Systemic risk to financial system rose in 2022 in wake of inflation, credit risk, report finds

Uncertainty from rising inflation, tight credit conditions, and the geopolitical landscape all contributed to elevated systemic risk to the financial system in 2022, according to the annual report, released Thursday, of the Treasury’s financial research arm.

The Office of Financial Research (OFR) said additional threats to financial stability also emerged from “non-traditional” risks, including cybersecurity, digital assets and climate-related financial risks.

The OFR said key findings of the report related to elevated systemic risk – which has increased from 2021 – included:

  • U.S. economic growth slowed as inflation and a spike in commodity prices hampered global growth prospects;
  • Tighter financial conditions exposed credit risk vulnerabilities;
  • Fixed-income and equity investors experienced large losses from a sharp increase in risk-free rates and may face more declines if market sentiment deteriorates.

For financial institutions, the report notes that despite the “headwinds” of the impact of elevated financial risk, “the U.S. banking sector remained well capitalized and maintained risk-based capital ratios well above regulatory minimums.” Nevertheless, the report asserts that financial institutions in general – including banks, insurance companies, hedge funds and more – face continued “uncertainty and unique challenges due to higher interest rates and inflation, slower economic growth, and geopolitical risks.”

On digital assets, the report notes the precipitous nosedive of crypto currency, pointing out that the total capitalization of digital assets fell from more than $2.2 trillion at the beginning of 2022 to less than $1 trillion by August of last year. “Many prominent crypto asset trading and lending platforms suspended customer withdrawals. Some also filed for bankruptcy,” the report notes. “The third largest stablecoin at the time depegged in May 2022. During that month, the $18.5 billion loss in value highlighted risks associated with stablecoins and spillover risks in the digital-assets space.”

OFR Finds Elevated Threats to U.S. Financial Stability Due to Inflation, Tighter Credit, and Geopolitical Uncertainties

Be the first to comment

Leave a Reply

Your email address will not be published.