WASHINGTON — In its first annual report to Congress, the Financial Stability Oversight Council warned that increasing the federal debt limit is vital to the stability of the financial system.

"The most important thing we can do right now to safeguard financial stability is lift the cloud of default hanging over our economy," Treasury Secretary Timothy Geithner said in the report. "As we move forward, however, we must also work to ensure that our regulatory framework keeps pace with the evolving global financial system."

The Dodd-Frank Act requires the council to report annually to lawmakers on a range of issues, including its activities; significant financial market and regulatory developments; and potential emerging threats to the country's financial stability.

Credit conditions and corporate balance sheets have improved significantly since the crisis, the report found, but the economy continues to heal from the recession as housing markets remain depressed and unemployment rate is elevated.

Geithner said the council will focus its work in the near-term on four areas: the ongoing interaction between the financial system and the economy; the imbalances between funding and assets across the financial industry; the ongoing evolution of financial market activity and practices; and the potential opportunities for regulatory arbitrage.

The report also recommended heightened risk management and supervisory attention in specific areas, further reforms to address structural vulnerabilities in key markets, steps to address housing market reform; and coordination on regulatory reform.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.