FSOC is an interagency council created by the Dodd‑Frank Act (2010) to identify and respond to risks to U.S. financial stability. It is chaired by the Secretary of the Treasury and comprises 10 voting federal members (Treasury Secretary; Chair of the Federal Reserve Board; Comptroller of the Currency; Director of the CFPB; Chairs of the SEC, FDIC, CFTC, FHFA, NCUA; and an insurance expert appointed by the President) plus five non‑voting members (OFR Director, Federal Insurance Office Director, and state insurance, banking, and securities regulators).
FSOC itself generally cannot directly change agency rules; its statutory role is advisory and coordination—identifying risks, making recommendations to member agencies or to Congress, and designating nonbank firms or financial market utilities for Fed supervision—which can trigger binding supervisory authority for the Fed under Dodd‑Frank. It can resolve jurisdictional disputes among agencies and recommend heightened standards, but it relies on member agencies or Congress to adopt binding rule changes except where the statute gives specific powers (e.g., designation process under 12 U.S.C. §5323).
Bessent uses “regulation by reflex” to mean automatic or politicized rulemaking that targets many issues without a clear link to traditional safety‑and‑soundness financial risks, diverting supervisory attention. He pointed to such distraction as a factor that left supervisors less focused on basic risk management (e.g., interest‑rate and liquidity risks) that contributed to the 2023 regional bank failures (e.g., Silicon Valley Bank).
FSOC’s report and Bessent propose workstreams to strengthen Treasury‑market resilience including: enhanced market surveillance and data sharing, coordinating the Inter‑Agency Working Group on Treasury Market Surveillance, Market Resilience Working Group work on market structure reforms, and encouraging private‑sector mitigants (e.g., liquidity backstops) and agency coordination to reduce fragility in Treasury trading and plumbing.
The Inter‑Agency Working Group on Treasury Market Surveillance is a FSOC member‑agency collaboration that consolidates surveillance of trading, liquidity, and market functioning in Treasury securities; the Market Resilience Working Group is a cross‑agency group that analyzes structural vulnerabilities and proposes resilience measures (both coordinate data sharing, analytics, and policy recommendations to strengthen market functioning).
Regulatory modernization means FSOC will push member agencies to simplify or remove rules that unduly burden lending, capital formation and community banks’ operations, while updating supervision to focus on safety‑and‑soundness risks. In practice this could lead to lighter reporting burdens, revised examination priorities, and tailoring of capital/liquidity expectations and supervisory guidance for community banks and credit unions—but concrete rule changes still require each agency’s action or rulemaking.
FSOC prioritizes cyber threats that could cause broad operational disruption or cascade across firms and markets—ransomware, nation‑state attacks on critical payment/clearing systems, and large‑scale data exfiltration. FSOC plans to expand timely information‑sharing, joint scenario‑based exercises among agencies and firms, and to use aggregated intelligence to inform resilience requirements and recovery planning.
"Responsible use of AI" means monitoring AI’s impact on systemic risk—model opacity, concentration of market‑moving models, automation‑driven liquidity shocks, discriminatory or operational failures—and promoting governance, testing, transparency, and incident‑response practices. FSOC will track risks, encourage standards, and work with member agencies to ensure AI deployment does not amplify financial‑stability vulnerabilities.