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Office of Financial Research: Financial system risks are moderate

NYSE floor

Risks to financial stability have not increased in the last six months, but market volatility has, said an assessment released Wednesday by the Office of Financial Research.

The most prominent risks, OFR officials found, are elevated U.S. equity price valuations, low risk premiums in U.S. government bonds, weakness in U.S. corporate credit fundamentals and fragile liquidity in some securities markets.

“Overall financial stability risks remain moderate. However, we must remain alert,” OFR Director Richard Berner said at a news conference Wednesday. Mr. Berner noted three areas that merit attention: “increased risk taking” in a low-interest-rate environment; more fragmented market liquidity; and financial activity migrating to more opaque and likely less-resilient parts of the financial system.

The Treasury Department’s OFR tracks vulnerabilities in the financial system for the Financial Stability Oversight Council and other federal regulators. This latest assessment is an update of OFR’s Financial Stability Monitor, which looks at five areas of risk: macroeconomic, market, credit, funding and liquidity, and contagion. “The general issue of liquidity is on everybody’s mind,” Mr. Berner said.

The latest version is interactive and available on the OFR’s website.