Key Takeaways:

  • The Financial Stability Oversight Council (FSOC) issued its 2025 Annual Report on December 11. The 2025 Annual Report, among other things, highlights four key areas of focus for 2026: strengthening the U.S. Treasury market, improving cybersecurity, enhancing supervisory and regulatory frameworks for depository institutions, and using artificial intelligence (AI) to strengthen financial stability.
  • Treasury Secretary and FSOC Chairperson Scott Bessent issued an introductory letter to accompany the Annual Report that outlines FSOC’s goals to safeguard financial stability through improved economic growth and security. Key to these goals is re-evaluating current financial regulations and policies for undue burdens on the economy and financial industry.
  • FSOC found “that U.S. financial markets and institutions functioned effectively in 2025, supporting the smooth provision of credit to businesses and households and facilitating asset price discovery.”

In a stark change from its previous annual reports, FSOC[1] focused on deregulation to promote economic growth in its 2025 Annual Report, issued on December 11. U.S. Treasury Secretary and FSOC Chairperson Scott Bessent noted that this year’s Annual Report is a “shift away from the past approach,” which described “nearly every sector of the economy, major market, and major financial institution” as a “financial stability vulnerability.”[2]

Established in 2010 by Title I of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), FSOC has broad authority “to monitor and promote U.S. financial stability,” including by monitoring threats to financial stability, facilitating regulatory coordination and information sharing, designating certain nonbank financial companies for Federal Reserve supervision, and recommending heightened prudential standards for banks and nonbank financial companies supervised by the Federal Reserve. Under Section 112(a)(2)(N) of the Dodd-Frank Act, FSOC must issue an annual report that discusses its activities, significant financial market and regulatory developments, and potential emerging threats to U.S. financial stability, among other topics. The Council is comprised of 10 voting members and five nonvoting members. FSOC issued its first report in 2011.[3]

In his opening remarks, Secretary Bessent explained his “firm belief” that FSOC is integral to the Trump administration’s focus “on building Parallel Prosperity—an era of economic expansion where Wall Street and Main Street grow together.”[4] To reach these ends through FSOC, Secretary Bessent stressed the need to promote “economic growth and deregulation,” which includes “focusing on policies that will increase global prosperity by removing harmful regulations and barriers to innovation.”[5]

And, for the first time since 2011,[6] FSOC accompanied its Annual Report, available in full here, with an introductory letter. The letter, written by Secretary Bessent, focused on the importance of economic growth and economic security to promote financial stability. Secretary Bessent announced that FSOC “will work with and support [its] member agencies in considering whether aspects of the U.S. financial regulatory framework impose undue burdens and negatively impact economic growth.”[7] And in contrast to last year’s report, available here, which focused on 14 “risks” and “vulnerabilities,” the 2025 Annual Report discusses four “key areas of focus” for the upcoming year: bolstering the Treasury market, strengthening cybersecurity, enhancing supervisory and regulatory frameworks for depository institutions, and using AI to strengthen financial stability.[8] We discuss each of these areas in turn below.

Bolstering Treasury Markets

“The U.S. Treasury market,” the report explains, “is the deepest and most liquid in the world with an average daily trading volume of nearly $1 trillion and over $29 trillion outstanding.”[9] It also plays a “unique role underpinning financial activity across domestic and global economics and performing numerous critical functions.”[10] Indeed, the Treasury market’s top holders are those in foreign markets; the Federal Reserve; registered funds; pensions and retirement funds; households; banks, credit unions, and insurance companies; and state and local governments.[11]

The Treasury market, however, is not immune to instability and “has experienced bouts of disruption in recent years,” including in April 2025 “when liquidity conditions deteriorated alongside an abrupt increase in market volatility.”[12] To limit these disruptions and provide additional protection, FSOC lauded the Treasury buyback program, the Federal Reserve’s Standing Repo Facility, and the scaling back of the enhanced supplementary leverage ratio by federal banking regulators “to reduce the likelihood that [it] would be a regularly binding constraint” that would “limit” banks from engaging in low-risk activities like Treasury market intermediation.[13] FSOC also pointed to the creation of a non-centrally cleared bilateral repo data collection program to close “the largest remaining data gap in the public sector’s understanding of repo market dynamics” and the Security and Exchange Commission’s adoption of “central clearing” standards for U.S. Treasury securities. FSOC further recommended that its member agencies[14] use FSOC’s “new Market Resilience Working Group as an interagency forum to supplement and reinforce” recommendations made by the Inter-Agency Working Group on Treasury Market Surveillance, such as the Treasury buyback program.[15]

Addressing Cyber Risks

One continuation from FSOC’s previous annual reports is the Council’s emphasis on cybersecurity in the modern world. Cyber threats are “evolving rapidly, with nation-state actors and sophisticated criminal groups continuing to target financial institutions.”[16] The report points to state-sponsored cyber actors from China who “are seeking to position themselves on information technology networks,” as well as “[o]ther prominent methods of cyber attacks,” such as distributed denial-of-service (commonly referred to as DDoS) attacks, ransomware and extortion, information technology work scams, digital asset theft, and cyber-enabled fraud.[17] With financial institutions increasingly using third parties to provide services, the Council stressed the importance of ensuring that supervisory agencies “have the necessary tools to oversee the related safety and soundness risks” associated with the use of third parties by financial institutions, particularly among community banks and small firms that may “have less negotiating power to obtain certain contractual rights and fewer resources to conduct due diligence and monitor the third-party service provider’s practices.”[18]

Additionally, the Council called on public and financial services sector partners “to consider the risks to cryptography posed by quantum computers.”[19] To counter and protect against cyber threats, the Council provided usual recommendations centered on coordination between and among the private and public sectors. One new recommendation, discussed in further detail later in this article, encourages the public sector to use the burgeoning capabilities of AI “as a useful defense instrument against cyber attacks by reducing incident response times and costs, providing more accurate and efficient threat management, enabling faster decision-making, and enhancing system resilience.”[20]

Enhancing Frameworks for Depository Institutions

Next, the report recognizes the importance of an “appropriately regulated and supervised banking system” for U.S. financial stability.[21] While acknowledging that some of the regulatory reforms following the financial crisis of 2008 have “made the banking system more resilient to shocks,” FSOC observed that some reforms have “proved more costly than beneficial or necessary and have had unintended consequences, particularly for community banks.”[22] Accordingly, the report recommends that banking agencies revisit the bank regulatory framework “to remove excessive impediments to economic growth” by conducting a cost-benefit analysis of significant regulations and by expressly considering “any adverse effects on the efficient functioning of the economy.”[23] This focus on regulatory reform includes current efforts “to simplify and modernize regulatory capital standards,” focusing bank supervision efforts “on material financial risks” through the Office of the Comptroller of the Currency’s and the Federal Deposit Insurance Corporation’s proposed rule that defines “unsafe or unsound practices,” and the National Credit Union Administration’s “reform efforts to streamline or eliminate overly burdensome regulations and processes to restore the focus on mitigating the risks of a significant credit union failure.”[24] FSOC further recommended that federal bank regulatory agencies engage in “measures to reduce regulatory burden identified through the Economic Growth and Regulatory Paperwork Reduction Act.”[25]

Artificial Intelligence

AI has taken the world by storm over the past year, and FSOC has taken note. Although there are undoubtedly “potential risks that could arise with the widespread adoption of AI,” FSOC also sees great promise in using AI to strengthen the economy and financial stability.[26] AI, used properly, could provide numerous benefits to financial institutions “by enabling them to provide innovative services cheaper, faster, to a broader set of customers, and under varied economic conditions.”[27] For example, currently, some lending institutions are using AI to evaluate a customer’s creditworthiness through “alternative data, such as cash flow history.”[28] AI may also “prepare tailored financial advice and investment strategies, analyze market and sentiment developments, and stress test investment strategies under various market scenarios.”[29] And, as touched on above, AI can be beneficially used to counter cyber threats.

But AI’s benefits are not just limited to the private sector. The report discusses incorporating AI in the public sector “to improve the effectiveness and efficiency of financial regulatory agencies” by assessing the compliance of regulatory reporting submissions with regulatory requirements, monitoring and surveilling trading activity, and overseeing payment systems.[30] Already, federal agencies have used AI “to find potential errors in financial institutions’ regulatory reporting submissions” and to detect over $4 billion in improper and fraudulent payments.[31] Accordingly, FSOC has recommended that member agencies use FSOC’s AI Working Group “to explore opportunities for AI to promote the resilience of the financial system.”[32] And, while largely focused on the potential benefits of AI, FSOC is wary that widespread AI technology must “be monitored from a financial stability and economic security perspective to ensure that risks such as misuse by malicious actors, as well as national security, cyber, or other unanticipated risks, are well understood” by FSOC member agencies and financial institutions.[33] Of note, on the same day that FSOC issued its 2025 Annual Report, President Donald Trump issued an executive order titled “Ensuring a National Policy Framework for Artificial Intelligence,” which aims to limit state-led efforts to regulate AI.[34]

The 2025 report further analyzes market developments in both financial markets and financial institutions. The report’s focus on financial markets touches on short-term funding, commercial real estate, corporate credit, household credit, residential real estate, and digital assets. The amount of commercial paper, a form of short-term funding through short-term debt instruments with maturities not exceeding 270 days, has grown roughly 9 percent over the past year to almost $1.3 trillion.[35] This figure, however, “remains below levels observed in 2007 and 2008” during the financial crisis.[36] Commercial real estate, a concern in the post-COVID environment, has seen mortgage debt rise to $6.2 trillion as of the second quarter of 2025.[37] But after “a period of post-pandemic deterioration,” the sector has “largely stabilized” with borrowing costs, vacancy rates, and asset values exemplifying “signs of steadying in several property types.”[38] Commercial real estate loan delinquency rates, in addition, have “remained low.”[39] Digital assets, which this presidential administration believes will play “an important role in innovation and economic development in the United States,” have grown tremendously in recent years, with banking institutions interacting with the industry “by providing core banking products and services to digital asset market participants” and “by facilitating customer access to digital asset markets.”[40]

FSOC’s summary of financial institutions focuses on depository institutions, such as banks and credit unions, investment funds, central counterparties, and insurers. Of note, bank loan growth rose during the first half of 2025, and bank mergers increased, with “the value of deals announced in 2025 exceed[ing] annual deal values for each of the previous three years.”[41] Delinquency rates, on the other hand, “are below rates that prevailed in the period prior to the COVID-19 pandemic.”[42]

Conclusion

 The 2025 Annual Report is a reset for FSOC and signals a changed trajectory for FSOC from the previous four years during the Biden administration. The report ushers in a new age that will likely lead to deregulation of certain aspects of the financial industry as the FSOC members work to eliminate costly and duplicative regulation and think about the effects of overregulation on the broader U.S. economy. As Secretary Bessent noted, “Regulations can stand in the way of growth and quality of life improvements that benefit all corners of American society.” The kind and extent of these deregulatory efforts put forth by the FSOC’s members will be worth monitoring in the upcoming year.

[1] Press Release, United States Department of the Treasury, FSOC 2025 Annual Report, https://home.treasury.gov/news/press-releases/sb0334 (Dec. 11, 2025).

[2] Remarks by Secretary of the Treasury Scott Bessent before the Financial Stability Oversight Council, https://home.treasury.gov/news/press-releases/sb0333 (Dec. 11, 2025).

[3] Council Work, United States Department of Treasury, https://home.treasury.gov/policy-issues/financial-markets-financial-institutions-and-fiscal-service/financial-stability-oversight-council/council-work.

[4] Remarks by Secretary of the Treasury Scott Bessent before the Financial Stability Oversight Council, https://home.treasury.gov/news/press-releases/sb0333 (Dec. 11, 2025).

[5] Id.

[6] Reiter, Aiden, Bessent resets financial watchdog with deregulatory mandate, Politico, https://www.politico.com/news/2025/12/11/treasury-bessent-financial-stability-oversight-council-letter-00686574 (Dec. 11, 2025).

[7] 2025 Annual Report at 4.

[8] Id. at 4-5.

[9] Id. at 9, 12.

[10] Id. at 9.

[11] Id. at 14.

[12] Id. at 9, 12-13.

[13] Id. at 14-15.

[14] FSOC’s voting members are: the Secretary of the Treasury, who serves as the Chairperson of the Council; the Chairman of the Board of Governors of the Federal Reserve System; the Comptroller of the Currency (OCC); the Director of the Bureau of Consumer Financial Protection (CFPB); the Chairman of the Securities and Exchange Commission (SEC); the Chairperson of the Federal Deposit Insurance Corporation (FDIC); the Chairperson of the Commodity Futures Trading Commission (CFTC); the Director of the Federal Housing Finance Agency (FHFA); the Chairman of the National Credit Union Administration (NCUA); and an independent member with insurance expertise, who is appointed by the President and confirmed by the Senate for a six-year term. The Council’s 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.

[15] 2025 Annual Report at 15.

[16] Id. at 16.

[17] Id.

[18] Id. at 17.

[19] Id. at 18.

[20] Id. at 17.

[21] Id. at 18.

[22] Id.

[23] Id. at 19.

[24] Id. at 20-21.

[25] Id. at 21.

[26] Id. at 21-24.

[27] Id. at 22.

[28] Id.

[29] Id.

[30] Id.

[31] Id.

[32] Id. at 23.

[33] Id.

[34] Presidential Actions, Executive Orders, Ensuring a National Policy Framework for Artificial Intelligence, https://www.whitehouse.gov/presidential-actions/2025/12/eliminating-state-law-obstruction-of-national-artificial-intelligence-policy/, (Dec. 11, 2025).

[35] 2025 Annual Report at 25.

[36] Id.

[37] Id. at 29.

[38] Id.

[39] Id. at 30.

[40] Id. at 41-43.

[41] Id. at 44.

[42] Id.