‘Market risk’ to financial system continues to be rated ‘high’ by federal research body

‘Financial vulnerability heat map’ indicates continuing high level of ‘market risk’ (2nd color row from top)

Market risk – including excessive valuations, low-risk premiums, and excesses in financial risk appetite and risk taking – continued to be at its highest level, according to a tool developed by a federal oversight body to monitor financial system vulnerability.

According to the “Financial System Vulnerabilities Monitor,” maintained by the Treasury’s Office of Financial Research (OFR), market risk is at the highest level of a six-level scale, running from low to high. The monitor was developed to provide early warning signals of potential U.S. financial system vulnerabilities that merit investigation, according to the OFR; it does not provide conclusions about financial stability.

The ratings are based on call reports and other information collected by the agency as of the end of the third quarter of 2017. The “high” rating for market risk in the third quarter was the fourth straight period rated at that level for that area by the OFR.

On the other hand, “solvency/leverage risk” – which looks at risk-based capital at U.S. banks and bank holding companies, as well as leverage among banks, bank holding companies, insurance companies and others – is rated as “low” under the scale developed by OFR.

“Credit risk” came in right in the middle of scale between low and high. The OFR monitor considers what it calls credit risk in the “real economy” – the risk of widespread credit defaults or delinquencies by households or other non-financial industries – in setting the risk rating.

“Macroeconomic risk” similarly was ranked in the middle of the scale. The OFR determines risk in this area by considering risks to the financial system including inflation, excessive government borrowing, and “excessive reliance on cross-border financing.”

OFR Financial System Vulnerabilities Monitor (heat map)