OFR: threat to US financial system on the rise
17 December 2015 Washington DC
Image: Shutterstock
The level of threat to financial stability in the US has increased during 2015, according to the Office of Financial Research (OFR).
In its first annual financial stability report, the OFR revealed that credit risks are rising for US non-financial businesses and in many emerging markets.
Non-financial business debt is growing rapidly, boosting leverage and in relation to gross domestic product, it is at elevated levels.
At the same time, persistently low interest rates and suppressed risk premiums in US fixed income markets contribute to excessive risk-taking and borrowing that could pose financial stability risks.
The report noted that the financial system is significantly more resilient than it was in 2007, but it is uneven.
Vulnerabilities persist and some new ones have emerged. Financial activity and risks have migrated outside the regulatory perimeter, market liquidity appears to have become more fragile in recent years, and connections between financial firms and markets are evolving in ways that are not fully understood.
Central clearing of derivatives has benefits for risk management, but concentrates risk in central counterparties and may transmit or amplify stress in new ways.
Derivatives data reported to registered swap data repositories still have significant room for improvement. Further development of the framework to standardise and validate data is essential to improve data quality, according to the OFR.
Enhanced capital and leverage requirements have made banks more resilient, but they can also have unintended consequences.
The OFR鈥檚 analysis shows areas where these requirements may increase incentives for risk-taking by large, complex banking firms.
The report supplements and precedes the 2015 annual report to US Congress, which the OFR will publish in January.
鈥淥verall, threats to US financial stability remain moderate, in other words, in a medium range, but they edged higher within that range over the past year,鈥� said OFR director Richard Berner.
鈥淲e see elevated and rising credit risks in US non-financial business and in emerging-market economies, the continued reach for yield in a climate of persistently low interest rates, and the uneven resilience of the financial system.鈥�
In its first annual financial stability report, the OFR revealed that credit risks are rising for US non-financial businesses and in many emerging markets.
Non-financial business debt is growing rapidly, boosting leverage and in relation to gross domestic product, it is at elevated levels.
At the same time, persistently low interest rates and suppressed risk premiums in US fixed income markets contribute to excessive risk-taking and borrowing that could pose financial stability risks.
The report noted that the financial system is significantly more resilient than it was in 2007, but it is uneven.
Vulnerabilities persist and some new ones have emerged. Financial activity and risks have migrated outside the regulatory perimeter, market liquidity appears to have become more fragile in recent years, and connections between financial firms and markets are evolving in ways that are not fully understood.
Central clearing of derivatives has benefits for risk management, but concentrates risk in central counterparties and may transmit or amplify stress in new ways.
Derivatives data reported to registered swap data repositories still have significant room for improvement. Further development of the framework to standardise and validate data is essential to improve data quality, according to the OFR.
Enhanced capital and leverage requirements have made banks more resilient, but they can also have unintended consequences.
The OFR鈥檚 analysis shows areas where these requirements may increase incentives for risk-taking by large, complex banking firms.
The report supplements and precedes the 2015 annual report to US Congress, which the OFR will publish in January.
鈥淥verall, threats to US financial stability remain moderate, in other words, in a medium range, but they edged higher within that range over the past year,鈥� said OFR director Richard Berner.
鈥淲e see elevated and rising credit risks in US non-financial business and in emerging-market economies, the continued reach for yield in a climate of persistently low interest rates, and the uneven resilience of the financial system.鈥�
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