OFR Summarizes Potential Threats to U.S. Financial Stability

In a 2015 Annual Report to Congress, the Office of Financial Research ("OFR") analyzed potential threats to U.S. financial stability, documented progress and reported key research findings.

The report identified "three key vulnerabilities" in the U.S. financial system:

• the long-term impact of persistently low interest rates on risk taking;

• mounting debt and declining credit quality in U.S. corporations and emerging-market countries; and

• weaknesses that remain in the system despite financial reforms and better risk management by financial companies.

Key findings from the OFR's report on the U.S. financial system include:

• U.S. banking activity remains highly concentrated in eight global systemically important banks, but changes in regulation seem to have reduced the perception of the banks' competitive advantages.

• Trades through central counterparties ("CCPs") benefit significantly from reduced risks to the counterparties of default as long as the CCPs have the resources to meet payment obligations in the event of member defaults. However, a CCP also can be a single point of vulnerability for failure and create the potential for the propagation of risks.

• Stress testing is an effective tool for verifying the safety and soundness of individual financial institutions, and the OFR offers approaches to "macroprudential" stress testing that span the financial system.

The OFR provided a status of its ongoing efforts:

• Monitors – "We are developing a suite of tools to assess, measure, and monitor risks across the financial system to complement our Financial Stability Monitor and Financial Markets Monitor."

• Central Counterparties – "We are evaluating and measuring vulnerabilities in CCPs, which have benefits but also potential risks."

• Data Quality – "We are continuing and expanding the already substantial work we have done to standardize financial data and assist [Financial Stability Oversight Council] member agencies with data standardization."

• Scope of Data – "We are continuing to assess and fill gaps in financial data, and to assure that data for financial stability monitoring are comprehensive and detailed."

• Data Accessibility – "We are increasing transparency and facilitating research by fostering secure and appropriate data sharing with other officials, industry, and the public."

• Stress Tests – "We are following our mandate to evaluate and report on the stress testing of banks, nonbanks, and the broader financial system."

• Risks in Changing Market Structure – "We are investigating disruptions and failures in financial markets as we conduct, coordinate, and sponsor research to support and improve market regulation."

• Risks in Financial Institutions – "We are conducting and promoting research to improve regulation of banks, insurance companies, and other financial institutions."