New Financial Stability Report Highlights Digital Age Risks

The unprecedented speed of bank deposit runs, accelerated by social media and digital banking, poses a fundamental challenge to financial stability, according to the Financial Stability Board’s (FSB) 2024 annual report. Analysis of recent banking failures reveals that digital technology has compressed response times to such an extent that traditional liquidity buffers may be insufficient to handle extreme outflows.

The March 2023 banking turmoil demonstrated that the velocity of modern deposit runs can overwhelm even well-capitalized institutions, forcing regulators and financial institutions to rethink crisis management strategies. The FSB notes that bank managers, supervisors, and central banks need to develop capabilities to react much more quickly to deposit outflows than historical experience would suggest. The report specifically highlights the need for enhanced monitoring of social media platforms to identify potential stress signals, while acknowledging the technical and resource challenges this presents.

Beyond the immediate banking sector concerns, the report emphasises the growing significance of non-bank financial intermediation (NBFI), which now accounts for almost half of global financial assets. While this sector provides valuable alternative funding sources, its rapid growth introduces new vulnerabilities. Of particular concern is the expansion of private credit markets, which have grown to approximately $2 trillion globally. The FSB notes that these markets’ opacity makes risk assessment challenging, particularly regarding leverage levels and interconnections with traditional banking systems.

Asset valuations also remain elevated across multiple markets, with the report highlighting particular concerns about commercial real estate. Office buildings in metropolitan areas face particular challenges due to structural declines in demand and thin transaction volumes. The FSB warns that these valuations could be susceptible to sharp corrections in the event of economic shocks.

Operational resilience has emerged as a critical concern following two significant disruptions in July 2024. A Swift outage affected high-value transactions across Europe, while a separate incident related to CrowdStrike security updates impacted financial institutions globally. These events underscore the systemic risks posed by concentration in third-party service providers and the need for enhanced operational resilience frameworks.

Climate-related financial risks continue to grow in importance. The report notes increasing instances of insurers withdrawing from markets affected by natural disasters, raising concerns about the long-term insurability of certain assets and regions. This trend could have significant implications for asset values and risk management practices across the financial sector.

The integration of artificial intelligence in financial services presents both opportunities and challenges. While AI offers potential benefits for operational efficiency and regulatory compliance, the FSB identifies several risk areas requiring attention. These include increased third-party dependencies, potential systemic correlations in market behavior, and the need to ensure model risk management frameworks remain appropriate as AI adoption accelerates.

Progress on cross-border payment reform continues, with over half of the FSB’s roadmap actions completed. However, implementation of targets lags behind schedule, particularly in emerging markets. The report emphasizes the need for continued focus on improving payment system interoperability and addressing regulatory fragmentation.

Cryptocurrency and digital asset markets receive particular attention, with the FSB noting that nearly all member jurisdictions have either implemented or are developing regulatory frameworks for crypto-asset activities. The report emphasizes the importance of consistent international implementation to prevent regulatory arbitrage.

The report concludes that while the global financial system has shown resilience, the pace of technological change and market evolution demands continued adaptation of regulatory frameworks and risk management practices. The FSB emphasizes that the unprecedented speed of modern financial flows requires a fundamental reassessment of traditional stability measures, with particular attention needed for the intersection of digital technology, market behavior, and systemic risk.

Read the full report here.