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By Emily Stephenson and Douwe Miedema
WASHINGTON, April 25 (Reuters) - Regulators should guard against runs on the shadow banking system and watch out for cyber attacks on banks in coming months, the top U.S. financial stability group said on Thursday.
The Financial Stability Oversight Council, which was set up after the 2007-2009 crisis to watch for developing threats to the financial system, also urged a reform of market benchmarks after a global rate-rigging scandal hit the Libor interbank rate.
"Technological failures, natural disasters, and cyberattacks can emanate from anywhere, at any time," the report said. "Preparation and planning to address these potential situations are essential to maintain the strength and resilience of our financial system."
The FSOC, a powerful body chaired by Treasury Secretary Jack Lew, voted on Thursday to adopt its annual report, which includes a set of recommendations to other regulatory agencies. The heads of those agencies are members of the council.
Regulators need to keep a close eye on operational risks, the FSOC said, after a year in which a hurricane disrupted stock exchanges and cyber attacks hit banks such as JPMorgan Chase and Wells Fargo.
The council also pointed to technological malfunctions plaguing the initial public offerings of BATS Global Markets and Facebook.
Short-term funding markets for banks remain susceptible to bank runs, singling out money market funds and the so-called triparty repo market -- jointly often referred to as the shadow banking market, the group said.
"We need to strengthen markets that may be susceptible to destabilizing runs and fire sales," Lew said at an open meeting of the council to consider the report.
The FSOC in the past has used its authority to take on the issue of a reform of money market funds, urging the Securities and Exchange Commission to come up with a plan after the securities watchdog failed last year to agree on new rules.
The council also urged overhauling the housing finance system in its report and said America should work with foreign regulators to improve benchmark rates such as Libor, which have been proven prone to manipulation in recent years.
The group repeated a call to Congress to raise the U.S. legal borrowing limit, which it said was more of a concern to markets than the combination of deep spending cuts and tax increases known as the fiscal cliff that was largely averted this year.
"The inability of the Treasury to borrow might cause an interruption of principal and interest payments on U.S. sovereign debt, which financial markets regard as one of the safest assets," the report said.
The group also warned about potential financial risks from ultra-low interest rates, with signs of an erosion in corporate borrowing standards and covenants, and greater issuance of risky, high-yielding bonds. These conclusions mirrored similar findings from the International Monetary Fund last week.