Risks to U.S. financial stability remain “in the medium range,” according to the annual report of the agency created by post-financial crisis legislation to keep a finger on the pulse of the nation’s financial system.
According to the 2018 Annual Report to Congress, published Thursday by the Office of Financial Research (OFR), the “medium range” risk to financial stability reflects a mix of high, moderate and low risks in the financial system.
“Market risk is highest, reflected in historically high stock prices and the sensitivity of bond prices to changes in interest rates,” according to OFR. “Credit risk is moderate, with risk rising from leveraged lending (lending to companies with lower credit ratings), tempered somewhat by risks from consumer credit.”
The OFR report also shines a spotlight on financial markets, offers a discussion of OFR data initiatives, and provides information about the initiative to refocus the OFR mission on primarily supporting the Financial Stability Oversight Council (FSOC) and its member agencies.
According to OFR, other highlights of the report include:
- Macroeconomic risks remain moderate. Although unemployment is exceptionally low, growth remains healthy, and inflation is close to the Federal Reserve’s target, the OFR sees more risks to the outlook than in the previous year.
- Market risks remain high. Similar to last year, stock prices remain historically high, and bond prices are more vulnerable to price declines than in the previous year because of the possibility that interest rates could rise quickly.
- Credit risk is moderate. Nonfinancial corporate credit growth is robust, credit quality shows signs of weakening, and credit risk is rising with growth in leveraged lending. Consumer credit remains a lesser concern.
- Solvency and leverage risks remain low under most conditions. Large banks and insurers hold capital well above regulatory minimum requirements, but a few U.S. global systemically important banks (GSIBs) could fall below those minimums under severely adverse conditions.
- Funding and liquidity conditions are generally good and continue to support corporate borrowing. For large banks, funding and liquidity risks appear low. Market liquidity risks also appear low, but can change rapidly.
- Contagion risks are moderate. Risks to the financial system from the largest U.S. banks remain low, although derivatives exposures are still a source of contagion risk throughout the financial system.
- Other risks bear watching. Cybersecurity remains a key risk. Digital assets, commonly known as cryptocurrencies, are not a concern at this point, but are worth monitoring because their use is rapidly growing and evolving.