Key Risks to US Financial Stability Include Commercial Real Estate Stress, Cyber Threats, Crypto: FSOC

The Financial Stability Oversight Council (FSOC) has identified over a dozen key vulnerabilities in its 2024 annual report, highlighting commercial real estate stress, cybersecurity threats, and digital asset risks as among the most pressing concerns for U.S. financial stability.
Commercial real estate was flagged as a key area of concern due to increasing vacancies, slowing rent growth, and higher borrowing costs associated with the high interest rate environment adopted by the Federal Reserve in its fight to quash inflation. The FSOC noted that office property vacancy rates in urban areas have reached decade-high levels, exacerbated by structural changes like the shift to remote work.
“Office properties in large urban metro areas are experiencing the most stress, suggesting the larger financial institutions likely to hold these loans may face particularly elevated risks,” the report notes, adding that interconnected risks in commercial real estate markets could amplify financial stress across banks and nonbank entities.
To address this vulnerability, the FSOC recommended that regulators ensure financial institutions strengthen their risk management practices and contingency planning, particularly for declines in property prices and loan quality.
In addition to commercial real estate, the FSOC highlighted cybersecurity threats as a critical vulnerability to the U.S. financial system. With the frequency and sophistication of cyberattacks continuing to rise, the report warned of the systemic risks posed by a major breach at a financial institution.
“A significant cyber attack, if successful, has the potential to disrupt operations, challenge access to liquidity, increase the likelihood of bank failures and market dysfunction, and generally erode confidence in the financial system,” the report warned.
Threat vectors identified in the report include ransomware attacks, insider threats, and misinformation campaigns, with geopolitical tensions adding further risk. To address this risk, the FSOC urged continued partnerships between federal and state agencies, private sector stakeholders, and international organizations, recommending routine cybersecurity exercises and expanded information sharing.
Digital assets, particularly stablecoins, were also flagged as a growing risk to financial stability. Despite the crypto market’s smaller size relative to traditional financial markets, the FSOC warned of its increasing systemic importance. Stablecoins, which are integral to crypto transactions, are vulnerable to destabilizing runs.
“This run risk is amplified by issues related to both market concentration and market opacity,” the report states. The stablecoin market is heavily concentrated, with a single firm holding around 70 percent of the sector’s total market value, amplifying the risk of market-wide disruption in the event of a failure, the report warns.
To address this risk, the FSOC urged Congress to establish a federal framework for stablecoin issuers to address run risk, payment system risks, market integrity, and investor and consumer protections. It also recommended granting regulators explicit authority over the crypto spot market to prevent fraud and manipulation.
The FSOC identified vulnerabilities in other areas, including depository institutions, investment funds, private credit markets, and third-party service providers. It recommended strengthening liquidity planning and completing Basel III reforms for banks, addressing liquidity mismatches in investment funds, improving transparency in private credit markets, and enhancing oversight of third-party providers.
Treasury market resilience and operational risks from central counterparties were also highlighted in the report, with calls for better data collection, enhanced risk management, and improved interagency coordination.