December 16, 2020
C-Suite Wednesday — FSOC Recommendations May Mean More Oversight for SBA
“The outbreak of the COVID-19 pandemic is the biggest external shock to hit the post-war U.S. economy,” says the Financial Stability Oversight Council (FSOC) in its 2020 annual report. “As businesses and establishments shut down in March and April, private-sector employment declined by almost a fifth. The implementation of the CARES Act and a series of policy measures taken by the Federal Reserve and Treasury helped stabilize financial markets. Although these policy measures have rejuvenated credit markets, a protracted outbreak can adversely affect any recovery and prolong the downturn.”
The FSOC is a council of regulators that consists of ten voting members and five advisory members. Each year, the council issues a report on significant financial market and regulatory developments, potential emerging threats to U.S. financial stability, and recommendations to enhance the integrity of U.S. financial markets. In the FSOC’s most recent report, the council identified potential risks in 5 categories: business credit, financial markets, financial institutions, market structure, and global economic developments.
Based on the identified threats, the FSOC made the following overarching recommendations:
- Monitor and analyze the exposures, loss-absorbing capacity, and incentives of different types of stakeholders.
- Coordinate with other regulators to collect data, identify risks, and strengthen oversight of nonbank companies.
- Encourage banks to bolster their loss absorption capacity by strengthening their capital and liquidity buffers.
- Ensure large financial institutions maintain sufficient capital and liquidity to survive economic shock caused by the pandemic.
- Continue to facilitate an orderly transition away from LIBOR.
- Ensure robust and comprehensive cybersecurity monitoring, especially in light of new risks posed by the pandemic.
- Encourage regulating agencies to collaborate and expand their data resources to assess risks.
Although none of the recommendations target the SBA, increased regulatory scrutiny may result in a more comprehensive review of SBA lending practices. Specifically, the SFOC’s concerns regarding cybersecurity, financial data, and oversight of nonbank participants are expected to be highlighted in future regulator reviews of SBA programs.