The U.S. financial system faces “medium range” risk overall, the Office of Financial Research said Tuesday in two annual reports.
The OFR identified four types of vulnerabilities: “those created by global economic and financial disruptions, by rates, by risks facing U.S. financial institutions and by challenges in improving financial data,” Director Richard Berner said in a statement.
The OFR's 2016 “Financial Stability Report” focuses on assessing and monitoring threats to financial stability, while the “2016 Annual Report to Congress” covers reporting requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act. In addition to assessing vulnerabilities against financial system resilience, “those mandates require us to develop new risk-assessment tools and to help fill gaps in data and analysis,” Mr. Berner said.
Key threats cited in the reports include potential spillovers affecting financial instability from Europe following the Brexit vote, high levels of debt among non-financial companies, cybersecurity risks at financial institutions, the risk of contagion by central clearing counterparties and pressures on U.S. life insurance companies that include “growing exposures to some retirement products” such as assuming large private pension plan obligations, writing variable annuities and issuing long-term-care insurance.
Despite banking reforms since the financial crisis, “the potential impact of a large bank failure remains substantial,” due to banks' size, complexity and interconnectedness, the reports said. Also discussed in the reports is the role in the financial system played by shadow banking, which has grown by $1.2 trillion since 2011, driven by mutual funds, hedge funds and other asset managers.
Data deficiencies in scope, quality and accessibility “continue to prevent a full assessment of risks,” said OFR, which has signed more than 50 memorandums of understanding with federal, state and overseas regulators to improve the data.
The reports are available on the OFR's website.