Climate change is an ’emerging threat’ to US financial stability, regulators say


The trajectory of the global economy is also of concern, as lockdowns and slowdowns in other countries could spill over into the U.S. financial system. Regulators specifically highlighted the prospect of a “hard landing” in China as a potential concern and noted that the Chinese real estate sector is “heavily indebted”. A slowdown in the real estate market there could hurt global commodity markets, as China is a heavy consumer of steel, copper and iron ore.

The report also highlighted the fact that the pandemic has brought about changes in the economy that remain difficult to grasp.

The FSOC is keeping a close watch on the commercial real estate industry, for example, lest the rise of teleworking will definitely displace demand for office space in cities. If this change causes valuations to fall rapidly at any one time, it could be a blow to small and medium-sized banks that hold mortgage loans and destabilize the financial system.

Credit to businesses also remains a concern, with the indebtedness of non-financial corporations being high compared to historical levels. Regulators are monitoring the airline, hotel and restaurant industries, which have been hit hard by the pandemic, and have warned that a wave of defaults or downgrades could be difficult for the financial sector to absorb.

The financial system is also facing a range of new threats.

Digital assets, known as stablecoins, are another potential source of vulnerability, regulators said, adding that more coordinated oversight is needed because the industry is changing so rapidly. They said the value of digital assets remained highly volatile and that they could be subject to “the risk of operational failures, fraud and market manipulation”.

The new technology could pose risks to the financial system as a whole if investors in digital currencies are suddenly unable to cash it in. Regulators have also said that stablecoins could pose risks related to cybersecurity and illicit financing.

The FSOC does not have the power to write rules, but it can act as an incentive for regulators to address market vulnerabilities, and it has the power to designate certain entities or activities as “systemic” and in need of tighter oversight.


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