFRC 

issued a staff progress report to provide an update 

on efforts by the Council and member agencies 

to advance the recommendations in the 2021 

climate report. Among its other efforts, the CFRC 

is developing a robust framework to identify and 

4 Council Activities and Regulatory 

Developments
100 2023 FSOC // Annual Report

tion, recommendations to regulators, or the designation of certain entities. The updated Guidance 

on Nonbank Financial Company Determinations 

(Nonbank Designations Guidance), also approved by the Council on November 3, sets forth 

the Council’s procedures for considering whether 

to designate a nonbank financial company for 

Federal Reserve supervision and prudential standards under section 113 of the Dodd-Frank Act. 

The Nonbank Designations Guidance provides a 

transparent process and significant opportunities 

for engagement with both a nonbank financial 

company under review and its existing regulators.

4.1.3 Operations of the Council

The Dodd-Frank Act requires the Council to convene no less frequently than quarterly. The Council held nine meetings in 2023, including at least 

two each quarter. The meetings bring Council 

members together to discuss and analyze market 

developments, potential threats to financial stability, and financial-regulatory issues. Although 

the Council’s work frequently involves confidential supervisory and sensitive information, the 

Council is committed to conducting its business 

as openly and transparently as practicable. Consistent with the Council’s transparency policy, the 

Council opens its meetings to the public whenever possible. The Council held a public session at 

four of its meetings in 2023. Approximately every 

two weeks, the Council’s Deputies Committee, 

composed of senior representatives of Council members, convenes to discuss the Council’s 

agenda and to coordinate and oversee the work 

of the Council’s six other staff-level committees: 

(1) the Systemic Risk Committee; (2) the Financial Market Utilities and Payment, Clearing, and 

Settlement Activities Committee; (3) the Nonbank 

Financial Companies Designations Committee; 

(4) the Regulation and Resolution Committee; (5) 

the Climate-related Financial Risk Committee; 

and (6) the Data Committee. As noted in Section 

4.1.1: Risk Monitoring and Regulatory Coordination, the Council also established its first advisory committee, the Climate-related Financial 

Risk Advisory Committee, in 2022. The Council 

adopted its FY 2024 budget in September 2023.

identified specific financial stability risks and regulatory gaps posed by various types of crypto-assets and provided recommendations to address 

these risks. The Council’s Digital Assets Working 

Group facilitates information sharing and analysis 

related to crypto-asset risks and market developments.

4.1.2 Determinations Regarding Nonbank 

Financial Companies

One of the Council’s statutory authorities is to 

determine that a nonbank financial company will 

be subject to enhanced prudential standards and 

supervision by the Federal Reserve if material 

financial distress at the company, or if the nature, 

scope, size, scale, concentration, interconnectedness, or mix of activities of the company, could 

pose a threat to U.S. financial stability. The DoddFrank Act sets forth the standard for the Council’s 

determinations regarding nonbank financial companies, and it requires the Council to consider 10 

specific considerations and any other risk-related 

factors that the Council deems appropriate when 

evaluating those companies. 

On April 21, 2023, the Council issued for public 

comment a new proposed analytical framework 

for financial stability risks and proposed updated interpretative guidance on the Council’s 

procedures for designating nonbank financial 

companies for Federal Reserve supervision and 

enhanced prudential standards. 

In November 2023, the Council finalized these 

two documents, which improve the Council’s 

ability to address risks to financial stability and 

to provide greater public transparency. The 

Council’s new Analytic Framework for Financial 

Stability Risk Identification, Assessment, and 

Response (Analytic Framework), approved by the 

Council on November 3, 2023, offers a detailed 

public explanation of how the Council monitors, assesses, and responds to potential risks to 

financial stability, whether they come from widely 

conducted activities or from individual firms. The 

Analytic Framework represents the first time that 

the Council has detailed the vulnerabilities and 

transmission channels that most commonly contribute to risks to financial stability irrespective of 

the source of the risks, and it explains the range 

of authorities the Council may use to address any 

particular risk, including interagency coordina-
101

On September 18, 2023, the Federal Reserve, 

OCC, and FDIC issued a notice of proposed 

rulemaking that would substantially revise the 

capital requirements applicable to large banking 

organizations (those with over $100 billion in total 

consolidated assets) and banking organizations 

with significant trading activity. The revisions set 

forth in the proposal would improve the calculation of risk-based capital requirements to better 

reflect the risks of these banking organizations’ 

exposures, reduce the complexity of the framework, enhance the consistency of requirements 

among these banking organizations, and facilitate 

more effective supervisory and market assessments of capital adequacy. The revisions would 

include replacing current requirements, which 

include the use of banking organizations’ internal 

models for credit risk and operational risk, with 

standardized approaches. The revisions would 

also include replacing the current market risk and 

credit valuation adjustment risk requirements 

with revised approaches. The proposed revisions 

would be generally consistent with recent changes to international capital standards issued by the 

Basel Committee on Banking Supervision. The 

proposal would not amend the capital requirements applicable to smaller, less-complex banking organizations.

On September 19, 2023, the Federal Reserve, 

OCC, and FDIC issued a notice of proposed 

rulemaking that would require certain large 

depository institution holding companies, U.S. 

intermediate holding companies of foreign banking organizations, and certain insured depository 

institutions (IDIs) to issue and maintain outstanding a minimum amount of long-term debt. 

The proposed rule would improve the resolvability of such banking organizations in case of failure, and it could also reduce costs to the Deposit 

Insurance Fund and mitigate financial stability 

and contagion risks by reducing the risk of loss to 

uninsured depositors.

On October 11, 2023, the FDIC issued a notice 

of proposed rulemaking seeking comment on 

proposed corporate governance and risk management guidelines that would apply to all insured 

state nonmember banks, state-licensed insured 

branches of foreign banks, and insured state 

savings associations that are subject to Section 39 

of the Federal Deposit Insurance Act, with total 

4.2 Safety and Soundness

4.2.1 Enhanced Capital and Prudential Standards and Supervision

On January 26, 2023, the Federal Reserve issued 

a final rule to implement the Adjustable Interest Rate (LIBOR) Act. The final rule establishes 

benchmark replacements for contracts governed 

by U.S. law that reference certain tenors of U.S. 

dollar LIBOR, the overnight and 1-, 3-, 6-, and 

12-month tenors, and that do not have terms that 

provide for the use of a clearly defined and practicable replacement benchmark rate following the 

first London banking day after June 30, 2023. The 

final rule also provides additional definitions and 

clarifications consistent with the LIBOR Act.

On June 9, 2023, the Federal Reserve, FDIC, and 

OCC issued final guidance on managing risks associated with third-party relationships. The final 

guidance offers the agencies’ views on sound risk 

management principles for banking organizations 

when developing and implementing risk management practices for all stages of the life cycle 

of third-party relationships. The final guidance 

states that sound third-party risk management 

takes into account the level of risk, complexity, 

and size of the banking organization and the nature of the third-party relationship. The agencies 

issued this joint guidance to promote consistency 

in supervisory approaches. It replaces each agency’s existing general guidance on this topic and is 

directed to all banking organizations supervised 

by the agencies.

On July 28, 2023, the Federal Reserve, FDIC, OCC, 

and NCUA updated their existing guidance on 

liquidity risks and contingency planning. The 

updated guidance highlights that depository institutions should regularly evaluate and update their 

contingency funding plans. The updated guidance 

encourages depository institutions to incorporate 

the discount window as part of their contingency 

funding plans. Consistent with other contingency 

funding sources, the guidance reinforces the supervisory expectation that if the discount window 

is part of a depository institution’s contingency 

funding plans, the depository institution should 

establish and maintain operational readiness to 

use the discount window, which includes conducting periodic transactions.

Council Activities and Regulatory Developments
102 2023 FSOC // Annual Report

more quarters beyond the initial eight-quarter 

collection period to collect the difference between actual or estimated losses and the amounts 

collected, and impose a final shortfall special assessment to collect the difference between actual 

losses and the amounts collected on a one-time 

basis after the receiverships for SVB and Signature 

Bank terminate. The final rule will become effective on April 1, 2024, with the first collection for 

the special assessment reflected on the invoice for 

the first quarterly assessment period of 2024 (i.e., 

January 1 through March 31, 2024), with a payment date of June 28, 2024.

4.2.2 Dodd-Frank Act Stress Tests

On June 28, 2023, the Federal Reserve released 

the results of its annual bank stress test, which 

demonstrate that large banks are well positioned 

to weather even a severe recession and continue to lend to households and businesses. The 

Federal Reserve’s stress test is one tool to help 

ensure that large banks can support the economy 

during economic downturns. The test evaluates 

the resilience of large banks by estimating their 

capital levels, losses, revenues, and expenses 

under a single hypothetical recession and financial market shock, using banks’ data as of the end 

of last year. All 23 banks tested remained above 

their minimum capital requirements during the 

hypothetical recession, despite total projected 

losses of $540 billion. Under stress, the aggregate 

common equity risk-based capital ratio, which 

provides a cushion against losses, is projected to 

decline by 2.5 percentage points to a minimum of 

9.9 percent.

4.2.3 Resolution Planning and Orderly Liquidation

On September 19, 2023, the FDIC issued a notice 

of proposed rulemaking to revise its current rule 

that requires the submission of resolution plans 

by IDIs with $50 billion or more in total assets. 

The proposal would modify the current rule by revising the requirements pertaining to the content 

and timing of resolution submissions, as well as 

interim supplements to those submissions, provided to the FDIC by IDIs with $50 billion or more 

in total assets. The goal of this proposal is to support the FDIC’s resolution readiness in the event 

of the material distress and failure of these large 

consolidated assets of $10 billion or more on or 

after the effective date of the final guidelines.

On October 24, 2023, the Federal Reserve, OCC, 

and FDIC jointly issued principles that provide a 

high-level framework for the safe and sound management of exposures to climate-related financial 

risks. Although all financial institutions, regardless 

of size, may have material exposures to climate-related financial risks, the principles are intended 

for the largest financial institutions, those with 

over $100 billion in total consolidated assets. The 

principles are intended to support efforts by large 

financial institutions to focus on key aspects of 

climate-related financial risk management.

On October 24, 2023, the Federal Reserve, OCC, 

and FDIC adopted final amendments to their 

regulations implementing the Community Reinvestment Act of 1977 (CRA) to update how CRA 

activities qualify for consideration, where CRA 

activities are considered, and how CRA activities 

are evaluated.

On November 16, 2023, the FDIC approved a final 

rule to implement a special assessment to recover 

the loss to the Deposit Insurance Fund arising 

from the protection of uninsured depositors, as 

required by the Federal Deposit Insurance Act, in 

connection with the systemic risk determination 

announced on March 12, 2023, following the closures of Silicon Valley Bank (SVB) and Signature 

Bank. The assessment base for the special assessment is equal to an IDI’s estimated uninsured 

deposits, reported for the quarter that ended December 31, 2022, adjusted to exclude the first $5 

billion in estimated uninsured deposits from the 

IDI, or for IDIs that are part of a holding company 

with one or more subsidiary IDIs, at the banking organization level. The FDIC will collect the 

special assessment at a quarterly rate of 3.36 basis 

points, over eight quarterly assessment periods, 

which it estimates will result in total revenue of 

$16.3 billion, the estimated losses attributable to 

the protection of uninsured depositors at the two 

failed banks. Because the estimated loss pursuant 

to the systemic risk determination will be periodically adjusted, and because assessments collected 

may change due to corrective amendments to the 

amount of uninsured deposits reported for the 

December 31, 2022 reporting period, the FDIC 

retains the ability to cease collection early, extend 

the special assessment collection period one or 
103

is presented by an insurer establishing that such 

a higher charge is unwarranted on a case-by-case 

basis. This change is intended to better align the 

risk level of certain residual tranche investments 

with the appropriate capital level. Additionally, 

changes were made to the NAIC Property RiskBased Capital formula to clarify expectations for 

companies that seek regulatory approval to use 

their own models to calculate catastrophe riskbased capital requirements. 

NAIC members adopted a new principle-based 

definition of bonds for inclusion in the NAIC’s 

Accounting Practices and Procedures Manual, to 

better identify the risk level of certain investments 

that became more prevalent during the period of 

prolonged low interest rates. Other changes were 

made to this same manual clarifying that an invested asset issued by an affiliated entity and held 

by a reporting insurer, or that includes the obligations of an affiliated entity, is deemed an affiliated 

investment that must be disclosed in the insurer’s 

Annual Statement.

NAIC members also adopted changes to the 

Purposes and Procedures Manual of the NAIC 

Investment Analysis Office to remove financially 

modeled collateralized loan obligations (CLOs) 

from filing exemption eligibility and to assign 

responsibility for modeling the NAIC Designation Categories to the NAIC’s Structured Securities Group. This change will provide regulators 

with more transparency and insight into certain 

CLO exposures that were previously exempt 

from filing. Additional updates to the Purposes 

and Procedures Manual include clarifications 

that state insurance regulators are permitted to 

require an insurance company to file with the 

Securities Valuation Office for an NAIC designation for an affiliated investment. Finally, the NAIC 

and state regulators have placed increased emphasis on Actuarial Guideline LIII, Application of 

the Valuation Manual for Testing of Adequacy of 

Life Insurer Reserve, which is intended to require 

insurers to file detailed information on their complex investments with the NAIC. 

NAIC members adopted the Liquidity Stress 

Testing Framework used for year-end 2022, which 

(along with Asset Adequacy Testing) is intended 

to help regulators evaluate the risks created by 

rising interest rates.

IDIs. IDIs with $100 billion or more in total assets 

will submit full resolution plans, while IDIs with 

total assets between $50 billion and $100 billion 

will submit informational filings. The proposed 

rule would also enhance how the credibility of 

resolution submissions will be assessed, expand 

expectations regarding engagement and capabilities testing, and explain expectations regarding 

the FDIC’s review and enforcement of IDIs’ compliance with the rule.

On September 19, 2023, the Federal Reserve and 

the FDIC issued proposed guidance for the 2024 

and subsequent resolution plan submissions by 

certain domestic and foreign banking organizations. The proposed guidance is meant to assist 

these firms in developing their resolution plans 

(which the Dodd-Frank Act requires them to 

submit) and the jointly issued implementing regulation. The scope of application of the proposed 

guidance would be domestic and foreign triennial 

full filers, which are Category II and III banking 

organizations. 

4.2.4 Insurance

FIO assists the Secretary of the Treasury in administering the Terrorism Risk Insurance Program (TRIP), created under the Terrorism Risk 

Insurance Act of 2002, as amended. In June 2023, 

Treasury published a Report on Small Insurer 

Competitiveness in the Terrorism Risk Insurance 

Marketplace. In addition to providing updates 

on the role of small insurers in the terrorism 

insurance marketplace, the report identifies new 

insights available from FIO’s expanded cyber 

insurance data collection. The report also shares 

analysis based upon the use of terrorism risk 

modeling to evaluate potential impacts on small 

insurers under TRIP. The report finds that small 

insurers are important components of the large 

and diverse U.S. insurance market and are also 

significant participants in the market for terrorism 

risk insurance in the United States. The report 

finds that small insurers’ market share of TRIP-eligible lines of insurance has been stable since 

2017, with an observed increase in market share 

in the last two years.

The NAIC adopted a new risk-based capital 

charge for investments in residual tranches of certain structured securities for year-end 2023; this 

charge will increase for 2024 unless information 

Council Activities and Regulatory Developments
104 2023 FSOC // Annual Report

uals across state markets and the United States, 

and how these effects could impact the broader 

financial system. This information collection will 

enable FIO to advance its statutory mandates and 

to fulfill the second undertaking for FIO under EO 

14030, which called on FIO to “further assess, in 

consultation with States, the potential for major disruptions of private insurance coverage in 

regions of the country particularly vulnerable to 

climate change impacts.” 

Throughout 2023, the NAIC took steps to provide 

state insurance regulators with tools to address 

challenges related to climate risk and resilience. In 2023, the first disclosures aligned with 

the Task Force on Climate-Related Disclosures 

(TCFD) were received from insurers as part of the 

NAIC’s revised survey methodology. The NAIC 

worked with the Society of Actuaries to develop 

a research report that analyzes the insurer responses; discerns how insurers are identifying, 

assessing, and managing their climate-related 

risks; and summarizes the results. The Financial 

Examiners Handbook (E) Technical Group drafted changes to the Financial Condition Examiners 

Handbook to specifically address enterprise risk 

management practices concerning catastrophic 

risk and to identify the NAIC Climate Disclosure 

Survey or TCFD as a reference to gather information from insurers. The NAIC has operationalized 

its Catastrophe Modeling Center of Excellence 

(COE) to provide state insurance regulators with 

tools and training regarding catastrophe models. 

In 2023, the COE produced initial research on 

model utilization, conducted in-person training 

in four states/territories, and released the regulator-only virtual training course Catastrophe 

Modeling 101. In 2022 and 2023, the NAIC worked 

with Moody’s Risk Management Services and 

the Colorado Division of Insurance to produce a 

wildfire risk assessment for the state and begin to 

identify how wildfire exposure correlates with the 

risk-based cost of coverage throughout the state. 

This research builds on an earlier paper produced 

in 2020 by the NAIC to identify how mitigation 

actions reduce the relative risk, thereby making 

insurance more affordable and available in some 

challenging markets.

4.3 Financial Infrastructure, Markets, 

and Oversight

4.3.1 Climate-Related Financial Risks

On March 25, 2023, the NCUA issued a request 

for comment on current and future climate and 

natural disaster risks to federally insured credit 

unions (FICUs), related entities, their members, 

and the National Credit Union Share Insurance 

Fund. The NCUA also sought input on the development of potential future guidance, regulations, 

reporting requirements, and supervisory approaches for FICUs’ management of climate-related financial risks.

On June 27, 2023, FIO released a report entitled Insurance Supervision and Regulation of 

Climate-Related Risks in response to President 

Biden’s Executive Order (EO) on Climate-Related 

Financial Risk. The report assesses climate-related issues and gaps in the supervision and regulation of insurers. It finds that there are important 

existing efforts to incorporate climate-related risk 

into state insurance regulation and supervision. 

The report, while recognizing the value of those 

efforts, notes that they are fragmented among 

states and limited in several critical ways. The 

report encourages state insurance regulators and 

the NAIC to build on their progress and makes 20 

policy recommendations for improving the supervision of climate-related risks affecting insurers. 

The report fulfilled the first undertaking to FIO 

under EO 14030, which called on FIO to “assess 

climate-related issues or gaps in the supervision 

and regulation of insurers.”

On November 2, 2023, FIO issued a public notice 

on its intent to proceed with its first-ever data 

collection from insurers to assess climate-related financial risk to consumers across the United 

States, while also submitting the data collection 

request to the Office of Management and Budget 

(OMB) for approval and public comment. FIO’s 

data collection will obtain previously unavailable 

insurance data at a ZIP Code level on a consistent, 

granular, and comparable basis from the largest 

homeowners insurance providers that collectively 

underwrite around 70 percent of homeowners 

insurance premiums nationwide. This nationwide 

view is critical to understanding how climate-related financial risks impact families and individ-
105

On September 29, 2023, FIO issued a request for 

comment on questions related to cyber insurance 

and catastrophic cyber incidents. The comments 

will inform FIO’s work in responding to a recommendation by the U.S. Government Accountability Office that FIO and the Department of Homeland Security’s Cybersecurity and Infrastructure 

Security Agency jointly assess the extent to which 

the risks to U.S. critical infrastructure from catastrophic cyberattacks warrant a federal insurance 

response. FIO is also coordinating with the Office 

of the National Cyber Director on this project.

On October 24, 2023, state bank regulators, in 

conjunction with the Bankers Electronic Crimes 

Task Force and U.S. Secret Service, released an 

updated Ransomware Self-Assessment Tool 

(R-SAT 2.0). The R-SAT is designed to help financial institutions periodically assess their efforts 

to mitigate risks associated with ransomware and 

identify gaps for increasing security. The self-assessment provides executive management and 

the board of directors with an overview of their 

institution’s preparedness towards identifying, 

protecting, detecting, responding to, and recovering from a ransomware attack. It may also assist 

other third parties (such as auditors, security 

consultants, and regulators) that might review a 

financial institution’s security practices.

On November 7, 2023, the CFPB announced a 

notice of proposed rulemaking to supervise larger 

nonbank companies that offer services like digital 

wallets and payment apps. Driven largely by Big 

Tech and other large technology firms, digital 

payment apps and wallets continue to grow in 

popularity, but many of the companies are not 

subject to CFPB supervisory examinations. The 

proposed rule would help ensure that these 

nonbank financial companies, specifically those 

larger companies handling more than 5 million 

transactions per year, adhere to the same rules 

as large banks, credit unions, and other financial 

institutions already supervised by the CFPB.

4.3.3 Derivatives, Swap Data Repositories, 

Regulated Trading Platforms, Central Counterparties, and Financial Market Utilities

On April 14, 2023, the CFTC issued a notice of 

proposed rulemaking to amend its derivatives 

clearing organization (DCO) risk management 

regulations, in order to permit futures commis4.3.2 Digital Assets, Payment Systems, and 

Technological Innovation

On January 3, 2023, the Federal Reserve, FDIC, 

and OCC issued a statement on crypto-asset risks 

to banking organizations. The statement noted 

that the events of 2022 were marked by significant volatility and the exposure of vulnerabilities 

in the crypto-asset sector, and it also noted that 

these events highlight a number of key risks associated with crypto-assets and crypto-asset sector 

participants that banking organizations should 

be aware of. These risks include: risk of fraud and 

scams among crypto-asset sector participants; 

legal uncertainties related to custody practices, 

redemptions, and ownership rights, some of 

which are currently the subject of legal processes and proceedings; inaccurate or misleading 

representations and disclosures by crypto-asset 

companies, including misrepresentations regarding federal deposit insurance; other crypto-asset 

company practices that may be unfair, deceptive, or abusive and may cause significant harm 

to retail and institutional investors, customers, 

and counterparties; and significant volatility in 

crypto-asset markets, the effects of which include 

potential impacts on deposit flows associated 

with crypto-asset companies.

On February 23, 2023, the Federal Reserve, FDIC, 

and OCC issued a statement on the liquidity 

risks presented by certain sources of funding 

from crypto-asset-related entities, along with 

certain effective practices to manage these risks. 

The statement reminds banking organizations 

to apply existing risk management principles; it 

does not create new risk management principles. 

Banking organizations are neither prohibited nor 

discouraged from providing banking services to 

customers of any specific class or type, as permitted by law or regulation.

On March 1, 2023, the NCUA issued a final rule 

amending Part 748 of its regulations to require a 

FICU that experiences a reportable cyber incident to report the incident to the NCUA as soon 

as possible and no later than 72 hours after the 

FICU reasonably believes that it has experienced 

such an incident. This notification requirement 

provides an early alert to the NCUA and does 

not require a FICU to provide a detailed incident 

assessment to the NCUA within the 72-hour time 

frame.

Council Activities and Regulatory Developments
106 2023 FSOC // Annual Report

among other things, update information requirements associated with commingling customer 

funds and positions in futures and swaps in the 

same account, revise certain daily and event-specific reporting requirements in the regulations, 

and codify in an appendix the data fields that a 

DCO is required to provide on a daily basis under 

the regulations. In addition, the CFTC adopted 

amendments to certain delegation provisions in 

its regulations.

On November 2, 2023, the SEC issued a final rule 

and forms under the Exchange Act that would 

create a regime for the registration and regulation 

of security-based swap execution facilities and 

address other issues relating to security-based 

swap execution generally. One of the rules being 

adopted implements an element of the DoddFrank Act that is intended to mitigate conflicts of 

interest at security-based swap execution facilities 

and national securities exchanges that trade securities-based swaps.

4.3.4 Securities and Asset Management

On December 16, 2022, the SEC issued a notice 

of proposed rulemaking to amend its current 

rules for open-end funds regarding liquidity risk 

management programs and swing pricing. The 

proposed amendments are designed to improve 

liquidity risk management programs to better 

prepare funds for stressed conditions and improve transparency in liquidity classifications. The 

amendments are also designed to mitigate dilution of shareholders’ interests in a fund by requiring any open-end funds, other than a money market fund (MMF) or exchange-traded fund (ETF), 

to use swing pricing to adjust the fund’s net asset 

value (NAV) per share to pass on costs stemming 

from shareholder purchase or redemption activity to the shareholders engaged in that activity. 

In addition, to help operationalize the proposed 

swing-pricing requirement, and to improve order 

processing more generally, the SEC proposed a 

“hard close” requirement for these funds. Under 

this requirement, an order to purchase or redeem 

a fund’s shares would be executed at the current 

day’s price only if the fund, its designated transfer 

agent, or a registered securities-clearing agency 

receives the order before the pricing time as of 

which the fund calculates its NAV. The SEC also 

proposed amendments to reporting and disclosion merchants (FCMs) that are clearing members to treat the separate accounts of a single 

customer as accounts of separate entities for purposes of withdrawing customer initial margin. The 

proposal would codify Staff Letter No. 19-17 and 

establish the conditions under which a DCO may 

permit such separate account treatment. 

On June 30, 2023, the SEC issued a final rule under the Exchange Act that is designed to prevent 

fraud, manipulation, and deception in connection 

with effecting any transaction in, or attempting to 

effect any transaction in, or purchasing or selling, 

or inducing or attempting to induce the purchase 

or sale of, any security-based swap. 

On July 13, 2023, the CFTC issued a final rule 

adopting amendments to its rules to require 

DCOs to establish and consult with one or more 

risk management committees (RMCs), which will 

be composed of clearing members and customers of clearing members, on matters that could 

materially affect the risk profile of the DCOs. In 

addition, the CFTC adopted minimum requirements for RMC composition and rotation, and 

it also required DCOs to establish and enforce 

fitness standards for RMC members. The CFTC 

also adopted requirements for DCOs to maintain 

written policies and procedures governing the 

RMC consultation process and the role of RMC 

members. Finally, the CFTC adopted requirements for DCOs to establish one or more market 

participant risk advisory working groups (RWGs) 

that must convene at least two times per year, and 

to adopt written policies and procedures related 

to the formation and role of the RWGs.

On July 28, 2023, the CFTC issued a notice of proposed rulemaking to amend certain regulations 

applicable to systemically important DCOs and 

DCOs that elect to be subject to the provisions in 

the CFTC’s regulations. These proposed amendments would, among other things, address certain 

risk management obligations, modify definitions, 

and codify existing staff guidance. The CFTC also 

proposed to amend certain regulations to require 

DCOs that are not designated as systemically 

important, and which have not elected to be covered by the CFTC’s regulations, to submit orderly 

Wind-Down plans. 

On August 8, 2023, the CFTC issued a final rule 

amending certain reporting and information regulations applicable to DCOs. The amendments, 
107

including changes to how orders are categorized 

by order size and order type. As part of the changes to these categories, the SEC proposed to capture execution quality information for fractional 

share orders, odd-lot orders, and larger-sized 

orders. Additionally, the SEC proposed to modify 

reporting requirements for nonmarketable limit 

orders to capture more relevant execution quality 

information for such orders by requiring statistics 

to be reported from the time such orders become 

executable. The SEC also proposed to eliminate 

time-to-execution categories in favor of average 

time to execution, median time to execution, and 

99th-percentile time to execution, each as measured in increments of a millisecond or finer and 

calculated on a share-weighted basis. In order to 

better reflect the speed of the marketplace, the 

SEC proposed that the time of order receipt and 

time of order execution be measured in increments of a millisecond or finer, and that realized 

spread be calculated at both 15 seconds and one 

minute. Finally, the SEC proposed to enhance the 

accessibility of the required reports by requiring 

all reporting entities to make a summary report 

available.

On January 27, 2023, the SEC proposed new rules 

under the Exchange Act relating to a broker-dealer’s duty of best execution. Proposed Regulation 

Best Execution is intended to enhance the existing regulatory framework concerning the duty 

of best execution by requiring detailed policies 

and procedures for all broker-dealers and more 

robust policies and procedures for broker-dealers 

engaging in certain conflicted transactions with 

retail customers, as well as related review and 

documentation requirements.

On March 6, 2023, the SEC issued a final rule to 

shorten the standard settlement cycle for most 

broker-dealer transactions from two business 

days after the trade date (T+2) to one business day 

after the trade date (T+1). In addition, the SEC 

adopted new rules related to the processing of 

institutional trades by broker-dealers and certain 

clearing agencies. The SEC also amended certain 

recordkeeping requirements applicable to registered investment advisers.

On April 5, 2023, the SEC proposed a new rule, a 

new form, and amendments to existing recordkeeping rules to require broker-dealers, clearing 

agencies, major security-based swap participants, 

sure requirements on Forms N–PORT, N–1A, and 

N–CEN that apply to certain registered investment 

companies, including registered open-end funds 

(other than MMFs), registered closed-end funds, 

and unit investment trusts. The proposed amendments would require more-frequent reporting 

of monthly portfolio holdings and related information to the SEC and the public, amend certain 

reported identifiers, and make other amendments 

to require the reporting of additional information 

about funds’ liquidity risk management and use 

of swing pricing.

On December 29, 2022, the SEC issued a notice 

of proposed rulemaking to amend certain rules 

of the Regulation National Market System (Regulation NMS) under the Exchange Act to adopt 

variable minimum pricing increments for the 

quoting and trading of NMS stocks, reduce the 

access fee caps, and enhance the transparency of 

better-priced orders.

On January 3, 2023, the SEC issued a notice of 

proposed rulemaking to amend the regulation 

governing the NMS under the Exchange Act, add 

a new rule designed to promote competition as 

a means to protect the interests of individual investors, and further the objectives of an NMS. The 

proposed rule would prohibit a restricted-competition trading center from internally executing certain orders of individual investors at a given price 

unless the orders are first exposed to competition 

at that price in a qualified auction operated by an 

open-competition trading center. The proposed 

rule would also include limited exceptions to this 

general prohibition. 

On January 20, 2023, the SEC issued a notice 

of proposed rulemaking to amend existing requirements under the Exchange Act to update 

the disclosures required for order executions in 

NMS stocks. First, the SEC proposed to expand 

the scope of reporting entities that are subject 

to the rule that requires market centers to make 

available to the public monthly execution quality 

reports; the amended rule will encompass broker-dealers with a larger number of customers. 

Next, the SEC proposed to modify the definition 

of “covered orders” to include certain orders 

submitted outside of regular trading hours and 

certain orders submitted with stop prices. In addition, the SEC proposed modifications to the information required to be reported under the rule, 

Council Activities and Regulatory Developments
108 2023 FSOC // Annual Report

the Exchange Act to strengthen the existing rules 

regarding margin with respect to intraday margin 

and the use of substantive inputs in a covered 

clearing agency’s risk-based margin system. The 

SEC also proposed a new rule to establish requirements for the contents of a covered clearing 

agency’s recovery and wind-down plan.

On August 1, 2023, the SEC proposed amendments to the rule under the Investment Advisers 

Act of 1940 (Advisers Act) that exempts certain 

investment advisers that provide advisory services through the internet from the prohibition on 

SEC registration. The SEC also proposed related 

amendments to Form ADV. The proposed amendments are designed to modernize the rule’s conditions to account for the evolution of technology 

and the investment advisory industry since the 

adoption of the rule.

On August 3, 2023, the SEC issued a final rule 

amending certain rules that govern MMFs under 

the Investment Company Act. These amendments are designed to improve the resilience 

and transparency of MMFs. The amendments 

will revise the primary rule that governs MMFs 

to remove a fund board’s ability to temporarily 

suspend redemptions if the fund’s liquidity falls 

below a threshold. In addition, the amendments 

will remove the tie between liquidity thresholds 

and the potential imposition of liquidity fees. The 

amendments will also require certain MMFs to 

implement a liquidity fee framework that will better allocate the costs of providing liquidity to redeeming investors. In addition, the SEC increased 

the daily liquid asset minimum requirement to 

25 percent and the weekly liquid asset minimum 

requirement to 50 percent. The SEC also amended 

certain reporting requirements on Form N–MFP 

and Form N–CR and made certain conforming 

changes to Form N–1A to reflect amendments to 

the regulatory framework for MMFs. In addition, 

the SEC addressed how MMFs with stable NAVs 

may handle a negative–interest rate environment, 

including by adopting amendments that will permit such funds to use share cancellation, subject 

to certain conditions. Also, the SEC adopted rule 

amendments to specify how funds must calculate 

weighted-average maturity and weighted-average 

life. In addition, the SEC adopted amendments to 

Form PF concerning the information large liquidity fund advisers must report for the liquidity 

funds they advise.

the Municipal Securities Rulemaking Board, national securities associations, national securities 

exchanges, security-based swap data repositories, 

security-based swap dealers, and transfer agents 

to address cybersecurity risks. The rule would 

require new policies and procedures, immediate 

notification of the SEC of the occurrence of any 

significant cybersecurity incident, reporting to the 

SEC of detailed information on such an incident, 

and public disclosures that would improve transparency with respect to cybersecurity risks and 

significant cybersecurity incidents. In addition, 

the SEC proposed amendments to existing clearing agency exemption orders to require the retention of records created under the proposed cybersecurity requirements. Finally, the SEC proposed 

amendments to address the potential availability 

of substituted compliance to security-based swap 

dealers and major security-based swap participants in connection with these requirements.

On April 14, 2023, the SEC issued a notice of proposed rulemaking to amend Regulation Systems 

Compliance and Integrity (Regulation SCI) under 

the Exchange Act. The proposed amendments 

would expand the definition of “SCI entity” to 

include a broader range of key market participants in the U.S. securities market infrastructure, 

and they would also update certain provisions of 

Regulation SCI to take into account developments 

in the markets’ technology landscape since the 

adoption of Regulation SCI in 2014. The proposed 

expansion would add the following entities to the 

definition of “SCI entity”: (1) registered security-based swap data repositories, (2) registered 

broker-dealers exceeding an asset or transaction 

activity threshold, and (3) additional clearing 

agencies exempted from registration. The proposed updates would amend provisions of Regulation SCI relating to systems classification and 

lifecycle management, third-party/vendor management, cybersecurity, the SCI review, the role of 

current SCI industry standards, and recordkeeping and related matters. Also, the SEC requested 

comment on whether significant-volume alternative trading systems (ATSs) and broker-dealers 

using electronic or automated systems for trading 

of corporate debt securities or municipal securities should be subject to Regulation SCI.

On May 5, 2023, the SEC issued a notice of proposed rulemaking to amend certain portions of 

the Covered Clearing Agency Standards under 
109

reporting entities to elect to account for their tax 

equity investments, regardless of the tax credit 

program from which the income tax credits are 

received, using the proportional amortization 

method (PAM) if certain conditions are met. 

Under PAM, an entity amortizes the initial cost of 

the investment in proportion to the income tax 

credits and other income tax benefits received 

and recognizes the net amortization and income 

tax credits and other income tax benefits in the 

income statement as a component of income tax 

expense (benefit). On August 3, 2023, the FASB 

issued ASU 2023-04 to amend and add various 

SEC paragraphs to the Accounting Standards 

Codification to reflect the issuance of SEC Staff 

Accounting Bulletin No. 121, which provides SEC 

staff views regarding the accounting for obligations to safeguard crypto-assets an entity holds 

for platform users.

4.3.6 Bank Secrecy Act/Anti–Money Laundering Regulatory Reform

On December 16, 2022, the Financial Crimes Enforcement Network (FinCEN) issued a proposed 

rule regarding access by authorized recipients 

to beneficial ownership information (BOI) that 

will be reported to FinCEN pursuant to Section 

6403 of the Corporate Transparency Act (CTA). 

The CTA was enacted into law as part of the Anti-Money Laundering Act of 2020, which is itself 

part of the National Defense Authorization Act for 

Fiscal Year 2021. The proposed regulations would 

implement the strict protocols on security and 

confidentiality required by the CTA to protect sensitive personally identifiable information reported 

to FinCEN. The proposed rule explains the circumstances in which specified recipients would 

have access to BOI and outlines data protection 

protocols and oversight mechanisms applicable to each recipient category. The disclosure of 

BOI to authorized recipients in accordance with 

appropriate protocols and oversight will help 

law enforcement and national security agencies 

prevent and combat money laundering, terrorist 

financing, tax fraud, and other illicit activity, as 

well as protect national security. The proposed 

regulations also specify when and how reporting 

companies can use FinCEN identifiers to report 

the BOI of entities.

On August 4, 2023, the SEC issued a final rule 

to enhance and standardize cybersecurity risk 

management, strategy, governance, and incident 

disclosures by public companies that are subject 

to the reporting requirements of the Exchange 

Act. Specifically, the SEC adopted amendments to 

require current disclosure of material cybersecurity incidents. The SEC also adopted rules requiring periodic disclosures of a registrant’s processes 

to assess, identify, and manage material cybersecurity risks, management’s role in assessing and 

managing material cybersecurity risks, and the 

board of directors’ oversight of cybersecurity risks.

On August 9, 2023, the SEC proposed new rules 

under the Exchange Act and the Advisers Act to 

eliminate or neutralize the effect of certain conflicts of interest associated with broker-dealers’ 

or investment advisers’ interactions with investors through such firms’ use of technologies that 

optimize, predict, guide, forecast, or direct investment-related behaviors or outcomes. The SEC 

also proposed amendments to rules under the 

Exchange Act and Advisers Act that would require 

firms to make and maintain certain records in 

accordance with the proposed rules.

On September 14, 2023, the SEC issued final rules 

under the Advisers Act. The rules are designed to 

protect investors who directly or indirectly invest 

in private funds by increasing visibility into certain practices involving compensation schemes, 

sales practices, and conflicts of interest through 

disclosure; establishing requirements to address 

such practices that have the potential to lead to 

investor harm; and restricting practices that are 

contrary to the public interest and the protection 

of investors. These rules are likewise designed 

to prevent fraud, deception, or manipulation by 

the investment advisers to those funds. The SEC 

also adopted corresponding amendments to 

the Advisers Act books and records rule to facilitate compliance with these new rules and assist 

SEC examination staff. Finally, the SEC adopted 

amendments to the Advisers Act compliance rule 

that affect all registered investment advisers, to 

better enable SEC staff to conduct examinations.

4.3.5 Accounting Standards

On March 29, 2023, the Financial Accounting 

Standards Board (FASB) issued Accounting 

Standards Update (FSU) 2023-02 that permits 

Council Activities and Regulatory Developments
110 2023 FSOC // Annual Report

against Ukraine by agreeing to additional restrictions on Russia’s membership rights.

4.4 Mortgages and Consumer Protection

4.4.1 Mortgages and Housing Finance

On December 27, 2022, the FHFA issued a final 

rule that establishes a process for Fannie Mae 

and Freddie Mac to provide advance notice to the 

FHFA Director before offering new activity to the 

market and to obtain prior approval from the Director before offering a new product to the market.

On March 13, 2023, the FHFA issued a notice of 

proposed rulemaking that would amend several 

provisions in the Enterprise Regulatory Capital 

Framework (ERCF) for Fannie Mae and Freddie 

Mac. The proposed rule would include modifications related to guarantees on commingled securities, multifamily mortgage exposures secured 

by government-subsidized properties, derivatives and cleared transactions, and credit scores, 

among other items.

On April 26, 2023, the FHFA issued a notice of 

proposed rulemaking that would address barriers 

to sustainable-housing opportunities for underserved communities by codifying existing FHFA 

practices in regulations and adding new requirements related to fair lending, fair housing, and 

Equitable Housing Finance Plans.

On May 15, 2023, the FHFA issued a Request for 

Information (RFI) on Fannie Mae and Freddie 

Mac’s single-family pricing framework. The RFI 

solicits public feedback on the goals and policy 

priorities that FHFA should pursue in its oversight of the pricing framework. FHFA also sought 

input on the process for setting the single-family 

upfront guarantee fees of government sponsored 

enterprises (GSEs), including whether it is appropriate to continue to link upfront guarantee fees 

to the ERCF, which was established in 2020 and 

has a significant impact on the risk-based pricing 

component of the GSEs’ guarantee fees.

On June 8, 2023, the Federal Reserve, OCC, CFPB, 

FDIC, and NCUA issued proposed interagency 

guidance with a request for comment on reconsiderations of value of residential real estate. The 

proposed interagency guidance highlights the 

On September 28, 2023, FinCEN issued a proposed rule to amend the BOI reporting rule 

(Reporting Rule) to extend the filing deadline for 

certain BOI reports. Under the Reporting Rule, 

entities created or registered on or after the rule’s 

effective date of January 1, 2024, must file initial 

BOI reports with FinCEN within 30 days of notice 

of their creation or registration. This proposed 

amendment would extend that filing deadline 

from 30 days to 90 days for entities created or 

registered on or after January 1, 2024, and before 

January 1, 2025, to give those entities additional 

time to understand the new reporting obligation 

and collect the necessary information to complete 

the filing. Entities created or registered on or after 

January 1, 2025, would have 30 days to file their 

BOI reports with FinCEN, as required under the 

Reporting Rule.

The Financial Action Task Force (FATF) is the 

intergovernmental body that sets standards and 

promotes effective implementation of legal, regulatory, and operational measures for combating 

money laundering, terrorist financing, the financing of proliferation, and other related threats to 

the integrity of the international financial system. 

In collaboration with other international stakeholders, the FATF also works to identify national-level vulnerabilities to protect the international 

financial system from misuse. 

In February 2023, the FATF finalized guidance to 

strengthen requirements on Recommendation 

24, covering transparency and beneficial ownership of legal persons. The FATF also agreed 

on enhancements to Recommendation 25 on 

beneficial ownership transparency for trusts and 

legal arrangements to bring its requirements 

broadly in line with those for Recommendation 

24, thus ensuring a balanced and coherent set of 

FATF standards on beneficial ownership. Collectively, these efforts seek to improve the ability of 

law enforcement to trace, report, and seize illicit 

proceeds, and to make it harder for criminals to 

exploit opaque legal structures to hide and launder the proceeds of their crimes.

In June 2023, the FATF published a report urging 

countries to swiftly implement the FATF’s Recommendations on virtual assets, which also highlight 

emerging risks associated with the sector. Also 

in June 2023, the FATF built on its prior suspension of Russia’s membership due to its brutal war 
111

The initiative involved significant stakeholder 

outreach, a historical review of the role of the 

FHLBanks, and detailed analysis of the strengths 

and areas for improvement of the System’s current operations and structure to ensure the 

FHLBanks remain well positioned to fulfill their 

mission. The report summarizes considerations 

for the FHLBanks’ mission, continued reliability 

of liquidity, support for housing and community 

development, and the System’s governance and 

structure. The report further outlines actions 

FHFA will take and recommendations for congressional consideration.

States continued to adopt new regulatory standards that require nonbank mortgage servicers to 

maintain the financial capacity, corporate governance, and risk management practices sufficient 

to adequately serve consumers and investors and 

simultaneously enhance market stability. In 2023, 

Montana, North Dakota, and Minnesota signed 

into law legislation based on the CSBS Model 

State Regulatory Prudential Standards for Nonbank Mortgage Servicers. 

4.4.2 Consumer Protection

On January 12, 2023, the OCC issued version 1.0 

of its “Fair Lending” booklet of the Comptroller’s 

Handbook. This booklet, which replaced the 

booklet of the same titled issued in January 2010, 

provides information and examination procedures to assist OCC examiners in assessing fair 

lending risk and evaluating compliance with the 

Fair Housing Act, Equal Credit Opportunity Act, 

and Regulation B, the consumer protection regulation that implements the Equal Credit Opportunity Act.

On April 26, 2023, the OCC issued a notice to 

address the risks associated with overdraft protection programs. This bulletin discussed certain 

practices that may present heightened risk of violating prohibitions against unfair or deceptive acts 

or practices. The bulletin also described practices 

that may assist banks with managing overdraft 

protection program risks.

On May 11, 2023, the CFPB issued an interim final 

rule to amend Regulation Z, which implements 

the Truth in Lending Act, to reflect the enactment 

of the LIBOR Act and its implementing regulations promulgated by the Federal Reserve. This 

risks of deficient residential real estate; outlines 

applicable statutes, regulations, and existing 

guidance that govern reconsiderations of value; explains how reconsiderations of value can 

be incorporated into existing risk management 

functions; and provides examples of policies and 

procedures banks may choose to adopt.

On June 21, 2023, the Federal Reserve, OCC, 

FDIC, NCUA, CFPB, and FHFA issued a notice of 

proposed rulemaking to implement the quality 

control standards mandated by the Dodd-Frank 

Act for the use of automated valuation models 

(AVMs) by mortgage originators and secondary 

market issuers in determining the collateral worth 

of a mortgage secured by a consumer’s principal 

dwelling. Under the proposal, the agencies would 

require institutions that engage in certain credit decisions or securitization determinations to 

adopt policies, practices, procedures, and control 

systems. These requirements are designed to 

help ensure that AVMs used in these transactions 

to determine the value of mortgage collateral 

adhere to quality control standards. Such standards are designed to help ensure a high level of 

confidence in the estimates produced by AVMs, 

protect against the manipulation of data, seek to 

avoid conflicts of interest, require random sample 

testing and reviews, and help ensure compliance 

with applicable nondiscrimination laws.

On July 6, 2023, the Federal Reserve, OCC, FDIC, 

and NCUA, in consultation with state bank and 

credit union regulators, issued a final policy 

statement for prudent CRE loan accommodations 

and workouts. The statement is relevant to all 

financial institutions supervised by the agencies. 

This updated policy statement builds on existing supervisory guidance calling for financial 

institutions to work with creditworthy borrowers 

during times of financial stress, updates existing 

interagency supervisory guidance on CRE loan 

workouts, and adds a section on short-term loan 

accommodations. The updated statement also 

addresses relevant accounting-standards changes 

on estimating loan losses, and it provides updated 

examples of classifying and accounting for loans 

modified or affected by loan accommodations or 

loan workout activity.

On November 7, 2023, the FHFA concluded its review of the FHLBank System and issued its report 

“FHLBank System at 100: Focusing on the Future”. 

Council Activities and Regulatory Developments
112 2023 FSOC // Annual Report

4.5 Data Scope, Quality, and Accessibility

On January 9, 2023, the OFR issued a notice of 

proposed rulemaking to establish a data collection covering U.S. non-centrally cleared bilateral 

repo (NCCBR) transactions. The proposed collection would require daily reporting to the OFR 

by certain brokers, dealers, and other financial 

companies with large exposures to the NCCBR 

market. The collected data would be used to support the work of the Council, its member agencies, and the OFR to identify and monitor risks to 

financial stability.

4.5.1 Data Scope

Global adoption of the Legal Entity Identifier 

(LEI), which enables the unique and transparent 

identification of legal entities participating in 

financial transactions, continues to grow. As of 

September 30, 2023, more than 2.3 million LEIs 

have been issued worldwide, with approximately 

13 percent having been issued to U.S. entities. The 

total number of LEIs issued represents a yearto-date increase of 9 percent, which follows a 12 

percent increase in 2022. In the United States, the 

LEI is used in regulatory reporting mandated by 

the Federal Reserve, CFPB, SEC, CFTC, and OFR, 

among others.

4.5.2 Data Quality

The Regulatory Oversight Committee 

Improving the quality of LEI data is important to 

building market confidence in the value of the 

LEI. Therefore, the Council members that are 

represented on the Regulatory Oversight Committee (ROC), including the Federal Reserve, OCC, 

CFPB, SEC, FDIC, CFTC, and OFR have directed 

considerable attention to this challenge.

This past year, Council members continued to 

contribute to ROC initiatives aimed at improving the quality of Level 2 LEI data, among other 

elements of LEI reference data. “Level 2 LEI data” 

are data submitted by a legal entity regarding its 

“direct accounting consolidating parent” and 

“ultimate accounting consolidating parent.” These 

data can improve the ability to perform a risk assessment of the counterparties to a transaction.

interim final rule further addresses the planned 

cessation of most U.S. dollar (USD) LIBOR tenors 

after June 30, 2023, by incorporating the Federal 

Reserve–selected benchmark replacement for 

consumer loans into Regulation Z. This interim 

final rule makes the terminology from the LIBOR 

Act and the Federal Reserve’s implementing regulation conform to relevant Regulation Z openend and closed-end credit provisions. The rule 

also addresses treatment of the 12-month USD 

LIBOR index and its replacement index, including 

permitting creditors to use alternative language 

in change-in-terms notice content requirements 

for situations in which the 12-month tenor of the 

LIBOR index is being replaced consistent with the 

LIBOR Act.

On October 19, 2023, the CFPB issued a proposed rule to establish 12 CFR part 1033, which 

would implement section 1033 of the Consumer 

Financial Protection Act of 2010. The proposed 

rule would require depository and nondepository entities to make available to consumers and 

authorized third parties certain data relating to 

consumers’ transactions and accounts; establish 

obligations for third parties accessing a consumer’s data, including important privacy protections 

for that data; provide basic standards for data 

access; and promote fair, open, and inclusive 

industry standards.

In 2023, the FDIC issued a number of letters 

demanding persons or entities cease and desist 

from making false or misleading representations 

about the existence of deposit insurance, misusing the name or logo of the FDIC, or knowingly 

misrepresenting the extent and manner of deposit 

insurance. Section 18(a)(4) of the Federal Deposit 

Insurance Act prohibits any person from misusing 

the name or logo of the FDIC or from engaging in 

false advertising or making knowing misrepresentations about deposit insurance. The FDIC has observed an increasing number of instances where 

financial services providers or other entities or 

individuals, including crypto-asset firms, have 

misused the FDIC’s name or logo or have made 

false or misleading representations about deposit 

insurance.
113

agencies established an interagency working 

group to perform the analysis.

White House National Strategy for Critical and 

Emerging Technology

In response to the principles set forth in multiple 

U.S. strategies, the National Security Council’s 

Interagency Policy Committee issued the National Standards Strategy for Critical and Emerging 

Technology in May 2023. 

Several Council member agencies contributed to 

the strategy, which notes that standards generated and deployed in critical and emerging technology are essential to securing the U.S. financial 

infrastructure and promoting competitiveness in 

the rapidly evolving technology landscape. The 

strategy emphasizes U.S. support for international 

technical standards and commits to partnering 

with the private sector to help accelerate standards development to close gaps, promote interoperability, and support innovation.

Ensuring Responsible Development of Digital Assets

Executive Order (EO) 14067 called on Council 

members to engage in a government-wide effort 

to consider and report on the global economic 

and technical implications of digital assets and 

central bank digital currencies (CBDC). The EO 

states that standards participation and development should be a central tenet for all government 

agencies, in order to elevate U.S. engagement with 

digital assets issues in technical standards bodies 

and promote development of digital asset and 

CBDC technologies.

In response, the White House Office of Science 

and Technology Policy recommended that the 

U.S. government develop and periodically update 

a National Digital Assets Research and Development Agenda. Council members, along with 

various departments and agencies from across 

government, under the auspices of the Networking and Information Technology Research and 

Development Program and the National Science 

Foundation, established a whole-of-government 

Fast-Track Action Committee (FTAC) to promote international standards and best practices. 

On January 26, 2023, the FTAC issued a Request 

for Information on Digital Assets Research and 

Development, and in March 2023, it issued National Objectives for Digital Assets Research and 

Additionally, the ROC continued to work closely 

with the Global Legal Entity Identifier Foundation 

(GLEIF), which is the not-for-profit organization 

that maintains the system’s operational integrity. Council members contributed to the ROC’s 

analysis of the draft of Part 3 of the LEI standard 

(ISO 17442), which is being developed under 

Technical Committee 68 of the International 

Organization for Standardization (ISO). Part 3 of 

this standard is what the GLEIF defines as “verifiable LEIs” (vLEIs), which provide automated 

remote verification of legal entities owning LEIs 

and cryptographically prove that an LEI is owned 

by the organization signing with or presenting the 

credential.

In 2023, the OFR continued to provide Secretariat services to the ROC. As Secretariat, the OFR 

provides organizational management and communications for the 70+ global regulatory authorities that compose the ROC’s membership. Additionally, the OFR partnered with other Council 

member agencies to establish effective strategies, 

positions, and decisions for the ROC, especially in 

recommending adoption of the LEI.

In conducting Secretariat duties for the ROC in 

2023, the OFR completed work to establish a new 

leadership team at the GLEIF. Additionally, as 

Secretariat, the OFR assisted the Derivatives Data 

Elements – Industry Representation in conducting an industry analysis of new over-the-counter 

derivatives data.

Financial Data Transparency Act

The Financial Data Transparency Act (FDTA), 

passed in 2022 as part of the National Defense 

Authorization Act, directs federal financial regulatory agencies to implement data standards developed through a joint rulemaking. The rulemaking 

will establish data standards for data collected by 

financial regulators and data collected on behalf 

of the Council, which should create efficiencies of 

standardization for both government and industry. The data standards will include common 

identifiers for collections of information, including a common non-proprietary legal entity identifier that is available under an open license for all 

entities required to report to covered agencies.

In 2023, representatives from the federal agencies initiated analysis of the FDTA to meet the 

rulemaking timelines. To facilitate this work, 

Council Activities and Regulatory Developments
114 2023 FSOC // Annual Report

Development. Publishing these documents was 

the first step toward establishing an evolving National Digital Assets Agenda, as well as guidance 

and recommendations for responsible research, 

development, and deployment of digital assets 

and CBDCs.
115

CFPB. Analysis of Deposit Insurance Coverage on Funds Stored Through Payment Apps. Washington: 

CFPB, 2023. https://www.consumerfinance.gov/data-research/research-reports/issue-spotlightanalysis-of-deposit-insurance-coverage-on-funds-stored-through-payment-apps/.

CFPB. Big Tech’s Role in Contactless Payments: Analysis of Mobile Device Operating Systems and Tap-toPay Practices. Washington: CFPB, 2023. https://www.consumerfinance.gov/data-research/researchreports/big-techs-role-in-contactless-payments-analysis-of-mobile-device-operating-systems-and-tapto-pay-practices/. 

CFPB. Chatbots in Consumer Finance. Washington: CFPB, 2023. https://www.consumerfinance.gov/

data-research/research-reports/chatbots-in-consumer-finance/chatbots-in-consumer-finance/. 

FDIC. FDIC’s Supervision of Signature Bank (April 2023). Washington: FDIC, 2023. https://www.fdic.

gov/news/press-releases/2023/pr23033a.pdf. 

FDIC. Options for Deposit Insurance Reform (May 2023). Washington: FDIC, 2023. https://www.fdic.

gov/analysis/options-deposit-insurance-reforms/report/options-deposit-insurance-reform-full.pdf. 

FDIC. FDIC Quarterly Banking Profile 2Q23 (October 2023). Washington: FDIC, 2023. https://www.fdic.

gov/analysis/quarterly-banking-profile/fdic-quarterly/2023-vol17-3/fdic-v17n3-2q2023.pdf. 

FDIC. 2023 Risk Review (August 2023). Washington: FDIC, 2023. https://www.fdic.gov/analysis/riskreview/2023-risk-review/2023-risk-review-full.pdf. 

FHFA. FHFA’s Annual Report to Congress. Washington: FHFA, 2023. https://www.fhfa.gov/AboutUs/

Reports/ReportDocuments/FHFA-2022-Annual-Report-to-Congress.pdf.

FHFA. FHFA Annual Performance Plan. Washington: FHFA, 2023. https://www.fhfa.gov/AboutUs/

Reports/ReportDocuments/FY2024_APP.pdf.

FHFA. Foreclosure Prevention, Refinance, and Federal Property Manager’s Report. Washington: FHFA, 

2023. https://www.fhfa.gov/AboutUs/Reports/ReportDocuments/July2023-FPR-Refi-FPM-Report.pdf.

FHFA. Annual Housing Report. Washington: FHFA, 2023. https://www.fhfa.gov/AboutUs/Reports/

Pages/Annual-Housing-Report-2023.aspx. 

FHFA. FHLBank System at 100 Report. Washington: FHFA, 2023. https://www.fhfa.gov/AboutUs/

Reports/Pages/FHLBank-System-at-100-Report.aspx. 

FIO. Annual Report on the Insurance Industry (September 2023). Washington: FIO, 2023. https://home.

treasury.gov/system/files/311/FIO%20Annual%20Report%202023%209292023.pdf. 

FIO. Study of Small Insurer Competitiveness in the Terrorism Risk Insurance Marketplace (June 2023).

Washington: FIO, 2023. https://home.treasury.gov/system/files/311/2023%20TRIP%20Small%20

Insurer%20Report%20FINAL.pdf. 

FIO. Insurance Supervision and Regulation of Climate-Related Risks (June 2023). Washington: FIO, 2023. 

https://home.treasury.gov/system/files/311/FIO-June-2023-Insurance-Supervision-and-Regulation-ofClimate-Related-Risks.pdf. 

Federal Reserve. Financial Stability Report (May 2023). Washington: Federal Reserve, 2023. https://

www.federalreserve.gov/publications/files/financial-stability-report-20230508.pdf. 

5 Select Council Member Agency Publications on 

Financial and Regulatory Developments

Select Council Member Agency Publications on Financial and Regulatory Developments
116 2023 FSOC // Annual Report

Federal Reserve. Financial Stability Report (October 2023). Washington: Federal Reserve, 2023. https://

www.federalreserve.gov/publications/files/financial-stability-report-20231020.pdf. 

Federal Reserve. Supervision and Regulation Report (May 2023). Washington: Federal Reserve, 2023. 

https://www.federalreserve.gov/publications/files/202305-supervision-and-regulation-report.pdf. 

Federal Reserve. Supervision and Regulation Report (November 2023). Washington: Federal Reserve, 

2023. https://www.federalreserve.gov/publications/files/202311-supervision-and-regulation-report.

pdf. 

NCUA. Cybersecurity and Credit Union System Resilience (June 2023). Washington: NCUA, 2023. https://

ncua.gov/files/publications/regulation-supervision/cybersecurity-credit-union-system-resilience-2023.

pdf. 

NCUA. Estimating Credit Union Exposure to Climate-related Physical Risks (April 2023). Washington: 

NCUA, 2023. https://ncua.gov/news/publication-search/climate-financial-risk/estimating-creditunion-exposure-climate-related-physical-risks.

OCC. Spring 2023 Semiannual Risk Perspective. Washington: OCC, 2023. https://www.occ.gov/

publications-and-resources/publications/semiannual-risk-perspective/files/pub-semiannual-riskperspective-spring-2023.pdf. 

OCC. Fall 2023 Semiannual Risk Perspective. Washington: OCC, 2023. https://www.occ.treas.gov/

publications-and-resources/publications/semiannual-risk-perspective/files/pub-semiannual-riskperspective-fall-2023.pdf.

OCC. Fall 2023 Interest Rate Risk Statistics Report. Washington: OCC, 2023. https://www.occ.gov/

publications-and-resources/publications/interest-rate-risk-statistics-reports/files/pub-interest-raterisk-statistics-fall-2023.pdf. 

Office of Financial Research. Annual Report 2023. Washington, D.C.: OFR, 2023. https://www.

financialresearch.gov/annual-reports/files/OFR-AR-2023_web.pdf.

SEC. Private Funds Statistics. Washington: SEC, 2023. https://www.sec.gov/divisions/investment/

private-funds-statistics. 

SEC. Money Market Fund Statistics. Washington: SEC, 2023. https://www.sec.gov/divisions/investment/

mmf-statistics. 
Abbreviations 117

CMBS Commercial Mortgage-Backed 

Security 

CME Chicago Mercantile Exchange 

Inc. 

COE Catastrophe Modeling Center of 

Excellence

Council Financial Stability Oversight 

Council 

CP Commercial Paper 

CRA Community Reinvestment Act 

of 1977

CRE Commercial Real Estate 

CRI Counter Ransomware Initiative

CSBS Conference of State Bank 

Supervisors 

CSP Cloud Service Provider

CTA Corporate Transparency Act

DAWG Digital Assets Working Group

DB Defined Benefit 

DCO Derivatives Clearing 

Organization 

DHS Department of Homeland 

Security 

DIF Deposit Insurance Fund

Dodd-Frank 

Act

Dodd-Frank Wall Street Reform 

and Consumer Protection Act 

of 2010

DTCC Depository Trust & Clearing 

Corporation 

DTI Debt-to-Income

EME Emerging Market Economy 

ERCF Enterprise Regulatory Capital 

Framework 

ERISA Employee Retirement Income 

Security Act of 1974

ESMA European Securities and Market 

Authority

ESTER Euro Short-Term Rate (also 

called €STR)

ETF Exchange-Traded Fund

Advisers 

Act

Investment Advisers Act of 1940

AFS Available for Sale 

AI Artificial Intelligence 

AI RMF 1.0 AI Risk Management 

Framework

ARRC Alternative Reference Rates 

Committee 

ATS Alternative Trading System

AUM Assets Under Management

AVM Automated Valuation Model

BHC Bank Holding Company 

BOI Beneficial Ownership 

Information

BTFP Bank Term Funding Program

C&I Commercial & Industrial

CARES Act Coronavirus Aid, Relief, and 

Economic Security Act of 2020

CBDC Central Bank Digital Currency 

CCAR Comprehensive Capital Analysis 

and Review 

CCP Central Counterparty 

CD Certificate of Deposit 

CDS Credit Default Swap 

CEA Commodity Exchange Act 

CEG Cyber Expert Group 

CESG Cloud Executive Steering Group

CET1 Common Equity Tier 1 Capital 

CFPB Consumer Financial Protection 

Bureau 

CFRAC Climate-related Financial Risk 

Advisory Committee

CFRC Climate-related Financial Risk 

Committee 

CFTC Commodity Futures Trading 

Commission 

CIF Collective Investment Fund CR

CISA Cybersecurity and 

Infrastructure Security Agency 

CLO Collateralized Loan Obligation 

6 Abbreviations
118 2023 FSOC // Annual Report

GHG Greenhouse Gas

Ginnie Mae Government National Mortgage 

Association 

GLEIF Global LEI Foundation 

GNE Gross Notional Exposure 

GSD Government Securities Division 

GSE Government-Sponsored 

Enterprise 

G-SIB Global Systemically Important 

Bank 

HFWG Hedge Fund Working Group 

HTM Held-to-Maturity 

IAWG Inter-Agency Working Group for 

Treasury Market Surveillance 

IDI Insured Depository Institution

IMF International Monetary Fund 

Investment 

Company 

Act

Investment Company Act of 

1940

IOSCO International Organization of 

Securities Commissions 

ISDA International Swaps and 

Derivatives Association 

ISO International Organization for 

Standardization 

L&H Life and Health

LEI Legal Entity Identifier 

LME London Metal Exchange 

LTV Loan-to-Value

M&A Merger & Acquisition

MBS Mortgage-Backed Security 

MBSD Mortgage-Backed Securities 

Division 

MMF Money Market Fund 

NAIC National Association of 

Insurance Commissioners

NAV Net Asset Value 

NBFI Nonbank Financial Institution 

NCCBR Non-centrally Cleared Bilateral 

Repo

NCD Negotiable Certificates of 

Deposit 

NCUA National Credit Union 

Administration 

NIM Net Interest Margin 

EO Executive Order

Exchange 

Act

Securities Exchange Act of 1934 

Fannie Mae Federal National Mortgage 

Association 

FASB Financial Accounting Standards 

Board 

FATF Financial Action Task Force

FBIIC Financial and Banking 

Information Infrastructure 

Committee 

FCM Futures Commission Merchant

FDI Act Federal Deposit Insurance Act

FDIC Federal Deposit Insurance 

Corporation 

FDTA Financial Data Transparency 

Act of 2022

Federal 

Reserve

Board of Governors of the 

Federal Reserve System

FHFA Federal Housing Finance 

Agency 

FHLB Federal Home Loan Bank 

FICC Fixed Income Clearing 

Corporation 

FICU Federally Insured Credit Union 

FinCEN Financial Crimes Enforcement 

Network 

FINRA Financial Industry Regulatory 

Authority

Fintech Financial Technology

FIO Federal Insurance Office 

FMU Financial Market Utility 

FOMC Federal Open Market 

Committee 

FRBNY Federal Reserve Bank of New 

York 

Freddie 

Mac

Federal Home Loan Mortgage 

Corporation 

FS-ISAC Financial Services Information 

Sharing and Analysis Center 

FSSCC Financial Services Sector 

Coordinating Council 

FTAC Fast-Track Action Committee

GAV Gross Asset Value 

GDP Gross Domestic Product 
Abbreviations 119

SOFR Secured Overnight Financing 

Rate 

SRC Systemic Risk Committee 

SRE Systemic Risk Exception

STIF Short-Term Investment Fund

SVB Silicon Valley Bank

TCFD Task Force on Climate-Related 

Financial Disclosures

TIPS Treasury Inflation-Protected 

Securities

TRACE Trade Reporting and 

Compliance Engine 

Treasury U.S. Department of the Treasury 

TRIP Terrorism Risk Insurance 

Program 

UK United Kingdom 

UPI Unique Product Identifier 

USD U.S. Dollar 

UTI Unique Transaction Identifier 

vLEI Verifiable LEI

NIST National Institute of Standards 

and Technology 

NMDB National Mortgage Database 

NMS National Market System 

NSA National Security Agency

NSCC National Securities Clearing 

Corporation 

OCC Office of the Comptroller of the 

Currency 

OCCIP Office of Cybersecurity 

and Critical Infrastructure 

Protection 

OFR Office of Financial Research 

OIS Overnight Indexed Swap

OMB Office of Management and 

Budget

ON RRP Overnight Reverse Repurchase 

Agreement Facility 

OTC Over-the-Counter 

PAM Proportional Amortization 

Method

P&C Property and Casualty 

PRT Pension Risk Transfer 

RaaS Ransomware as a Service

Repo Repurchase Agreement 

RFI Request for Information 

RMC Risk Management Committee

ROA Return on Assets

ROC Regulatory Oversight 

Committee 

RWA Risk-Weighted Asset 

RWG Risk Advisory Working Group

S&P Standard & Poor’s 

SCI Systems Compliance and 

Integrity

SEC Securities and Exchange 

Commission 

SI>1 CCPs CCPs Considered Systemically 

Important in More than One 

Jurisdiction 

SIFMA Securities Industry and 

Financial Markets Association 

SLOOS Senior Loan Officer Opinion 

Survey
120 2023 FSOC // Annual Report

between them or through a broker, and in which 

the participants must agree on the specific 

securities to be used as collateral. The bilateral 

repo market includes both noncleared trades and 

trades cleared through Fixed Income Clearing 

Corporation’s delivery versus payment repo 

service. 

Bit

A bit, or binary digit, the smallest unit of data that 

a computer can process and store.

Cash-Futures Basis Trade

The Treasury cash-futures basis trade is a fixedincome arbitrage trading strategy whereby funds 

try to capture the spread between the implied 

repo rate and general repo rates over the term of 

the trade. Entering into this trade involves selling 

a Treasury futures contract, buying a Treasury 

security deliverable into that contract with 

repo funding from dealer intermediaries, and 

delivering the security at contract expiry.

Central Bank Digital Currencies (CBDCs)

A digital form of central bank money that is 

widely available to the general public. Central 

bank money refers to money that is a liability 

of the central bank. In the United States, there 

are currently two types of central bank money: 

physical currency issued by the Federal Reserve 

and digital balances held by commercial banks at 

the Federal Reserve.

Central Counterparty (CCP)

An entity that interposes itself between 

counterparties to contracts traded in one or 

more financial markets, becoming the buyer to 

every seller and the seller to every buyer, thereby 

ensuring the performance of open contracts. 

Clearing Bank

A bank holding company (BHC) subsidiary that 

facilitates payment and settlement of financial 

transactions (such as check clearing) or facilitates 

trades between the sellers and buyers of securities 

or other financial instruments or contracts. 

Accumulated Other Comprehensive Income 

(AOCI) 

Typically includes unrealized gains and losses in 

available-for-sale securities, actuarial gains and 

losses in defined benefit plans, gains and losses 

on derivatives held as cash flow hedges, and gains 

and losses resulting from translating the financial 

statements of foreign subsidiaries. 

Affiliate

In general, a company is an affiliate of another 

company if (1) either company consolidates 

the other on financial statements prepared 

in accordance with U.S. Generally Accepted 

Accounting Principles, the International 

Financial Reporting Standards, or other similar 

standards; (2) both companies are consolidated 

with a third company on financial statements 

prepared in accordance with such principles or 

standards; (3) for a company that is not subject 

to such principles or standards, consolidation 

as described above would have occurred if 

such principles or standards had applied; or 

(4) a primary regulator determines that either

company provides significant support to, or is

materially subject to the risks or losses of, the

other company.

Asset-Backed Commercial Paper

Short-term debt that has a fixed maturity of up 

to 270 days and is backed by some financial 

asset, such as trade receivables, consumer debt 

receivables, securities, or auto and equipment 

loans or leases.

Availability

Availability means information should be 

consistently and readily accessible by authorized 

parties. This involves properly maintaining 

hardware, technical infrastructure, and systems 

that hold and display the information.

Bilateral Repo

A repo between two institutions in which the 

participants conduct negotiations directly 

7 Glossary 
Glossary 121

Crypto-assets

Private sector digital assets that depend primarily 

on cryptography and distributed ledger or similar 

technology.

Defined Benefit (DB) Plan

A retirement plan in which the cost to the 

employer is based on a predetermined formula 

to calculate the amount of a participant’s future 

benefit. In defined benefit plans, the investment 

risk is borne by the plan sponsor. 

Digital Assets

Two categories of products: (1) central bank 

digital currencies (CBDCs) and (2) crypto-assets. 

Dry Powder

The amount of capital that has been committed to 

a private capital fund minus the amount that has 

been called by the general partner for investment.

Duration

The sensitivity of the prices of bonds and other 

fixed-income securities to changes in the level of 

interest rates. 

Duration gaps

Measures of the sensitivity of banks’ equity 

positions to changes in interest rates.

Emerging Market Economies (EMEs)

Economies generally classified according to their 

state of economic development, liquidity, and 

market accessibility. There is no single definition, 

so this report has grouped economies based on 

the classifications used by significant data sources 

such as the MSCI and Standard & Poor’s, which 

include, for example, Brazil, China, India, and 

Russia. 

Federal Funds Rate

The interest rate at which depository institutions 

borrow overnight from lenders in the federal 

funds market. The FOMC sets a target range 

for the level of the overnight federal funds rate. 

The FRBNY then uses open-market operations 

to influence the rate so that it trades within the 

target range. 

Collateral

Any asset pledged by a borrower to guarantee 

payment of a debt. 

Collateralized Loan Obligation (CLO)

A securitization vehicle backed predominantly by 

commercial loans. 

Commercial Paper (CP)

Short-term (maturity of up to 270 days), 

unsecured corporate debt. 

Common Equity Tier 1 Capital (CET1)

A regulatory capital measure that includes capital 

with the highest loss-absorbing capacity, such as 

common stock and retained earnings. 

Common Equity Tier 1 Capital Ratio

A ratio that divides common equity tier 1 capital 

by total risk-weighted assets. The ratio applies to 

all banking organizations subject to the Revised 

Capital Rule.

Comprehensive Capital Analysis and Review 

(CCAR)

An annual exercise by the Federal Reserve to help 

ensure that institutions have robust, forwardlooking capital-planning processes that account 

for their unique risks and sufficient capital to 

continue operations through times of economic 

and financial stress. 

Confidentiality

Confidentiality is roughly equivalent to privacy. 

Confidentiality measures are designed to prevent 

sensitive information from unauthorized access 

attempts. It is common for data to be categorized 

according to the amount and type of damage 

that could be done if it fell into the wrong hands. 

More or less stringent measures to protect that 

information can then be implemented according 

to those categories.

Credit Default Swap (CDS) 

A financial contract in which one party agrees to 

make a payment to the other party in the event 

of a specified credit event, in exchange for one or 

more fixed payments. 
122 2023 FSOC // Annual Report

Gross Notional Exposure (GNE)

The sum of the absolute values of long and short 

notional amounts. 

Initial Margin

Collateral that is collected to cover potential 

changes in the value of each participant’s 

position (that is, potential future exposure) over 

the appropriate closeout period in the event the 

participant defaults. 

Integrity

Integrity involves maintaining the consistency, 

accuracy, and trustworthiness of data over their 

entire lifecycle. Data must not be changed in 

transit, and steps must be taken to make sure that 

data cannot be altered by unauthorized people 

(for example, in a breach of confidentiality).

Interest Rate Swap (IRS)

A derivative contract in which two parties swap 

interest rate cash flows on a periodic basis, 

referencing a specified notional amount for 

a fixed term. Typically, one party will pay a 

predetermined fixed rate while the other party 

will pay a short-term variable reference rate that 

resets at specified intervals. 

Large Hedge Fund Adviser

Advisers that have at least $1.5 billion in hedge 

fund assets under management. 

Legal Entity Identifier (LEI) 

A 20-character alphanumeric code that connects 

to key reference information that enables 

clear and unique identification of legal entities 

participating in global financial markets. The LEI 

system is designed to facilitate many financial 

stability objectives, including improved risk 

management in firms, better assessment of 

microprudential and macroprudential risks,

expediting of orderly resolution, containment of 

market abuse and financial fraud, and provision of 

higher-quality and more accurate financial data. 

Leveraged Loan 

Generally, a type of loan that is extended to 

companies that already have considerable 

amounts of debt, have a noninvestment-grade 

credit rating, are unrated, or have post-financing 

leverage that significantly exceeds industry norms 

Financial and Banking Information 

Infrastructure Committee (FBIIC)

A committee composed of 18 member 

organizations from across the financialregulatory community, both federal and state. 

FBIIC was chartered under the President’s 

Working Group on Financial Markets following 

September 11, 2001, to improve coordination 

and communication among financial regulators, 

enhance the resilience of the financial sector, and 

promote public-private partnership. 

Financial Market Utility (FMU)

An entity, as defined in the Dodd-Frank Act, 

that, subject to certain exclusions, “manages or 

operates a multilateral system for the purpose 

of transferring, clearing, or settling payments, 

securities, or other financial transactions among 

financial institutions or between financial 

institutions and the person.” 

Fiscal Year (FY)

Any 12-month accounting period. The fiscal year 

for the federal government begins on October 1 

and ends on September 30 of the following year; it 

is named after the calendar year in which it ends. 

Futures Contract 

An agreement to purchase or sell a commodity 

for delivery in the future that (1) specifies a buy 

or sell price determined at the initiation of the 

contract, (2) obligates each party to the contract 

to fulfill the contract at the specified price, (3) is 

used to assume or shift price risk, and (4) may be 

satisfied by delivery or offset. 

Government-Sponsored Enterprise (GSE) 

A corporate entity with a federal charter 

authorized by law, but which is a privately owned 

financial institution. Examples include the 

Federal National Mortgage Association (Fannie 

Mae) and the Federal Home Loan Mortgage 

Corporation (Freddie Mac).

Gross Domestic Product (GDP)

The broadest measure of aggregate economic 

activity, measuring the total value of all final 

goods and services produced within a country’s 

borders during a specific period. 
Glossary 123

Mortgage Servicing Company

A company that acts as an agent for mortgage 

holders by collecting and distributing mortgage 

cash flows. Mortgage servicers also manage 

defaults, modifications, settlements, foreclosure 

proceedings, and various notifications to 

borrowers and investors. 

Municipal Bonds 

Bonds issued by states, cities, counties, 

local governmental agencies, or certain 

nongovernment issuers to finance certain general 

or project-related activities. 

Net Asset Value (NAV) 

An investment company’s total assets minus its 

total liabilities. 

Net Interest Margin (NIM)

Net interest income as a percent of interestearning assets. 

Notional Amount

The amount used to calculate payments due on 

a derivative contract, just as the face amount of a 

bond is used to calculate coupon payments. 

Off-Balance Sheet Leverage 

Off-balance sheet leverage, or “synthetic 

leverage,” refers to using instruments (such as 

derivatives) to create exposures whose value 

depends on an underlying asset. 

Offshore MMFs 

Offshore MMFs are similar to U.S. MMFs, but 

they are domiciled outside the United States; the 

offshore MMFs considered in this report invest in 

U.S.-dollar-denominated assets.

On-Balance Sheet Leverage

On-balance sheet leverage, or “financial leverage,” 

refers to borrowing through loans, bonds, 

repurchase and securities lending agreements, 

and other securities financing transactions. 

Open-Market Operations

The purchase and sale of securities in the open 

market by a central bank to implement monetary 

policy. 

or historical levels. Numerous other definitions of 

leveraged lending exist throughout the financial 

services industry.

LIBOR

LIBOR is a rate based on submissions from a panel 

of banks. LIBOR is intended to reflect the rate at 

which large, globally active banks can borrow on 

an unsecured basis in wholesale markets. 

Local Government Investment Pools 

Local government investment pools typically 

pool the resources of participating governments 

and invest in various securities as permitted 

under state law. By pooling their cash together, 

participating governments benefit in a variety 

of ways, including from economies of scale and 

professional fund management. 

Loan-to-Value (LTV) Ratio 

The ratio of a loan amount to the value of the 

asset that the loan funds. The LTV ratio is typically 

expressed as a percentage and is a key metric 

when considering a mortgage’s collateralization 

level. 

Margin

In the context of clearing activity, collateral that 

is collected to protect against current or potential 

future exposures resulting from market price 

changes or in the event of a counterparty default.

Modified Coinsurance

Modified coinsurance is a type of reinsurance 

treaty wherein the ceding company retains the 

assets with respect to policies reinsured and 

also establishes and maintains reserves on 

those policies, creating the obligation to render 

payments to the reinsurer at a later date.

Money Market Mutual Fund (aka Money 

Market Fund or MMF)

A type of mutual fund that invests in short-term, 

high-quality, liquid securities such as government 

bills, CDs, CP, or repos. 

Mortgage-Backed Security (MBS) 

An asset-backed security backed by a pool of 

mortgages. Investors in the security receive 

payments derived from the interest and principal 

payments on the underlying mortgages. 
124 2023 FSOC // Annual Report

accounts, such as the Social Security Trust Funds. 

Public debt does not include debt issued by 

government agencies other than Treasury. 

Qualifying Hedge Fund

A hedge fund that is advised by a Large Hedge 

Fund Adviser and that has an NAV (individually 

or in combination with any feeder funds, parallel 

funds, or dependent parallel managed accounts) 

of at least $500 million as of the last day of 

any month in the fiscal quarter immediately 

preceding the adviser’s most recently completed 

fiscal quarter. 

Real Estate Investment Trust (REIT) 

An operating company that manages incomeproducing real estate or real estate-related assets. 

Certain REITs also operate real estate properties 

in which they invest. To qualify as a REIT, a 

company must have three-fourths of its assets and 

gross income connected to real estate investment 

and must distribute at least 90 percent of its 

taxable income to shareholders annually in the 

form of dividends.

Regional Banks

Banks with assets between $10 billion and $100 

billion and BHCs in category IV from the Federal 

Reserve’s tailoring rule.

Repurchase Agreement (Repo)

The sale of a security combined with an 

agreement to repurchase the security, or a 

similar security, on a specified future date at a 

prearranged price. A repo is a secured lending 

arrangement. 

Risk-Weighted Assets (RWAs)

A risk-based concept used as the denominator of 

risk-based capital ratios (common equity Tier 1, 

Tier 1, and total). The total RWAs for an institution 

are a weighted total asset value calculated from 

assigned risk categories or modeled analysis. 

Broadly, total RWAs are determined by calculating 

RWAs for market risk and operational risk, as 

applicable, and adding the sum of RWAs for on–

balance sheet, off–balance sheet, counterparty, 

and other credit risks. 

Operational Resilience 

The ability of an entity’s personnel, systems, 

telecommunications networks, activities, or 

processes to resist, absorb, and recover from 

or adapt to an incident that may cause harm, 

destruction, or loss of ability to perform missionrelated functions. 

Option

A financial contract granting the holder the right 

(but not the obligation) to engage in a future 

transaction on an underlying security or real 

asset. The most basic examples are equity call 

options, which provide the right (but not the 

obligation) to buy a block of shares at a fixed price 

for a fixed period; and equity put options, which 

similarly grant the right to sell a block of shares. 

Over-the-Counter (OTC)

A method of trading that does not involve a 

registered exchange. An OTC trade could occur 

on purely a bilateral basis or could involve some 

degree of intermediation by a platform that is 

not required to register as an exchange. An OTC 

trade could, depending on the market and other 

circumstances, be centrally cleared or bilaterally 

cleared. The degree of standardization or 

customization of documentation of an OTC trade 

will depend on whether the trade is cleared and 

whether it is traded on a nonexchange platform 

(and, if so, the type of platform). 

Primary Dealer

A financial institution that is a trading 

counterparty of the FRBNY. Primary dealers 

are expected to participate in open-market 

operations conducted by the Federal Reserve and 

to bid on a pro rata basis in all Treasury auctions 

at reasonably competitive prices. 

Private Liquidity Funds

Private liquidity funds are private funds that seek 

to generate income by investing in a portfolio 

of short-term obligations in order to maintain 

a stable net asset value per unit or minimize 

principal volatility for investors. 

Public Debt

All debt issued by Treasury and the Federal 

Financing Bank, including both debt held by 

the public and debt held in intergovernmental 
Glossary 125

as an ordinary course of business for their own 

account, or (4) engages in any activity causing 

the person to be commonly known in the trade 

as a dealer or market maker in swaps. See Section 

1a(49) of the Commodity Exchange Act for the 

definition.

Syndicated Loan

A loan to a commercial borrower in which 

financing is provided by a group of lenders. The 

loan package may have a revolving portion, a 

term portion, or both.

Tri-Party Repo

A repo in which a clearing bank acts as third-party 

agent to provide collateral management services 

and to facilitate the exchange of cash against 

collateral between the two counterparties. 

Ultrashort Bond Funds

Ultrashort bond funds are mutual funds that 

generally invest in fixed-income securities with 

extremely short maturities (that is, time periods in 

which they become due for payment). Like other 

bond funds, ultrashort bond funds may invest in a 

wide range of securities. 

Underwriting Standards

Terms, conditions, and criteria used to determine 

the extension of credit in the form of a loan or 

bond. 

Variation Margin

Funds that are collected and paid out to reflect 

current exposures resulting from actual changes 

in market prices. 

Yield Curve

A graphical representation of the relationship 

between bond yields and their respective 

maturities.

Secured Overnight Financing Rate (SOFR) 

A broad measure of the cost of borrowing cash 

overnight, collateralized by Treasury securities. 

The rate is calculated as a volume-weighted 

median of transaction-level tri-party repo data,

as well as general collateralized financing repo 

transaction data and data on bilateral Treasury 

repo transactions. 

Securities Lending and Borrowing 

The temporary transfer of securities from one 

party to another for a specified fee and term, in 

exchange for collateral in the form of cash or 

securities. 

Securitization 

A financial transaction in which assets such 

as mortgage loans are pooled, securities 

representing interests in the pool are issued, and 

proceeds from the underlying pooled assets are 

used to service and repay the securities. 

Seed

In AI, a seed is a series of numbers that tells the AI 

how to generate an output.

Short-term Wholesale Funding

Short-term funding instruments that are not 

covered by deposit insurance and that are 

typically issued to institutional investors. 

Examples include large checkable and time 

deposits, brokered CDs, CP, Federal Home Loan 

Bank borrowings, and repos. 

Stablecoins

Digital assets that purport to maintain a stable 

value relative to a national currency or other 

reference asset or assets. 

Swap 

An exchange of cash flows with defined terms 

over a fixed period, agreed upon by two parties. A 

swap contract may reference underlying financial 

products across various asset classes, including 

interest rates, credit, equities, commodities, and 

foreign exchange. 

Swap Dealer (SD)

Any person who (1) holds themselves out as a 

dealer in swaps, (2) makes a market in swaps, (3) 

regularly enters into swaps with counterparties 
126 2023 FSOC // Annual Report

8 List of Charts

A.1 Global Economic Outlook .................................................................................................................................16

A.2 Chinese Real Estate Indicators......................................................................................................................... 17

A.3 Credit-to-GDP, Relative to Income .................................................................................................................... 17

3.1.1.1 Conduit CMBS Delinquency and Foreclosure Rates.........................................................................................19

3.1.1.2 Conduit CMBS Delinquency Rates by Property Type ........................................................................................19

3.1.1.3 Vacancy Rates by Property Type.......................................................................................................................19

3.1.1.4 Commercial Property Price Indexes................................................................................................................. 20

3.1.2.1 House Price Indexes........................................................................................................................................ 22

3.1.2.2 New- and Existing- Home Sales....................................................................................................................... 23

3.1.2.3 Residential Purchase and Refinance Levels .................................................................................................... 23

3.1.2.4 Average DTI and LTV Ratios at Origination ...................................................................................................... 23

3.1.2.5 Mortgage Origination Volumes........................................................................................................................ 25

B.1 Debt Servicing to Disposable Income Ratio..................................................................................................... 28

B.2 Change in Mean Weekly Real Earnings ........................................................................................................... 28

B.3 National Mortgage Delinquency Rates............................................................................................................ 29

3.1.3.1 Nonfinancial Corporate Debt as a Percentage of GDP ..................................................................................... 31

3.1.3.2 Interest Coverage Ratios.................................................................................................................................. 31

3.1.3.3 Corporate Bond Yields..................................................................................................................................... 32

3.1.3.4 Corporate Bond Spreads................................................................................................................................. 33

3.1.3.5 Gross Issuance of Corporate Debt................................................................................................................... 33

3.1.3.6 Leveraged Loan Default Rates......................................................................................................................... 33

3.1.3.7 Global Private Debt AUM................................................................................................................................. 34

3.1.4.1 CP Outstanding by Issuer Type........................................................................................................................ 36

3.1.4.2 CP Investors..................................................................................................................................................... 36

3.1.4.3 One-Month CP Interest Rate Spreads.............................................................................................................. 36

3.1.4.4 Repo Rates........................................................................................................................................................37

3.1.4.5 Repo Borrowing Outstanding ...........................................................................................................................37

3.1.4.6 Repo Volumes...................................................................................................................................................37

3.1.4.7 Sponsored Repo Activity.................................................................................................................................. 38

3.1.4.8 ON RRP Balance .............................................................................................................................................. 39
List of Charts 127

3.1.5.1 Thirty-Day Volatility for Selected Digital Assets ................................................................................................ 41

3.1.6.1 Transmission Channels Linking Climate Risks to Financial Stability ................................................................ 46

3.1.6.2 Billion-Dollar Weather and Climate Events ...................................................................................................... 48

3.2.1.1.1 Common Equity Tier 1 Ratios ........................................................................................................................... 52

3.2.1.1.2 Return on Assets.............................................................................................................................................. 52

3.2.1.1.3 Bank Funding Rates......................................................................................................................................... 52

3.2.1.1.4 Delinquency Rates on Selected Loans ............................................................................................................. 53

3.2.1.1.5 Ratios of Provisions to Total Loans .................................................................................................................. 53

3.2.1.1.6 Total Deposit Growth (2016Q1 = 100) ............................................................................................................... 53

3.2.1.2.1 Unrealized Gains (Losses) on AFS and HTM Securities .................................................................................... 54

C.1 Bank Stock Prices and Stock Indexes .............................................................................................................. 56

3.2.2.1 Hedge Fund Leverage Ratios: GNE/NAV .......................................................................................................... 60

3.2.2.2 Hedge Fund Leverage Ratios: GAV/NAV .......................................................................................................... 60

3.2.2.3 Hedge Fund Industry Concentration .................................................................................................................61

3.2.2.4 Treasury Futures Positioning ........................................................................................................................... 62

3.2.2.5 Repo Volumes & Primary Dealer Treasury Inventory ....................................................................................... 62

3.2.2.6 MMFs Total Net Assets by Fund Type .............................................................................................................. 63

3.2.2.7 MMFs Asset Composition ................................................................................................................................ 64

3.2.2.8 MMF Weighted Average Maturity .................................................................................................................... 64

3.2.2.9 Mutual Fund AUM............................................................................................................................................ 65

3.2.2.10 Monthly Mutual Fund Flows ............................................................................................................................. 65

3.2.2.11 ETF AUM.......................................................................................................................................................... 65

3.2.2.12 Monthly ETF Fund Flows .................................................................................................................................. 66

3.2.2.13 Collective Investment Funds AUM: by Sector ...................................................................................................67

3.2.3.1 DTCC Clearing Fund Requirements ................................................................................................................. 70

3.2.3.2 Initial Margin: U.S. Exchange-Traded Derivatives ............................................................................................ 70

3.2.3.3 Initial Margin: Centrally Cleared OTC Derivatives ............................................................................................. 71

3.2.3.4 Initial Margin Account Daily Breach Likelihood at IRS Central Counterparties ................................................. 71

3.2.4.1 Insurance Sector CRE Exposure by Property Type ............................................................................................75

3.2.4.2 L&H Insurance Sector BBB-Rated Bond Exposure ............................................................................................75

3.2.4.3 L&H Insurance Sector Private Credit Exposure .................................................................................................76

3.3.1.1 Interest Rate Volatility & Treasury Liquidity Indexes .........................................................................................79

3.3.1.2 Intraday Volatility for 10-Year Treasury Yields ...................................................................................................79

3.3.1.3 U.S. Treasury Yields ......................................................................................................................................... 80
128 2023 FSOC // Annual Report

3.3.1.4 U.S. Treasury Curve Spreads........................................................................................................................... 80

D.1 U.S. Treasury (UST) Liquidity Index vs. Implied Volatility: 2-Year Tenor.............................................................81

D.2 U.S. Treasury (UST) Liquidity Index vs. Implied Volatility: 10-Year Tenor...........................................................81

D.3 Total TRACE U.S. Treasury Average Daily Volume by Week ............................................................................. 82

D.4 Daily Share of Participant Activity in the Interdealer Electronic Market .......................................................... 82
Endnotes 129

1 Federal law generally requires that the FDIC resolve failed banks by using the method that would be least costly to the Deposit 

Insurance Fund (DIF). While insured depositors are made whole, losses may be imposed on uninsured depositors and debt holders. 

The exception to this requirement is if the Secretary of the Treasury, in consultation with the President, makes an emergency 

“systemic risk” determination that adherence to the least-cost requirement would have serious adverse effects on economic 

conditions or financial stability and that an exception would avoid or mitigate such adverse effects. The Secretary’s determination 

must be on the written recommendations of both the FDIC’s Board of Directors and the Board of Governors of the Federal Reserve 

System based on a two-thirds vote of each board. If granted, a systemic risk exception can enable the FDIC to protect uninsured, as 

well as insured, depositors.

2 Markets Group, Federal Reserve Bank of New York. Responses to Survey of Market Participants. New York, NY: FRBNY. September 

2023. https://www.newyorkfed.org/medialibrary/media/markets/survey/2023/sep-2023-smp-results.pdf. These forecasts are also 

consistent with the third quarter results from the Federal Reserve Bank of Philadelphia’s Survey of Professional Forecasters.

3 There are several different approaches to AI learning, such as those that aim to mimic human thought processes by “thinking 

humanly” as well as those that prioritize other factors like efficiency, accuracy, and interpretability.

4 U.S. Department of the Treasury. 2023 Guidance on Nonbank Financial Company Determinations. Final Interpretive Guidance, 

Washington, D.C.: Treasury, 88 Federal Register no. 221 (November 17, 2023). https://home.treasury.gov/system/files/261/

Interpretive-Guidance-Regarding-Authority-to-Require-Supervision-and-Regulation-of-Certain-Nonbank-Financial-Companies.

pdf. U.S. Department of the Treasury. 2019 Authority to Require Supervision and Regulation of Certain Nonbank Financial 

Companies. Final Interpretive Guidance, Washington, D.C.: Treasury, 84 Federal Register no. 249 (December 30, 2019). https://

home.treasury.gov/system/files/261/Authority-to-Require-Supervision-and-Regulation-of-Certain-Nonbank-Financial-Companies.

pdf. 

5 Board of Governors of the Federal Reserve System. Financial Accounts of the United States – Z.1. Tables L.219 and L.220 as of Q2 

2023. https://www.federalreserve.gov/releases/z1/20230608/z1.pdf.

6 Data based on calculations using Federal Financial Institutions Examination Council (FFIEC) Reports of Condition and Income. For 

purposes of this analysis, large relative to capital is an amount of CRE loans that exceeds 300 percent of Tier 1 capital and reserves.

7 Federal Deposit Insurance Corporation

8 Trepp. CMBS. September 2023. https://www.trepp.com/cmbs-solutions.

9 Vacancy rates are provided by CoStar unless otherwise noted. Vacancy rates reflect the most recent data, which may include 

revisions of prior-period data.

10 Ibid.

11 Ehmann, Chuck. 2023. “Multifamily permitting and starts drop further.” RealPage Analytics Blog. RealPage. October 30, 2023. https://

www.realpage.com/analytics/multifamily-permits-starts-decline/. 

12 Board of Governors of the Federal Reserve System. Financial Accounts of the United States – Z.1. As of Q3 2023. https://www.

federalreserve.gov/releases/z1/20230908/html/d3.htm. 

13 Freddie Mac. Primary Mortgage Market Survey. 2023. https://www.freddiemac.com/pmms. 

14 National Association of Home Builders. “NAHB/Wells Fargo Housing Market Index (HMI).” Washington, D.C.: NAHB, September 

2023. https://www.nahb.org/news-and-economics/housing-economics/indices/housing-market-index. 

15 National Association of Home Builders. “Builder Confidence Falls on Rising Mortgage Rates.” Press Release, August 15, 2023: NAHB. 

https://www.nahb.org/news-and-economics/press-releases/2023/08/builder-confidence-falls-on-rising-mortgage-rates.

16 New-home sales data are provided by the U.S. Census Bureau; existing-home sales data are produced by the National Association of 

Realtors.

17 Vajja, Anju. 2023. “Homeowners’ Equity Remains High.” FHFA Stats Blog. FHFA. August 31, 2023. https://www.fhfa.gov/Media/Blog/

Pages/Homeowners-Equity-Remains-High.aspx.

18 Mortgage Bankers Association. “Mortgage Delinquencies Increase in the Third Quarter of 2023.” Press Release, November 9, 2023: 

MBA. https://www.mba.org/news-and-research/newsroom/news/2023/11/09/mortgage-delinquencies-increase-in-the-thirdquarter-of-2023. Also see Mortgage Bankers Association. “Mortgage Delinquencies Decrease in the Second Quarter of 2023.” Press 

Release, August 10, 2023: MBA. https://www.mba.org/news-and-research/newsroom/news/2023/08/10/mortgage-delinquenciesdecrease-in-the-second-quarter-of-2023. 

19 Ibid. 

20 See Bloomberg CPR function for more information.

9 Endnotes
130 2023 FSOC // Annual Report

21 Inside Mortgage Finance. https://www.insidemortgagefinance.com/. 

22 Ibid.

23 Ibid.

24 Ibid.

25 For loans guaranteed by the Enterprises, servicers must generally advance interest and principal for a period of four months. For loans 

guaranteed by Ginnie Mae, servicers must advance interest and principal until delinquency is resolved. 

26 The Enterprises have longstanding mortgage eligibility guidelines that require every loan sold to them to have the appropriate type(s) and 

level(s) of property insurance. Guidelines are clearly stated in Freddie Mac’s Seller/Servicer Guide, https://guide.freddiemac.com/app/

guide/section/8202.1, and in Fannie Mae’s Selling Guide, https://selling-guide.fanniemae.com/Selling-Guide/Origination-thru-Closing/

Subpart-B7-Insurance/Chapter-B7-3-Property-and-Flood-Insurance/1032998301/B7-3-01-General-Property-Insurance-Requirementsfor-All-Property-Types-12-14-2022.htm.

27 Based on the 2022 Survey of Consumer Finances. See Board of Governors of the Federal Reserve System. Changes in U.S. Family Finances 

from 2019 to 2022. Washington, D.C.: Federal Reserve, October 2023. https://www.federalreserve.gov/publications/files/scf23.pdf.

28 See Federal Reserve Bank of New York. Household Debt and Credit Report (Q3 2023). New York, NY: FRBNY, Third Quarter 2023. https://

www.newyorkfed.org/microeconomics/hhdc.

29 Historically, the debt servicing ratio (DSR) reached highs of over 13 percent during the 2007–09 financial crisis. The low of 8.3 percent in 

the first quarter of 2021 is the lowest it has been going back to 1980. Increases in interest rates may put further pressure on this household 

measure. See Board of Governors of the Federal Reserve System. Household Debt Service and Financial Obligations Ratios. https://www.

federalreserve.gov/releases/housedebt/default.htm.

30 Wheat, Chris and Erica Deadman. “Household Pulse: Balances through March 2023.” JPMorgan Chase Institute, July 2023. https://www.

jpmorganchase.com/institute/research/household-income-spending/household-pulse-cash-balances-through-March-2023.

31 Federal Reserve Bank of New York. Household Debt and Credit Report (Q3 2023). New York, NY: FRBNY, Third Quarter 2023. https://www.

newyorkfed.org/microeconomics/hhdc.

32 Fulford, Scott. “Housing inflation is hitting low-income renters,” CFPB Office of Research Blog. CFPB. July 27, 2022. https://www.

consumerfinance.gov/about-us/blog/office-of-research-blog-housing-inflation-is-hitting-low-income-renters/. 

33 Federal Reserve Bank of New York, “Quarterly Report on Household Debt and Credit,” August 2023, p. 12, https://www.newyorkfed.org/

medialibrary/interactives/householdcredit/data/pdf/HHDC_2023Q2.

34 These delinquency and default numbers exclude privately held federal loans issued under the Federal Family Education Loan Program 

(FFELP), as well as private education loans. At the end of 2019, Commercial FFELP loans, Federal Perkins loans (primarily owned by 

schools in 2019), and private education loans accounted for 18 percent of the nation’s $1.638 trillion student loan portfolio. Aggregate 

data for Commercial FFELP loan delinquency rates are not publicly reported. According to the available data, as of the fourth quarter 

2019, 3.89 percent of the outstanding $123 billion private student loan portfolio was at least 30 days delinquent. See Office of Federal 

Student Aid (FSA), Federal Student Aid Portfolio Summary, June 30, 2023, https://studentaid.gov/sites/default/files/fsawg/datacenter/

library/PortfolioSummary.xls; FSA, Portfolio by Loan Status, June 30, 2023, https://studentaid.gov/sites/default/files/fsawg/datacenter/

library/PortfoliobyLoanStatus.xls; FSA, Portfolio by Delinquency Status, June 30, 2023, https://studentaid.gov/sites/default/files/fsawg/

datacenter/library/DLPortfoliobyDelinquencyStatus.xls; Federal Reserve, G.19 Consumer Credit, August 7, 2023 (historical data), https://

www.federalreserve.gov/releases/g19/HIST/cc_hist_memo_levels.html; and Enterval Analytics LLC Private Student Loan Report, June 27, 

2023, p. 30, https://www.enterval.com/media/files/enterval/psl/enterval-private-student-loan-report-2023-q1.pdf?v=20230627T195956. 

35 Congressional Research Service, Student Loans: “A Timeline of Actions Taken in Light of the COVID-19 Pandemic,” June 23, 2023, https://

crsreports.congress.gov/product/pdf/IF/IF12136.

36 Conkling, Thomas and Christa Gibbs. “Update on student loan borrowers as payment suspension set to expire.” Office of Research blog. 

CFPB. June 7, 2023. https://www.consumerfinance.gov/about-us/blog/office-of-research-blog-update-on-student-loan-borrowers-aspayment-suspension-set-to-expire/.

37 Bureau estimates.

38 Federal Student Aid. “SAVE Repayment Plan Offers Lower Monthly Loan Payments.” FSA. https://studentaid.gov/announcements-events/

save-plan. 

39 Federal Student Aid. “Federal Student Loan Debt Relief.” FSA. https://studentaid.gov/manage-loans/forgiveness-cancellation/debt-reliefinfo.

40 The Biden-Harris Administration continues to assist borrowers by discharging loans in accordance with federal loan forgiveness 

programs, including Public Service Loan Forgiveness, Total and Permanent Disability Discharge, Closed School Discharge, Teacher Loan 

Forgiveness, Borrower Defense to Repayment (a program designed to assist consumers who have been defrauded by for-profit schools), 

and Income-Driven Repayment plan discharge of balances that remain after borrowers make the required number of payments. Also, 

the Administration has initiated a rulemaking process that seeks to provide broader debt relief for federal student loan borrowers under 

the Higher Education Act. See U.S. Department of Education. “Biden-Harris Administration Moves Forward with Student Debt Relief 

Negotiated Rulemaking to Deliver Support to as Many Borrowers as Possible as Quickly as Possible.” Press Release, September 29, 2023. 

https://www.ed.gov/news/press-releases/biden-harris-administration-moves-forward-student-debt-relief-negotiated-rulemakingdeliver-support-many-borrowers-possible-quickly-possible.
Endnotes 131

41 Liquidity mismatches are particularly prevalent in open-end investment funds that hold illiquid assets and allow shareholders to redeem 

shares daily.

42 Additionally, overnight Treasury repo rates form the basis of the Secured Overnight Financing Rate (SOFR), the Alternative Reference 

Rates Committee’s preferred alternative to LIBOR.

43 Baklanova, Viktoria, Isaac Kuznits, and Trevor Tatum. “Primer: Money Market Funds and the Repo Market.” Washington, D.C.: Securities 

and Exchange Commission, February 2021. https://www.sec.gov/files/mmfs-and-the-repo-market-021721.pdf.

44 Board of Governors of the Federal Reserve System. Financial Accounts of the United States – Z.1. As of Q2 2023. https://www.

federalreserve.gov/releases/z1/20230608/z1.pdf.

45 DTCC Solutions LLC, an affiliate of The Depository Trust & Clearing Corporation. This publication includes data licensed from DTCC 

Solutions LLC, an affiliate of The Depository Trust & Clearing Corporation. Neither DTCC Solutions LLC nor any of its affiliates shall 

be responsible for any errors or omissions in any DTCC data included in this publication, regardless of the cause and, in no event, shall 

DTCC or any of its affiliates be liable for any direct, indirect, special or consequential damages, costs, expenses, legal fees, or losses 

(including lost income or lost profit, trading loses and opportunity costs) in connection with this publication.

46 Barth, Daniel, R. Jay Kahn and Robert Mann. “Recent Developments in Hedge Funds’ Treasury Futures and Repo Positions: is the 

Basis Trade “Back”?” FEDS Notes. Washington, D.C.: Board of Governors of the Federal Reserve System, August 30, 2023. https://www.

federalreserve.gov/econres/notes/feds-notes/recent-developments-in-hedge-funds-treasury-futures-and-repo-positions-20230830.html.

47 Hempel, Samuel J., R. Jay Kahn, Vy Nguyen, and Sharon Y. Ross, “Non-centrally Cleared Bilateral Repo.” Washington, D.C.: Office of 

Financial Research. August 2022. https://www.financialresearch.gov/the-ofr-blog/2022/08/24/non-centrally-cleared-bilateral-repo/.

48 For additional information regarding the development of repo markets, their role in the 2007–09 financial crisis, and post-2008 reforms, 

see Mullin, John. 2020. “The Repo Market is Changing (and What Is a Repo, Anyway?).” Federal Reserve Bank of Richmond. https://www.

richmondfed.org/publications/%20research/econ_focus/2020/q1/federal_reserve.

49 Hempel, Samuel J., R. Jay Kahn, Robert Mann, and Mark E. Paddrik (2023). “Why is so much repo not centrally cleared?” OFR Brief no. 

23-01, Washington, D.C.: Office of Financial Research, May 2023. https://www.financialresearch.gov/briefs/2023/05/12/why-is-so-muchrepo-not-centrally-cleared/; and Banegas, Ayelen, and Phillip Monin. (2023). “Hedge Fund Treasury Exposures, Repo, and Margining,” 

FEDS Notes. Washington, D.C.: Board of Governors of the Federal Reserve System, September 8, 2023. https://www.federalreserve.gov/

econres/notes/feds-notes/hedge-fund-treasury-exposures-repo-and-margining-accessible-20230908.htm.

50 Federal Reserve Bank of New York. 2022. “Repo and Reverse Repo Agreements.” Federal Reserve Bank of New York. https://www.

newyorkfed.org/markets/domestic-market-operations/monetary-policy-implementation/repo-reverse-repo-agreements. For additional 

discussion of the Federal Reserve’s standing repo and ON RRP facilities in current monetary policy implementation, see Ennis, Huberto 

and Jeff Huther. “The Fed’s Evolving Involvement in the Repo Markets.” Economic Brief No. 21-31. Richmond, VA: Federal Reserve Bank of 

Richmond, September 2021. https://fraser.stlouisfed.org/title/economic-brief-6034/fed-s-evolving-involvement-repo-markets-607767.

51 Securities and Exchange Commission. Money Market Fund Reforms. Final Rule, Washington, D.C.: SEC, 88 Federal Register, No. 148 

(August 3, 2023). https://www.federalregister.gov/documents/2023/08/03/2023-15124/money-market-fund-reforms-form-pf-reportingrequirements-for-large-liquidity-fund-advisers-technical.

52 STIFs are short-term collective investment funds that are bank-sponsored trusts. STIFs that are sponsored by OCC-regulated banks 

must comply with the detailed requirements of OCC’s 12 CFR 9.18, including valuation and record-keeping requirements. STIFs that are 

sponsored by state-regulated banks are subject to similar requirements under state laws and regulations, which often cross-reference or 

otherwise incorporate key components of the OCC’s STIF framework. Local government investment pools typically pool the resources 

of participating governments and invest in various securities as permitted under state law. By pooling their cash together, participating 

governments benefit in a variety of ways, including from economies of scale and professional fund management. Private liquidity funds 

are private funds that seek to generate income by investing in a portfolio of short-term obligations in order to maintain a stable net asset 

value per unit or minimize principal volatility for investors. Ultrashort bond funds are mutual funds that generally invest in fixed-income 

securities with extremely short maturities (that is, time periods in which they become due for payment). Like other bond funds, ultrashort 

bond funds may invest in a wide range of securities. Offshore MMFs are similar to U.S. MMFs, but they are domiciled outside the United 

States; the offshore MMFs considered here invest in U.S.-dollar-denominated assets.

53 The vulnerability of these funds to investor runs is also partly dependent on the composition of the funds’ investor base. For example, 

bank-sponsored STIFs primarily consist of retirement fund assets, and retirement investors may be less likely to make withdrawals during 

periods of market stress, given retirement plan rules. 

54 The $310 billion figure reflects STIF AUM reported on FFIEC call reports. Some state-chartered non-depository institutions offering STIFs 

are not required to report STIF AUM on FFIEC call reports. However, these institutions may be required by some states to file Call Reports 

that are not made publicly available.

55 For the purposes of this report, digital assets include central bank digital currencies (CBDCs) and crypto-assets. Definitions and other 

descriptions used throughout section 3.1.5 of this report do not have any legal effect and create no rights or obligations. Other reports 

published by the members of the Council may use different definitions or taxonomies.

56 Financial Stability Oversight Council. Report on Digital Asset Financial Stability Risks and Regulation. Washington, D.C.: Council, 2022. 

https://home.treasury.gov/system/files/261/FSOC-Digital-Assets-Report-2022.pdf. Subsequent in-text and endnote citations will refer to 

this report as the Digital Asset Report. 

57 Interconnections inside the crypto-asset ecosystem can spread losses if, for example, a shock causes the default of an interconnected 

entity. The defaulted entity’s counterparties may incur knock-on losses.
132 2023 FSOC // Annual Report

58 See Digital Asset Report, p. 43: “Operational vulnerabilities involve key market activities or infrastructure that are likely to be disrupted in 

a response to a shock, such as a malicious attack or some other unexpected development.”

59 See Digital Asset Report, p. 46.

60 Bank of International Settlements. “Financial stability risks from crypto-assets in emerging market economies.” BIS Paper No. 138, p. 6-8. 

Basel, Switzerland: BIS, August 2023. https://www.bis.org/publ/bppdf/bispap138.pdf.

61 For example, see U.S. Department of Treasury. “Following Terrorist Attack on Israel, Treasury Sanctions Hamas Operatives and Financial 

Facilitators.” Press Release, October 18, 2023: Treasury. https://home.treasury.gov/news/press-releases/jy1816; and U.S. Department of 

Treasury. “Treasury Designates Roman Semenov, Co-Founder of Sanctioned Virtual Currency Mixer Tornado Cash.” Press Release, August 

23, 2023: Treasury. https://home.treasury.gov/news/press-releases/jy1702.

62 Curve Finance purports to be a DeFi protocol.

63 CRV represents approximately .04 percent of total crypto-asset market value, as of September 25, 2023.

64 As of September 25, 2023, the price of CRV is $0.52, which is down from the Sept. 1, 2022, CRV price of $1.15. CoinMarketCap, CRV. 

Accessed August 30, 2023, https://coinmarketcap.com/currencies/curve-dao-token.

65 The details surrounding the hack highlight cybersecurity risks associated with protocols in the crypto-asset ecosystem. Several pools 

on Curve Finance that use Viper programming language, which is similar to Python, contained issues that made some Curve Finance 

smart contracts vulnerable to reentrancy attacks, where a function is called recursively before a balance is recalculated, allowing an 

attacker to exploit a vulnerability in a smart contract’s code. Viper is a widely used Web3 programming language, so the bug in three of its 

versions could threaten several other protocols. See Kessler, Sam, Danny Nelson, and Shaurya Malwa. 2023. “Curve Finance Drained of 

$50M While CRV Token Sinks 12% in Latest DeFi Exploit.” CoinDesk (July 30, 2023, updated July 31, 2023). https://www.coindesk.com/

business/2023/07/30/curve-finance-exploit-puts-100m-worth-of-crypto-at-risk/.

66 Malwa, Shaurya. 2023. “Curve Recoups 73% of Hacked Funds, Bolstering CRV Sentiment Recoups.” CoinDesk (August 7, 2023). https://

www.coindesk.com/tech/2023/08/07/curve-recoups-73-of-hacked-funds-bolstering-crv-sentiment/.

67 Ibid.

68 @DelphiDigital, X (July 31, 2023, 9:31pm), https://twitter.com/Delphi_Digital/status/1686187959303708672?ref_src=twsrc%5Etfw. 

69 U.S. Department of Treasury. Crypto-Assets: Implications for Consumers, Investors, and Businesses. Washington, D.C.: Treasury, 2022, p. 

28-29. https://home.treasury.gov/system/files/136/CryptoAsset_EO5.pdf. 

70 Securities Exchange Commission. Safeguarding Advisory Client Assets. Washington, D.C.: 88 Federal Register 14672 (March 9, 2023).

https://www.federalregister.gov/documents/2023/08/30/2023-18667/safeguarding-advisory-client-assets-reopening-of-commentperiod.

71 Securities Exchange Commission. Supplemental Information and Reopening of Comment Period for Amendments Regarding the Definition 

of “Exchange.” Proposed Rule, Washington, D.C.: SEC, 88 Federal Register 29448 (May 5, 2023). https://www.federalregister.gov/

documents/2023/05/05/2023-08544/supplemental-information-and-reopening-of-comment-period-for-amendments-regarding-thedefinition-of. 

72 Commodity Futures Trading Commission. CFTC Letter No. 23-07. Washington, D.C.: CFTC, May 30, 2023. https://www.cftc.gov/csl/23-07/

download.

73 New York Department of Financial Services, Guidance on Custodial Structures for Customer Protection in the Event of Insolvency. 

Guidance, New York, NY: NYDFS. 2023. https://www.dfs.ny.gov/industry_guidance/industry_letters/il20230123_guidance_custodial_

structures. 

74 In re Coinbase, Inc. et al., No. 2300225 (Ill. Sec’y of State, Notice of Hearing, Jun. 6, 2023). In re Coinbase, Inc. et al. (N.J., Bureau of Sec., 

Cease and Desist Order, Jun. 6, 2023). In re Coinbase, Inc. et al. (Cal. Dep’t. of Fin. Prot. & Innov., Desist and Refrain Order, Jun. 6, 2023). In 

re Coinbase, Inc. et al., No. 20225292 (S. C. Sec. Comm’r, Order to Cease and Desist, Jun. 6, 2023). In re Coinbase, Inc. et al., No. SC-2023-

0009 (Ala. Sec. Comm’n, Order to Show Cause, Jun. 6, 2023). In re Coinbase, Inc. et al., No. 23-003-S (Vt. Dep’t of Fin. Reg, Show Cause 

Order, Jun. 6, 2023). Ky Dep’t of Fin. Inst. v. Coinbase, Inc. et al., No. 2023-AH-0011 (Jun. 6, 2023). Wash. Dep’t of Fin. Inst. v. Coinbase, 

Inc. et al., No. S-23-3540-23-SC01 (Jun. 6, 2023). In re Coinbase, Inc. et al, No. S-246912 (EX) (Wis. Dep’t of Fin. Inst., Jun. 6, 2023). In re 

Coinbase, Inc. et al., No. 2023-0130 (Md. Sec. Comm’r, Summary Order to Cease and Desist, Jun. 6, 2023).

75 For further description of the CFTC’s fiscal year 2023 enforcement actions, please review the CFTC’s Department of Enforcement annual 

report. See Commodity Futures Trading Commission. “CFTC Releases FY 2023 Enforcement Results.” Press Release, November 7, 2023: 

CFTC. https://www.cftc.gov/PressRoom/PressReleases/8822-23. For a description of the SEC’s crypto-asset related enforcement actions, 

see https://www.sec.gov/spotlight/cybersecurity-enforcement-actions. 

76 See SEC v. Bittrex, Inc. et al., No. 2:23-cv-00580 (W.D. Wa. Apr. 17, 2023). SEC v. Binance Holdings Limited et al., No. 1:23-cv-01599 (D.D.C. 

June 5, 2023). SEC v. Coinbase, Inc. et al., No.1:23-cv-04738 (S.D.N.Y Jun. 6, 2023). SEC v. Beaxy Digital, Ltd., et al., No. 1:23-cv-01962 (N.D. 

Ill. March 29, 2023) and SEC v. Kraken, No. 3:23-cv-06003 (N.D. Cal. Nov. 20, 2023).

77 See SEC v. Payward Ventures, et al. (d/b/a Kraken), No.3:23-cv-00588 (N.D. Cal. Feb. 9, 2023). In re Nexo Cap. Inc., No.3-21281 (Sec. 

& Exch. Comm’n, Cease and Desist Order, Jan. 19, 2023). SEC v. Beaxy Digital, Ltd., No. 1:23-cv-01962 (N.D. Il. Mar. 29, 2023). SEC v. 

Terraform Labs PTE Ltd., No. 1:23-cv-1346 (S.D.N.Y. Apr. 21, 2023).
Endnotes 133

78 For example, see CFTC v. Changpeng Zhao, Binance Holdings Limited, Binance Holdings (IE) Limited, and Binance (Services) Holdings 

Limited, No. 23-cv-01887 (N.D. Ill. Mar. 27, 2023) (CFTC reached a proposed $2.85 billion settlement). https://www.cftc.gov/PressRoom/

PressReleases/8825-23. Separately, on November 21, 2023, the U.S. Department of Justice (DOJ) and the U.S. Department of the 

Treasury’s Financial Crimes Enforcement Network (FinCEN) and Office of Foreign Assets Control (OFAC) announced charges against 

Binance Holdings. the Financial Crimes Enforcement Network (FinCEN) and the Department of Justice (DOJ) have continued to bring 

other actions against entities and persons participating in or facilitating illicit activity. Imposition of Special Measure Prohibiting the 

Transmittal of Funds Involving Bitzlato, RIN1506-AB42 (effective Feb. 1, 2023). See also FinCEN Proposes New Regulation to Enhance 

Transparency in Convertible Virtual Currency Mixing and Combat Terrorist Financing, RIN 1506-AB64, https://www.federalregister.

gov/documents/2023/10/23/2023-23449/proposal-of-special-measure-regarding-convertible-virtual-currency-mixing-as-a-class-oftransactions. 

79 Interconnections between the traditional financial sector and the crypto-asset ecosystem may include financial institutions providing 

crypto-asset custodial services, funding, and banking services (among other things) to crypto-asset companies.

80 Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency. 

Joint Statement on Crypto-Asset Risks to Banking Organizations. January 3, 2023. https://www.occ.treas.gov/news-issuances/newsreleases/2023/nr-ia-2023-1a.pdf. Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Office 

of the Comptroller of the Currency. Joint Statement on Liquidity Risks to Banking Organizations Resulting from Crypto-Asset Market 

Vulnerabilities. February 23, 2023. https://www.fdic.gov/news/financial-institution-letters/2023/fil23008a.pdf.

81 Silvergate also had extensive connections to the crypto-asset ecosystem outside of its highly concentrated deposit base, which were 

publicly known prior to March 2023. The bank stated in its 2021 10K that it “offers a loan product collateralized by certain cryptocurrencies 

which currently include Bitcoin.” In later SEC filings, the bank also noted loans tied to private equity/ venture and its partners accounted 

for 41 percent, 43 percent, and 39 percent of total loans in 2022 first quarter, second quarter, and third quarter, respectively.

82 SEC Form 10-Q. 2022. https://s23.q4cdn.com/615058218/files/doc_financials/2022/q3/fe57d23e-df43-4118-bffa-43ec28b9cad6.pdf. 

83 Committee on Financial Services United States House of Representatives “Statement of Marin Gruenberg, Chairman of the Federal 

Deposit Insurance Corporation on “The Federal Regulators’ Response to Recent Bank Failures”” 118th Cong., 1st Sess., March 29, 2023. 

https://docs.house.gov/meetings/BA/BA00/20230329/115605/HHRG-118-BA00-Wstate-GruenbergM-20230329.pdf. 

84 SEC Form 12b-25. 2023. https://d18rn0p25nwr6d.cloudfront.net/CIK-0001312109/14a9b861-b10a-458d-8f9d-44f0d18bc75e.pdf. 

85 Silvergate Capital Corporation. “Silvergate Capital Corporation Announces Intent to Wind Down Operations and Voluntarily Liquidate 

Silvergate Bank.” Press Release, March 8, 2023. https://ir.silvergate.com/news/news-details/2023/Silvergate-Capital-CorporationAnnounces-Intent-to-Wind-Down-Operations-and-Voluntarily-Liquidate-Silvergate-Bank/default.aspx. 

86 New York Department of Financial Services. Internal Review of the Supervision and Closure of Signature Bank. New York, NY: NYDFS, April 

28, 2023. https://www.dfs.ny.gov/system/files/documents/2023/04/nydfs_internal_review_rpt_signature_bank_20230428.pdf. 

87 Federal Deposit Insurance Corporation. “FDIC’s Supervision of Signature Bank.” Press Release, April 28, 2023. FDIC. https://www.fdic.

gov/news/press-releases/2023/pr23033a.pdf.

88 Ibid.

89 Team Circle. 2023. “An Update on USDC and Silicon Valley Bank.” Circle Blog. Circle. https://www.circle.com/blog/an-update-on-usdcand-silicon-valley-bank.

90 @Coinbase, X (Mar. 11, 2023, 10:41pm), https://twitter.com/coinbase/status/1634399032767307776?ref_src=twsrc%5Etfw. 

91 MakerDAO is an unregulated, purportedly decentralized autonomous organization that operates the Maker Protocol, an unregulated 

lending platform. 

92 Napolitano, Elizabeth. “MakerDAO Weighs Using Emergency Switch to Prevent Future DAI Depegging.” CoinDesk (March 13, 2023). 

https://www.coindesk.com/business/2023/03/13/makerdao-weighs-using-emergency-switch-to-prevent-future-dai-depegging/. 

Stablecoin depegs are not limited to the value falling below its peg. In some instances, the value can exceed the peg. This was the case for 

Tether, which traded above its $1 peg amid the banking stress in March.

93 Board of Governors of the Federal Reserve System. “Creation of Novel Activities Supervision Program: SR 23-7.” 2023. https://www.

federalreserve.gov/supervisionreg/srletters/SR2307.htm. The FDIC has also continued to monitor the safety and soundness of banking 

practices aside from the March bank failures. In March 2023, the FDIC issued a Consent Order with Cross River Bank, a bank servicing the 

crypto-asset ecosystem, after determining that Cross River had engaged in unsafe and unsound banking practices.

94 President’s Working Group on Financial Markets. Report on Stablecoins. Washington, D.C.: PWG, 2021. p. 15. https://home.treasury.gov/

system/files/136/StableCoinReport_Nov1_508.pdf. Hereafter, this report will be referred to as the 2021 PWG Report.

95 Ibid. 

96 Ibid, p. 12.

97 Ibid, p. 12-13.

98 Ibid, p. 14.

99 Ibid.
134 2023 FSOC // Annual Report

100 To the extent that a given stablecoin’s activity falls within the jurisdiction of the SEC or CFTC, that activity must be conducted 

in compliance with applicable provisions of the federal securities laws and/or the CEA. See 2021 PWG Report, p. 11. Stablecoin 

arrangements are also likely subject to the Bank Secrecy Act.

101 Ibid.

102 U.S. Department of the Treasury. Crypto-Assets: Implications for Consumers, Investors, and Businesses. Washington, D.C.: UST, 2022. p. 21.

https://home.treasury.gov/system/files/136/CryptoAsset_EO5.pdf. 

103 Allison, Ian. “JPMorgan Debuts Tokenized BlackRock Shares as Collateral with Barclays.” CoinDesk (October 11, 2023). https://

www.coindesk.com/business/2023/10/11/jpmorgan-debuts-tokenized-blackrock-shares-as-collateral-with-barclays/. While bankled tokenization activity occurs on private, permissioned blockchains, some nonbank institutions are using public, permissionless 

blockchains. See also Carapella, Francesca, Grace Chuan, Jacob Gerszten, Chelsea Hunter, Nathan Swem. “Tokenization: Overview 

and Financial Stability Implications.” Finance and Economics Discussion Series 2023-060, Washington, D.C.: Board of Governors of the 

Federal Reserve System, September 2023. p. 11. https://www.federalreserve.gov/econres/feds/tokenization-overview-and-financialstability-implications.htm.

104 U.S. Department of the Treasury. Crypto-Assets: Implications for Consumers, Investors, and Businesses. Washington, D.C.: UST, 2022. p. 15.

https://home.treasury.gov/system/files/136/CryptoAsset_EO5.pdf.

105 Carapella, Francesca, Grace Chuan, Jacob Gerszten, Chelsea Hunter, Nathan Swem. “Tokenization: Overview and Financial Stability 

Implications.” Finance and Economics Discussion Series 2023-060, Washington, D.C.: Board of Governors of the Federal Reserve System, 

September 2023. p. 7. https://www.federalreserve.gov/econres/feds/tokenization-overview-and-financial-stability-implications.htm.

106 See Joint Statement on Crypto-Asset Risks to Banking Organizations: “[I]ssuing or holding as principal crypto-assets that are issued, 

stored, or transferred on an open, public, and/or decentralized network, or similar system is highly likely to be inconsistent with safe 

and sound banking practices.”). See also Federal Reserve Order No. 2023-02: Custodia Bank, Inc. Cheyenne, Wyoming Order Denying 

Application for Membership, Federal Reserve System (Jan. 27, 2023). https://www.federalreserve.gov/newsevents/pressreleases/files/

orders20230324a1.pdf, p. 33–34: “The pseudonymity of crypto-asset transactions may also lead to financial institutions unknowingly but 

directly engaging in what may result in illicit financial activity. Crypto-asset transactions on some blockchains, including Ethereum, rely 

on distributed networks of anonymous persons for validation. Validators perform this service in exchange for earning crypto-assets, which 

may take the form of an award for validations (for bitcoin “miners”) or a tip from transactors as payment for the validation (“transaction 

processing fees”). These transaction processing fees on some blockchains, including Ethereum, go to unknown validators, which may 

include illicit actors or sanctioned entities. To the extent a financial institution pays such transaction processing fees, it is risking making 

payments that support illicit finance or terrorist activity or to a prohibited jurisdiction or entity.” 

107 Financial Stability Oversight Council. Report on Climate-Related Financial Risk. Washington, D.C.: Council, 2021. https://home.treasury.

gov/system/files/261/FSOC-Climate-Report.pdf.

108 Ranger, Nicola Ann, Olivier Mahul, and Irene Monasterolo. “Assessing Financial Risks from Physical Climate Shocks: A Framework for 

Scenario Generation.” Equitable Growth, Finance & Institutions Insight Publications, Washington, D.C.: World Bank. February 2022. 

https://openknowledge.worldbank.org/server/api/core/bitstreams/9c82ed4b-6554-5475-b7ae-8a0ef15e685b/content/.

109 Brei, Michael, Preeya Mohan, and Eric Strobel. 2019. “The impact of natural disasters on the banking sector: Evidence from hurricane 

strikes in the Caribbean.” The Quarterly Review of Economics and Finance Volume 72 (May), p. 232-239. https://doi.org/10.1016/j.

qref.2018.12.004.

110 See the International Labor Organization’s Frequently Asked Questions on Climate Change and Jobs: https://www.ilo.org/global/topics/

green-jobs/WCMS_371589/lang--en/index.htm. 

111 Financial Stability Oversight Council. Report on Climate-Related Financial Risk. Washington, D.C.: Council, 2021. https://home.treasury.

gov/system/files/261/FSOC-Climate-Report.pdf. Financial Stability Oversight Council. 2022 Annual Report. Washington, D.C.: Council, 

December 16, 2022. https://home.treasury.gov/system/files/261/FSOC2022AnnualReport.pdf. 

112 Count of weather- and climate-disaster events is as of October 10, 2023, and does not include Tropical Storm Hilary (August 2023) 

or the Texas Hail Storms (September 2023) as total costs have not yet been determined for these events. NOAA National Centers for 

Environmental Information (NCEI). U.S. Billion-Dollar Weather and Climate Disasters. 2023. https://www.ncei.noaa.gov/access/billions/. 

113 Cerdá, José J., and Raluca A. Roman. “Climate Change and Consumer Finance: A Very Brief Literature Review.” Federal Reserve 

Bank of Philadelphia Working Paper Series, Philadelphia, PA: Federal Reserve Bank of Philadelphia, September 2021. https://www.

philadelphiafed.org/-/media/frbp/assets/consumer-finance/discussion-papers/dp21-04.pdf; and Addoum, Jawad M., Piet Eichholtz, 

Eva Steiner, and Erkan Yönder. “Climate Change and Commercial Real Estate: Evidence from Hurricane Sandy.” Available at SSRN, March 

2021. http://dx.doi.org/10.2139/ssrn.3206257.

114 Avtar, Ruchi, Kristian S. Blickle, Rajashri Chakrabarti, Janavi Janakiraman, and Maxim L. Pinkovskiy. “Understanding the Linkages 

between Climate Change and Inequality in the United States,” Staff Report no. 991, New York, NY: Federal Reserve Bank of New York. 

November 2021. https://www.newyorkfed.org/research/staff_reports/sr991.html.

115 Katz, Lily and Sheharyar Bokhari. “Migration Into America’s Most Flood-Prone Areas Has More Than Doubled Since the Start of the 

Pandemic.” Redfin (July 24, 2023). https://www.redfin.com/news/climate-migration-real-estate-2023/.

116 Ibid.

117 For a thorough review of the literature, see Contact, Justin, Carrie Hopkins, Luis Mejia, and Matthew Suandi. “When Climate Meets Real 

Estate: A Survey of the Literature.” Staff Working Paper 23-05, Washington, D.C.: Federal Housing Finance Agency, August 2023. https://

www.fhfa.gov/PolicyProgramsResearch/Research/PaperDocuments/wp2305.pdf.
Endnotes 135

118 See, for example, recent insolvencies in Louisiana. Finch, Michael. 2022. “Ninth insurer in Louisiana goes under; here’s what it means 

for 1,500 open claims.” Nola.com (September 26, 2022). https://www.nola.com/news/business/article_70791e32-3dc1-11ed-98d3-

57c09e5237a1.html. Also see page 1 of Louisiana Insurance Guaranty Association. 2021 Annual Report. Baton Rouge, LA: LIGA, March 30, 

2022. https://www.laiga.org/wp-content/uploads/2022/07/2021-Annual-Report.pdf, which notes that “State National Fire Ins. Co. and 

Access Home Ins. Co. were two homeowner insurers which became insolvent in the wake of Hurricane Ida.”

119 Zawacki, Tim. 2022. “US Property & Casualty Insurance Market Report: Climate, cyberrisks to drive expansion.” S&P Global, New York, 

Accessed August 23, 2022. https://www.spglobal.com/marketintelligence/en/news-insights/research/us-p-and-c-insurance-marketreport-climate-cyberrisks-to-drive-expansion.

120 Center for Insurance Policy and Research. “Extreme Weather and Property Insurance: Consumer Views.” Kansas City: CIPR, 2021. https://

content.naic.org/sites/default/files/CIPR%20Consumer%20property%20ins%20report%208-21_0.pdf. 

121 Home insurance rates rose 35 percent in Florida, 31 percent in Idaho, and 30 percent in Colorado, according to recent analysis. See 

Howard, Pat. 2023. “Home insurance prices up 21% as homeowners are left to deal with climate change, turbulent market.” Policygenius. 

Accessed September 12, 2023. 

https://www.policygenius.com/homeowners-insurance/home-insurance-pricing-report-2023/. 

122 For example, the majority of the flood insurance in the United States is provided by the National Flood Insurance Program (NFIP). 

However, the increased incidence and cost of flooding is putting increasing pressure on the NFIP to meet its obligations. While 

the NFIP was largely solvent until the early 2000s, its financial condition has deteriorated since that time. Changes to NFIP’s riskrating methodology in 2021 to improve its financial position have resulted in higher premiums for policyholders, with 66 percent of 

policyholders expected to see their premiums increase and 9.4 percent projected to see an increase of 300 percent or more. Louisiana and 

nine other states are suing to block these increases. See Government Accountability Office. “Flood Insurance: FEMA’s New Rate-Setting 

Methodology Improves Actuarial Soundness but Highlights Need for Broader Program Reform.” GAO-23-105977, Washington, D.C.: GAO, 

July 2023. https://www.gao.gov/products/gao-23-105977 and McGill, Kevin. 2023. “Louisiana, 9 other states ask federal judge to block 

changes in National Flood Insurance Program.” AP News (September 14, 2023). https://apnews.com/article/louisiana-flood-insurancelawsuit-4bb2307431db2ea4781959c99f5a0e61. 

123 Insurance Information Institute. “Homeowners Perceptions of Weather Risks: 2023Q2 Consumer Survey.” New York: NY, Triple-I. June 

2023. https://www.iii.org/sites/default/files/docs/pdf/2023_q2_ho_perception_of_weather_risks.pdf. 

124 See Dagher, Veronica. 2023. “Americans are bailing on their home insurance.” Wall Street Journal (August 28, 2023). https://www.wsj.com/

personal-finance/americans-are-bailing-on-their-home-insurance-e3395515.

125 S&P Global. “Sustainability Insights: California’s Evolving Insurance Market Has Mixed Impacts.” https://www.spglobal.com/ratings/en/

research/articles/230802-sustainability-insights-california-s-evolving-insurance-market-has-mixed-impacts-spotlight-on-u-s-publicfi-12799846.

126 See Sweet, Ken. “Climate change fuels skyrocketing surge in insurance costs.” Morganton News Herald. (September 23, 2023). https://

morganton.com/news/nation-world/homeowners-insurance-cost-climate-change-wildfire-disasters/article_535c00cf-756a-525c-8ba1-

09a72270d6be.html#:~:text=Americans%20nationwide%20face%20hefty%20increases,unable%20to%20keep%20up%20with. 

127 Carpenter, Guy. U.S. Property Catastrophe Rate-On-Line Index. 2023. Artemis.bm. https://www.artemis.bm/us-property-cat-rate-on-lineindex/. 

128 “Best’s Special Report: U.S. Property/Casualty Industry Records $24.5 Billion Underwriting Loss in the First Half of 2023.” Businesswire 

(September 11, 2023). https://www.businesswire.com/news/home/20230911931537/en/Best%E2%80%99s-Special-Report-U.S.-

PropertyCasualty-Industry-Records-24.5-Billion-Underwriting-Loss-in-the-First-Half-of-2023.

129 Flavelle, Christopher, Jill Cowan, and Ivan Penn. 2023. “Climate Shocks Are Making Parts of America Uninsurable. It Just Got Worse.” 

The New York Times (May 31, 2023). https://www.nytimes.com/2023/05/31/climate/climate-change-insurance-wildfires-california.

html?searchResultPosition=1.

130 The Council of Insurance Agents & Brokers. “Q1 2023 P/C Market Survey.” Press Release: CIAB. https://www.ciab.com/resources/

news-release-the-councils-q1-2023-p-c-market-survey-shows-signs-of-stabilization-in-cyber-line-with-spike-in-commercial-propertypremiums/. 

131 The Council of Insurance Agents & Brokers. “Q2 2023 P/C Market Survey.” Press Release: CIAB. https://www.ciab.com/resources/q2-2023-

p-c-market-survey/.

132 Zawacki, Tim. 2023. “Berkshire Unit to Exit Increasingly Embattled California Homeowners Market.” S&P Global Market Intelligence 

(August 3, 2023). https://www.capitaliq.spglobal.com/apisv3/spg-webplatform-core/news/article?id=76840049&redirected=1.

133 Brooks, Kristopher J. “Another Major Insurer is Halting New Sales in California.” CBS News. (June 2, 2023). https://www.cbsnews.com/

news/allstate-insurance-state-farm-california/. State Farm. “State Farm Insurance Company: California New Business Update.” Press 

Release, May 26, 2023: State Farm. https://newsroom.statefarm.com/state-farm-general-insurance-company-california-new-businessupdate/.

134 Stanley, Eliza. 2023. “Survey shows 17% of Louisiana Residents Lost Home Insurance Last Year.” NOLA (May 31, 2023). https://www.

nola.com/news/business/survey-shows-17-of-louisiana-residents-lost-home-insurance-last-year/article_a4444bc8-fff5-11ed-9ad9-

ab39d036b107.html.

135 Hope, Anika. 2023. “Farmers Insurance stops writing new property policies in Florida.” WESH 2 News. (June 15, 2023) https://www.wesh.

com/article/farmers-insurance-property-policies-florida/44189948. Note that in the Florida insurance market specifically, fraud and 
136 2023 FSOC // Annual Report

lawsuits, in addition to the increasing frequency and severity of extreme weather, have also been cited as factors contributing to changes 

in insurance premiums and availability of policies. Hamid, Shahid S. “The big reason Florida insurance companies are failing isn’t just 

hurricane risk—it’s fraud and lawsuits.” Florida International University News (October 5, 2022). https://news.fiu.edu/2022/the-bigreason-florida-insurance-companies-are-failing-isnt-just-hurricane-risk-its-fraud-and-lawsuits. 

136 Eaglesham, Jean. 2023. “Home Insurers Curb New Policies in Risky Areas Nationally.” The Wall Street Journal (June 8, 2023). https://www.

wsj.com/articles/home-insurers-curb-new-policies-in-risky-areas-nationally-c93abac0.

137 Federal Insurance Office, U.S. Department of the Treasury. Insurance Supervision and Regulation of Climate-Related Risks. Washington, 

D.C.: FIO June 2023. https://home.treasury.gov/system/files/136/FIO-June-2023-Insurance-Supervision-and-Regulation-of-ClimateRelated-Risks.pdf. 

138 Statistics provided by the National Association of Insurance Commissioners via the California Department of Insurance.

139 Florida counts of policies in force are from the website of Citizens Property Insurance Corporation of Florida, https://www.citizensfla.

com/policies-in-force, accessed on November 13, 2023. Louisiana counts of policies in force are from an email exchange on November 

9, 2023, with the Louisiana Citizens Property Insurance Corporation (Louisiana Citizens). Louisiana Citizens explained that the drastic 

increase in the count of policies in force is primarily due to four hurricanes in 2020 and Hurricane Ida in 2021 which led to multiple 

insurer insolvencies and a decrease in policies written by the insurance industry in Louisiana as a result of the losses incurred from those 

catastrophic storm events. 

140 Fannie Mae guidelines suggest that annual housing costs become burdensome if mortgage costs plus insurance, taxes, and condo fees 

exceed 30 percent of gross income. Federal National Mortgage Association. Housing Affordability Primer. Washington, D.C.: Fannie 

Mae, 2015. https://www.fanniemae.com/sites/g/files/koqyhd191/files/migrated-files/resources/file/research/datanotes/pdf/housinginsights-111215.pdf. 

141 Joint Analysis Data Environment (JADE) is an OFR-hosted platform designed for Council member agencies to analyze risks to financial 

stability. For more information, see: https://www.financialresearch.gov/data/joint-analysis-data-environment/.

142 See the Climate-related Financial Risk: 2023 Staff Progress Report for more detail on how the CFRC is providing a forum for coordination 

on data prioritization and acquisition. https://home.treasury.gov/system/files/261/FSOC-2023-Staff-Report-on-Climate.pdf.

143 See the Climate-related Financial Risk: 2023 Staff Progress Report for more detail on how agencies are working toward a shared set of 

preliminary risk indicators on banking, insurance, and financial markets. https://home.treasury.gov/system/files/261/FSOC-2023-StaffReport-on-Climate.pdf.

144 Deposits and other sources of bank funding are considered sticky if they are likely to be renewed or rolled over by the customer as part of 

the bank’s funding, including under conditions of stress.

145 In the case of Signature Bank, high reliance on uninsured deposits and broader concurrent concerns about banks with business related to 

digital assets were more critical than unrealized losses in the bank’s securities portfolio.

146 The survey is available on the Federal Reserve website at https://www.federalreserve.gov/data/sloos.htm. 

147 In this section, we consider BHCs in categories I to III from the Federal Reserve’s final tailoring rule. See https://www.federalreserve.gov/

aboutthefed/boardmeetings/files/tailoring-rule-visual-20191010.pdf. 

148 FR Y-9C and Call Report data.

149 In this section, we consider regional banks—defined as banks with assets between $10 billion and $100 billion—and BHCs in category 

IV from the Federal Reserve’s tailoring rule. See https://www.federalreserve.gov/aboutthefed/boardmeetings/files/tailoring-rulevisual-20191010.pdf. 

150 Regional banks tend to have higher duration gaps—measures of the sensitivity of banks’ equity positions to changes in interest rates—

than larger banks, meaning that the potential for future rate increases could lead to material fair-value losses on long-duration assets.

151 See the interagency guidance: Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, Federal 

Deposit Insurance Corporation, and National Credit Union Administration. Prudent Commercial Real Estate Loan Accommodations 

and Workouts. Notice, Washington, D.C.: OCC, Federal Reserve, FDIC, NCUA, 88 Federal Register 43115 (July 6, 2023). https://www.

federalregister.gov/documents/2023/07/06/2023-14247/policy-statement-on-prudent-commercial-real-estate-loan-accommodationsand-workouts.

152 The exact cost of the resolution of SVB and Signature Bank will be determined when the FDIC terminates the receiverships. The FDIC’s 

current estimated loss is approximately $17.8 billion from the failure of SVB and $0.9 billion from the failure of Signature Bank. See 

Special Assessment Pursuant to Systemic Risk Determination Final Rule, November 16, 2023, https://www.fdic.gov/news/boardmatters/2023/2023-11-16-notational-fr-b.pdf. For earlier estimates and other details, see: FDIC Chairman’s testimony from May 18, 2023, 

https://www.fdic.gov/news/speeches/2023/spmay1723.html#_ftn11, as well as: Federal Deposit Insurance Corporation. “Subsidiary of 

New York Community Bancorp, Inc., to Assume Deposits of Signature Bridge Bank, N.A., from the FDIC.” Press Release, March 19, 2023: 

FDIC. https://www.fdic.gov/news/press-releases/2023/pr23021.html, and Federal Deposit Insurance Corporation. “First–Citizens Bank & 

Trust Company, Raleigh, NC, to Assume All Deposits and Loans of Silicon Valley Bridge Bank, N.A., from the FDIC.” Press Release, March 

26, 2023: FDIC. https://www.fdic.gov/news/press-releases/2023/pr23023.html.

153 For more details, see Federal Deposit Insurance Corporation. “JPMorgan Chase Bank, National Association, Columbus, Ohio Assumes 

all the Deposits if First Republic Bank, San Francisco, California.” Press Release, May 1, 2023: FDIC. https://www.fdic.gov/news/pressreleases/2023/pr23034.html.
Endnotes 137

154 For more detail, see Board of Governors of the Federal Reserve System. Review of the Federal Reserve’s Supervision and Regulation 

of Silicon Valley Bank. Washington, D.C.: Federal Reserve, April 2023. https://www.federalreserve.gov/publications/files/svbreview-20230428.pdf.

155 On September 18, 2023, the Federal Reserve, OCC, and FDIC requested comment on a proposal to increase the strength and resilience 

of the banking system. The proposal would modify large bank capital requirements to better reflect underlying risks and increase the 

consistency of how banks measure their risks. Additionally, the proposal seeks to further strengthen the banking system by applying 

a more stringent set of capital requirements to a broader set of banks, specifically those with more than $100 billion in assets.

156 Federal Deposit Insurance Corporation. Special Assessment Pursuant to Systemic Risk Determination. Final Rule, Washington, D.C.: 12 

CFR Part 327 FDIC, RIN 3064-AF93 (November 16, 2023). https://www.fdic.gov/news/board-matters/2023/2023-11-16-notational-fr-b.

pdf. 

157 Certain plans are also required to provide resolution strategies that (1) are not dependent on over-the-weekend sale, (2) contemplate the 

establishment of a bridge depository institution, and (3) identify franchise components that can be separated and sold, thereby expanding 

the options available to the FDIC upon a bank’s failure.

158 Federal Deposit Insurance Corporation. Options for Deposit Insurance Reform. Washington, D.C.: FDIC, 2023. https://www.fdic.gov/

analysis/options-deposit-insurance-reforms/report/options-deposit-insurance-reform-full.pdf.

159 Aggregate gross asset value of hedge funds reporting to the SEC on Form PF. SEC Q1 2023 Form PF Statistics Report available at: https://

www.sec.gov/files/investment/private-funds-statistics-2023-q1.pdf. SEC Q1 2018 Form PF Statistics Report available at: https://www.sec.

gov/divisions/investment/private-funds-statistics/private-funds-statistics-2018-q1.pdf. 

160 On-balance sheet leverage, or “financial leverage,” refers to borrowing through loans, bonds, repurchase and securities lending 

agreements, and other securities financing transactions. Off-balance sheet leverage, or “synthetic leverage,” refers to using instruments 

(such as derivatives) to create exposures whose value depends on an underlying asset. 

161 SEC Q1 2023 Form PF Statistics Report, available at: https://www.sec.gov/files/investment/private-funds-statistics-2023-q1.pdf.

162 For a more detailed discussion of Archegos, see the Council’s 2022 Annual Report, p. 44 and 81. https://home.treasury.gov/system/

files/261/FSOC2022AnnualReport.pdf. 

163 SEC Q1 2023 Form PF Statistics Report, available at: https://www.sec.gov/files/investment/private-funds-statistics-2023-q1.pdf; SEC Q1 

2018 Form PF Statistics Report, available at: https://www.sec.gov/divisions/investment/private-funds-statistics/private-funds-statistics2018-q1.pdf. 

164 The Treasury cash-futures basis trade is a fixed-income arbitrage trading strategy whereby funds try to capture the spread between the 

implied repo rate and general repo rates over the term of the trade. Entering into this trade involves selling a Treasury futures contract, 

buying a Treasury security deliverable into that contract with repo funding from dealer intermediaries, and delivering the security at 

contract expiry.

165 The term qualifying hedge funds, as defined by the SEC, refers to any hedge fund that is advised by a Large Hedge Fund Adviser and that 

has an NAV (individually or in combination with any feeder funds, parallel funds, or dependent parallel managed accounts) of at least 

$500 million as of the last day of any month in the fiscal quarter immediately preceding the adviser’s most recently completed fiscal 

quarter. On the relationship among qualifying hedge funds’ activity in short-term funding markets and the U.S. Treasury market and 

the Treasury cash-futures basis trade, see: Barth, Daniel, and Kahn, R. Jay, “Hedge Funds and the Treasury Cash-Futures Disconnect.” 

OFR WP 21-01, Washington, D.C.: Office of Financial Research, April 2021. https://www.financialresearch.gov/working-papers/files/

OFRwp-21-01-hedge-funds-and-the-treasury-cash-futures-disconnect.pdf; and Banegas, Ayelen, Monin, Phillip, and Petrasek, Lubomir. 

“Sizing Hedge Funds’ Treasury Market Activities and Holdings.” FEDS Notes. Washington, D.C.: Board of Governors of the Federal Reserve 

System, October 6, 2021. https://www.federalreserve.gov/econres/notes/feds-notes/sizing-hedge-funds-treasury-market-activities-andholdings-20211006.html. 

166 The growth of funds’ net short positioning has been concentrated in the 2-, 5-, and 10-year Treasury futures contracts. 

167 See the Council’s statement on Nonbank Financial Intermediation, February 4, 2022. https://home.treasury.gov/news/press-releases/

jy0587. 

168 Afonso, Gara, Marco Cipriani, Catherine Huang, Abduelwahab Hussein, and Gabriele La Spada. “Monetary Policy Transmission and 

the Size of the Money Market Fund Industry.” Liberty Street Economics Blog. Federal Reserve Bank of New York. April 3, 2023. https://

libertystreeteconomics.newyorkfed.org/2023/04/monetary-policy-transmission-and-the-size-of-the-money-market-fund-industry-anupdate.

169 Retail investors have driven the recent inflow into prime funds; between September 30, 2022, and September 30, 2023, retail prime MMFs 

saw inflows of $321 billion while institutional prime MMFs saw outflows of $24 billion.

170 SEC. Money Market Fund Statistics Report. September 2023. https://www.sec.gov/files/mmf-statistics-2023-09.pdf. 

171 Investment Company Institute. September 2023. https://www.ici.org/research/stats/trends.

172 CIFs are subject to a different regulatory regime than open-end funds. By statute, CIFs are not required to be registered under the federal 

securities laws. CIFs must be administered by banks acting as fiduciaries, are subject to regulation and prudential oversight by banking 

regulators, and are limited to eligible bank fiduciary accounts and retirement plans. CIFs are also subject to applicable federal tax law 

requirements and, to the extent that they hold applicable retirement plan investments, Employee Retirement Income Security Act (ERISA) 

obligations.
138 2023 FSOC // Annual Report

173 These data may significantly underestimate the CIF AUM because uninsured state nonmember trust banks are not required to file publicly 

available Call Reports and are therefore not included in these figures. 

174 CIFs are exempt from federal securities law registration, disclosure, and uniform data-reporting requirements imposed on open-end 

funds. Federal securities laws also impose other requirements on open-end funds that do not apply to CIFs, although the antifraud 

provisions of the securities laws still apply to CIF. 

175 Board of Governors of the Federal Reserve System. Financial Accounts of the United States – Z.1. Table L.117 as of Q2 2023. https://www.

federalreserve.gov/releases/z1/.

176 Ibid. Table L.118 as of Q2 2023.

177 LIMRA, “U.S. Pension Risk Transfer Sales Jump 31% in Second Quarter 2023.” LIMRA (August 23, 2023). https://www.limra.com/en/

newsroom/news-releases/2023/limra-u.s.-pension-risk-transfer-sales-jump-31-in-second-quarter-2023/. 

178 LIMRA, “U.S. Pension Risk Transfer Sales Jump 31% in Second Quarter 2023.” LIMRA (August 23, 2023). https://www.limra.com/en/

newsroom/news-releases/2023/limra-u.s.-pension-risk-transfer-sales-jump-31-in-second-quarter-2023/. Board of Governors of the 

Federal Reserve System. Financial Accounts of the United States – Z.1. Table L.117 as of Q2 2023. https://www.federalreserve.gov/releases/

z1/.

179 FICC consists of two divisions, the Government Securities Division (GSD) and the Mortgage-backed Securities Division (MBSD). GSD 

provides CCP services for its customers for the U.S. government securities market, and MBSD provides CCP services to the U.S. mortgagebacked securities market. NSCC serves as a CCP for virtually all broker-to-broker trades involving equities, corporate and municipal debt, 

American depositary receipts, exchange-traded products, and unit investment trusts.

180 See the discussion of Central Counterparties on p. 87 of Part One: Risks to U.S. Financial Stability: Office of Financial Research. Annual 

Report 2023. Washington, D.C.: OFR, 2023. https://www.financialresearch.gov/annual-reports/files/OFR-AR-2023_web.pdf. 

181 For a more detailed discussion of LME suspending trading in the nickel market in 2022, see Box E: Recent Development in Commodities 

Markets in the Council’s 2022 Annual Report, p. 54-55. https://home.treasury.gov/system/files/261/FSOC2022AnnualReport.pdf. 

182 Casanova-Aizpun, Fernando, Loïc Lanci, Roman Lechner, Arnaud Vanolli, and Li Xing. sigma 3/2023: World Insurance: Stirred, and not 

Shaken. Swiss Re Institute, July 10, 2023. https://www.swissre.com/institute/research/sigma-research/sigma-2023-03.html.

183 The industry reported an immaterial surplus decline in 2018. Total combined surplus of the two sectors was $1.2 trillion at year-end 2018, 

which was 0.3 percent lower than at year-end 2017.

184 Under statutory accounting, most fixed-income securities are carried at book value, and the accounting treatment is similar to that of 

banks’ held-to-maturity investment portfolios and loans. However, in statutory accounting for life insurers, the Interest Maintenance 

Reserve (IMR) captures the realized capital gains and losses resulting from changes in the general level of interest rates. These gains and 

losses are amortized into investment income, thereby reducing the volatility of reported earnings and capital. Therefore, upon the sale 

of long-term fixed-income securities with unrealized losses due to changes in interest rates, the insurer would generally not recognize 

the full losses. Negative IMR means that net realized interest-related losses are greater than net realized interest-related gains. From the 

standpoint of reserve adequacy, the inclusion of a negative IMR balance appropriately reduces the investment income in asset adequacy 

testing. Without the inclusion of negative IMR, reserve inadequacies would potentially not be recognized.

185 Zawacki, Tim. “Commercial Real Estate Chart Book: Weathering the Storm.” S&P Global Market Intelligence, (May 12, 2023). https://www.

spglobal.com/marketintelligence/en/news-insights/research/commercial-real-estate-chart-book-weathering-the-storm.

186 Ibid.

187 Ibid.

188 Ibid.

189 Modified coinsurance is a type of reinsurance treaty wherein the ceding company retains the assets with respect to policies reinsured and 

also establishes and maintains reserves on those policies, creating the obligation to render payments to the reinsurer at a later date.

190 National Association of Insurance Commissioners. “Regulatory Considerations Applicable (But Not Exclusive) to Private Equity (PE) 

Owned Insurers.” Washington, D.C.: NAIC, 2022. https://content.naic.org/sites/default/files/inline-files/List%20of%20MWG%20

Considerations%20-%20PE%20Related%20and%20Other.pdf. 

191 See: “Private Equity,” NAIC, https://content.naic.org/cipr-topics/private-equity.

192 The MPI’s “Other” category includes the NAIC’s Macroprudential Risk Assessment, which is a key component of the NAIC’s 

Macroprudential Supervision, aimed at enhancing state insurance regulators’ ability to monitor industry trends through a risk 

“dashboard.” See: National Association of Insurance Commissioners. “NAIC Macroprudential Risk Assessment.” Washington, D.C.: NAIC, 

May 2022. https://content.naic.org/sites/default/files/inline-files/Macroprudential%20Risk%20Assessment_0.pdf.

193 Inter-Agency Working Group for Treasury Market Surveillance. Enhancing the Resilience of the U.S. Treasury Market: 2023 Staff Progress 

Report. Washington, D.C.: IAWG, November 2023. https://home.treasury.gov/system/files/136/20231106_IAWG_report.pdf.

194 See: Financial Conduct Authority. “LIBOR transition and the derivatives trading obligation.” Policy Statement 21/13. October 2021. 

https://www.fca.org.uk/publication/policy/ps21-13.pdf. In addition to the actions taken in the US and UK, ESMA has submitted draft 

regulatory technical standards (RTS) to amend the scope of the EU derivatives trading obligation to include certain Euro Short-Term 

Rates (€STR) OIS to the European Commission for its endorsement. See ESMA70-446-772 Final Report on CO-DTO in the context of the 
Endnotes 139

benchmark transition.pdf (europa.eu). See also the Final Compromise text for MiFIR (October 2023), https://www.consilium.europa.

eu/en/press/pressreleases/2023/06/29/capital-markets-union-council-and-parliament-agree-on-proposal-to-strengthen-market-datatransparency/. 

195 U.S. House of Representatives, Office of the Law Revision Counsel. “United States Code, Title 12 – Banks and Banking, Chapter 

55 – Adjustable Interest Rate (LIBOR), Sections 5801-5807.” https://uscode.house.gov/view.xhtml?path=/prelim@title12/

chapter55&edition=prelim. 

196 Confidentiality is roughly equivalent to privacy. Confidentiality measures are designed to prevent sensitive information from 

unauthorized access attempts. It is common for data to be categorized according to the amount and type of damage that could be done 

if it fell into the wrong hands. More or less stringent measures to protect that information can then be implemented according to those 

categories.

197 Integrity involves maintaining the consistency, accuracy, and trustworthiness of data over their entire lifecycle. Data must not be 

changed in transit, and steps must be taken to make sure that data cannot be altered by unauthorized people (for example, in a breach of 

confidentiality).

198 Availability means information should be consistently and readily accessible by authorized parties. This involves properly maintaining 

hardware, technical infrastructure, and systems that hold and display the information.

199 Microsoft. Special Report: Ukraine: An overview of Russia’s cyberattack activity in Ukraine. Redmond: 2022. https://query.prod.cms.

rt.microsoft.com/cms/api/am/binary/RE4Vwwd.

200 Orenstein, Mitchell. 2022. “Russia’s Use of Cyberattacks: Lessons from the Second Ukraine War.” Foreign Policy Research Institute (June 7, 

2022). https://www.fpri.org/article/2022/06/russias-use-of-cyberattacks-lessons-from-the-second-ukraine-war/.

201 Cybersecurity and Infrastructure Security Agency. FBI Releases PIN on Ransomware Straining Local Governments and Public Services. 

Washington, D.C.: CISA, 2022. https://www.cisa.gov/news-events/alerts/2022/03/31/fbi-releases-pin-ransomware-straining-localgovernments-and-public.

202 Glover, Claudia. “Killnet REvil and Anonymous threaten to attack SWIFT in 48 hours.” TechMonitor. (June 15, 2023; updated June 19, 

2023). https://techmonitor.ai/technology/cybersecurity/killnet-revil-and-anonymous-threaten-swift-with-destructive-attack-in-48-

hours.

203 Okunyte, Paulina. “European Investment Bank attacked, hackers claiming to ‘impose sanctions on EU’.” Cybernews. (June 19, 2023). 

https://cybernews.com/news/european-investment-bank-cyberattack-russia/.

204 Microsoft Threat Intelligence. “Volt Typhoon targets US critical infrastructure with living-off-the-land techniques.” Microsoft (May 24, 

2023). https://www.microsoft.com/en-us/security/blog/2023/05/24/volt-typhoon-targets-us-critical-infrastructure-with-living-off-theland-techniques/.

205 Department of Defense, Joint Cybersecurity Advisory. “People’s Republic of China State-Sponsored Cyber Actor Living off the Land to 

Evade Detection.” June 2023. https://media.defense.gov/2023/May/24/2003229517/-1/-1/0/CSA_Living_off_the_Land.PDF. 

206 Mahendru, Puja. “The State of Ransomware in Financial Services 2023.” Sophos News (July 13, 2023). https://news.sophos.com/enus/2023/07/13/the-state-of-ransomware-in-financial-services-2023/. 

207 Hill, Michael. “Ransomware attacks cost financial organizations USD $32.3 billion in downtime since 2018.” CSO Online (July 13, 

2023). https://www.csoonline.com/article/645690/ransomware-attacks-cost-financial-organizations-us32-3-billion-in-downtimesince-2018.html#:~:text=Ransomware%20attacks%20cost%20financial%20organizations%20US%2432.3%20billion%20in%20

downtime%20since%202018,-News&text=Research%20predicts%20a%20spike%20in,financial%20service%20organizations%20in%20

2023.&text=Ransomware%20attacks%20on%20the%20global,in%20downtime%20alone%20since%202018. 

208 Sophos. https://www.sophos.com/en-us/cybersecurity-explained/ransomware-as-a-service. 

209 Yarochkin, Fyodor. “Ransomware as a Service: Enabler of Widespread Attacks.” Trend micro (October 5, 2021). https://www.trendmicro.

com/vinfo/us/security/news/cybercrime-and-digital-threats/ransomware-as-a-service-enabler-of-widespread-attacks.

210 Sophos. https://www.sophos.com/en-us/cybersecurity-explained/ransomware-as-a-service. 

211 Cybersecurity and Infrastructure Security Agency. “#StopRansomware Guide.” Washington, D.C.: CISA, October 2023. https://www.cisa.

gov/resources-tools/resources/stopransomware-guide.

212 Financial institutions have access to guidance from the FFIEC on meeting security control objectives to prepare for 

and respond to cybersecurity threats. See Federal Financial Institutions Examination Council. “Cybersecurity Resource 

Guide for Financial Institutions.” Washington, D.C.: FFIEC, Revised November 2022. https://www.ffiec.gov/press/pdf/

FFIECCybersecurityResourceGuide2022ApprovedRev.pdf. 

213 “The State of Ransomware in 2023.” Sophos White Paper 2023-05-05. Abingdon, UK: May 2023. https://assets.sophos.com/X24WTUEQ/

at/c949g7693gsnjh9rb9gr8/sophos-state-of-ransomware-2023-wp.pdf. 

214 In addition, Congress has established the Joint Ransomware Task Force (JRTF), which is an interagency effort led by CISA and the FBI to 

coordinate nationwide efforts to address the rise in ransomware attacks. See: https://www.cisa.gov/joint-ransomware-task-force. 

215 U.S. White House. “Fact Sheet: The Second International Counter Ransomware Initiative Summit.” Fact Sheet, November 1, 2022: White 

House. https://www.whitehouse.gov/briefing-room/statements-releases/2022/11/01/fact-sheet-the-second-international-counterransomware-initiative-summit/. 
140 2023 FSOC // Annual Report

216 Seewald, Lucas. “Insider Risk in the Financial Industry – Case Study.” Security Bloggers Network (Blog). Security Boulevard. June 12, 2023.

https://securityboulevard.com/2023/06/insider-risk-in-the-financial-sector-case-study/. 

217 Tripwire. 2023. “Motivations for Insider Threats: What to Watch Out For.” State of Security (Blog) Tripwire. March 28, 2023. https://www.

tripwire.com/state-of-security/motivations-insider-threats-what-watch-out.

218 “Malicious Insider: Motivation, Examples, Detection, and Prevention.” Cynet. https://www.cynet.com/insider-threat/maliciousinsider/#:~:text=According%20to%20a%20recent%20report,are%20rare%20but%20do%20happen. 

219 Amos, Zac. “Common Insider Threat Motivations and Prevention Tactics.” The Tek (April 29, 2022). https://thetek.com/common-insiderthreat-motivations-and-prevention-tactics/.

220 Tripwire. 2023. “Motivations for Insider Threats: What to Watch Out For.” State of Security (Blog) Tripwire. March 28, 2023. https://www.

tripwire.com/state-of-security/motivations-insider-threats-what-watch-out. 

221 Amos, Zac. “Common Insider Threat Motivations and Prevention Tactics.” The Tek (April 29, 2022). https://thetek.com/common-insiderthreat-motivations-and-prevention-tactics/.

222 National Institute of Standards and Technology. “Framework for Improving Critical Infrastructure Cybersecurity.” Washington, D.C.: NIST, 

April 2018. https://nvlpubs.nist.gov/nistpubs/cswp/nist.cswp.04162018.pdf. 

223 Cybersecurity and Infrastructure Security Agency. “Insider Threat Mitigation Guide.” CISA, November 2020. https://www.cisa.gov/sites/

default/files/2022-11/Insider%20Threat%20Mitigation%20Guide_Final_508.pdf.

224 Securities Industry and Financial Markets Association. “Insider Threat Best Practices Guide, 2nd Edition.” New York, NY: SIFMA, February 

2018. https://www.sifma.org/wp-content/uploads/2018/02/insider-threat-best-practices-guide.pdf.

225 Ibid.

226 Hernandez de Cos, Pablo. “Financial Technology: The 150-year Revolution.” Speech, Basel Committee on Banking Supervision and 

Governor of the Bank of Spain, November 19, 2019. https://www.bis.org/speeches/sp191119.pdf. 

227 Shortening the Securities Transaction Settlement Cycle, Exchange Act Release No. 96930 (Feb. 15, 2023). https://www.sec.gov/

rules/2023/02/shortening-securities-transaction-settlement-cycle. Securities and Exchange Commission. Shortening the Securities 

Transaction Settlement Cycle. Rule, Washington, D.C.: SEC, 88 Federal Register 13872 (Mar. 6, 2023). https://www.federalregister.gov/

documents/2023/03/06/2023-03566/shortening-the-securities-transaction-settlement-cycle.

228 Depository Trust and Clearing Corporation. 2022 Annual Report. New York, NY: DTCC, May 18, 2023. p. 37. https://www.dtcc.com/

about/-/media/Files/Downloads/Annual-Report-2022/DTCC2022AR-PRINT.pdf.

229 Regarding the securities industry preparation for the T+1 standard settlement cycle, the T+1 Securities Settlement Industry 

Implementation Playbook outlines a detailed approach to identifying the potential impacts, implementation activities, implementation 

timelines, dependencies, and risk impacts that market participants should consider in order to prepare for the impending transition to 

T+1. See: Securities Industry and Financial Markets Association. “T+1 Securities Settlement 

Industry Implementation Playbook.” New York, NY: SIFMA, Revised April 2023. https://www.sifma.org/wp-content/uploads/2022/08/

T1_Industry_Implementation_Playbook.pdf.

230 This growth rate is based on annual P2P transaction volume estimates from Insider Intelligence, which uses data from major providers 

such as PayPal, Venmo, Cash App, and Zelle. P2P payments in this context are defined as transfers of funds from one consumer to another 

using a mobile phone, mobile banking website, or mobile app. P2P payments exclude cross-border P2P transactions, consumer-tobusiness (C2B) transactions, business-to-business (B2B) transactions, and business-to-customer (B2C) transactions.

231 Toplin, Jaime. 2023. “U.S. Mobile P2P Payments Forecast 2023: Providers Confront Trust Concerns as Spending Swells.” Insider 

Intelligence (June 6, 2023, updated on October 13, 2023). https://www.insiderintelligence.com/content/us-mobile-p2p-paymentsforecast-2023.

232 Anderson, Monica. “Payment Apps Like Venmo and Cash App Bring Convenience—and Security Concerns—to Some Users.” Short Reads, 

Washington, D.C.: Pew Research Center, September 2022. https://www.pewresearch.org/short-reads/2022/09/08/payment-apps-likevenmo-and-cash-app-bring-convenience-and-security-concerns-to-some-users/. The survey also breaks out consumers’ use of several 

payment app options, finding that 57 percent of U.S. adults have used PayPal, 38 percent have used Venmo, 36 percent have used Zelle, 

and 26 percent have used Cash App.

233 For example, a recent survey found that 82 percent of Americans aged 18 to 29 use a P2P payment service, compared to 64 percent of 

Americans overall. See: Consumer Reports Survey Group. “Peer-to-Peer Payment Services: Findings from CR’s Nationally Representative 

American Experience Survey in 2022.” Consumer Reports (January 24, 2023). https://advocacy.consumerreports.org/research/peer-topeer-payment-services-findings-from-crs-nationally-representative-american-experiences-survey-in-2022/.

234 Conference of State Bank Supervisors. “Summary of Two Options for Financial Requirements.” Washington, D.C.: CSBS, September 2019. 

https://www.csbs.org/sites/default/files/2019-10/Financial%20Condition%20Templates.pdf. 

235 Rose, Jonathan. “Understanding the Size and Speed of Bank Runs in Historical Perspective.” Economic Synopses No. 12, Saint Louis, 

MO: Federal Reserve Bank of St. Louis, May 2023. https://research.stlouisfed.org/publications/economic-synopses/2023/05/26/

understanding-the-speed-and-size-of-bank-runs-in-historical-comparison.

236 Ibid. 
Endnotes 141

237 Federal Deposit Insurance Corporation. FDIC’s Supervision of First Republic Bank. Washington, D.C.: FDIC, September 8, 2023. https://

www.fdic.gov/news/press-releases/2023/pr23073a.pdf; Federal Deposit Insurance Corporation. FDIC’s Supervision of Signature Bank. 

Washington, D.C.: FDIC, April 28, 2023. https://www.fdic.gov/news/press-releases/2023/pr23033a.pdf; and Board of Governors of the 

Federal Reserve System. Review of the Federal Reserve’s Supervision and Regulation of Silicon Valley Bank. Washington, D.C.: Federal 

Reserve, April 2023. https://www.federalreserve.gov/publications/review-of-the-federal-reserves-supervision-and-regulation-of-siliconvalley-bank.htm.

238 The National Institute of Standards and Technology (NIST) at the U.S. Department of Commerce defines AI as a branch of computer 

science devoted to developing data processing systems that perform functions normally associated with human intelligence, such as 

reasoning, learning, and self-improvement. 

239 Types of data security controls include operational (rules and processes to protect data), administrative (actions and policies to enforce 

standards), architectural (system interconnections), technical (security controls and software), response (incidence response), and 

visibility (controls to spot active threats) controls.

240 In AI, a seed is a series of numbers that tells the AI how to generate an output.

241 U.S. White House. “Executive Order on the Safe, Secure, and Trustworthy Development and Use of Artificial Intelligence.” Washington, 

D.C.: White House, October 2023. https://www.whitehouse.gov/briefing-room/presidential-actions/2023/10/30/executive-order-on-thesafe-secure-and-trustworthy-development-and-use-of-artificial-intelligence/. 

242 A bit, or binary digit, is the smallest unit of data that a computer can process and store.

243 McKinsey&CO. (April 2023). Quantum Technology Monitor. McKinsey. https://www.mckinsey.com/~/media/mckinsey/business%20

functions/mckinsey%20digital/our%20insights/quantum%20technology%20sees%20record%20investments%20progress%20on%20

talent%20gap/quantum-technology-monitor-april-2023.pdf. 

244 Zapata Computing. The Second Annual Report on Enterprise Quantum Computing Adoption. Boston, MA: Zapata AI. January 11, 2023. 

https://zapata.ai/enterprise-quantum-adoption-2022/.

245 National Institute of Standards and Technology’s Computer Security Resource Center. (August 2023). Post-Quantum Cryptography. NIST. 

https://csrc.nist.gov/projects/post-quantum-cryptography. 

246 Cybersecurity and Infrastructure Security Agency. “Quantum Readiness: Migration to Post-Quantum Cryptography.” Washington, D.C.: 

CISA, August 2023. https://www.cisa.gov/resources-tools/resources/quantum-readiness-migration-post-quantum-cryptography. 

247 The Federal Reserve, FDIC, and OCC issued guidance in June 2023 on managing risks associated with third-party relationships to 

promote consistency in the agencies’ supervisory approach to third-party risk management. See https://www.federalregister.gov/

documents/2023/06/09/2023-12340/interagency-guidance-on-third-party-relationships-risk-management and https://www.fdic.gov/

news/financial-institution-letters/2023/fil23029.html.

248 Cloud Security Alliance. “State of Financial Services in Cloud.” Cloud Security Alliance (June 5, 2023). https://cloudsecurityalliance.org/

artifacts/state-of-financial-services-in-cloud/.

249 Ibid.

250 See Rundle, James. 2019. “Human Error Often the Culprit in Cloud Data Breaches.” Wall Street Journal (August 27, 2019). https://www.wsj.

com/articles/human-error-often-the-culprit-in-cloud-data-breaches-11566898203. 

251 U.S. Treasury Department. The Financial Services Sector’s Adoption of Cloud Services. Washington, D.C.: Treasury, February 2023. https://

home.treasury.gov/system/files/136/Treasury-Cloud-Report.pdf.

252 Cybersecurity and Infrastructure Security Agency. “#StopRansomware: CL0P Ransomware Gang Exploits CVE-2023-34362 MOVEit 

Vulnerability.” Washington, D.C.: CISA, June 2023. https://www.cisa.gov/news-events/cybersecurity-advisories/aa23-158a. 

253 Page, Carly. “MOVEit, the biggest hack of the year, by the numbers.” TechCrunch (August 25, 2023). https://techcrunch.com/2023/08/25/

moveit-mass-hack-by-the-numbers/.

254 Pape, Carter. “15 banks, credit unions confirm MOVEit data breaches.” American Banker (July 24, 2023). https://www.americanbanker.

com/creditunions/news/15-banks-credit-unions-confirm-moveit-data-breaches. 

255 “The MOVEit Hack and What It Taught Us About Application Security.” Bleeping Computer (August 23, 2023). https://www.bleepingcomputer.com/news/security/the-moveit-hack-and-what-it-taught-us-about-application-security/. 

256 Cybersecurity and Infrastructure Security Agency. “Securing the Software Supply Chain: Recommended Practices for Software Bill of 

Materials Consumption.” Washington, D.C.: CISA, November 2023. https://www.cisa.gov/news-events/alerts/2023/11/09/cisa-nsa-andpartners-release-new-guidance-securing-software-supply-chain.