Risks to U.S. financial stability are averaging in the medium range, with the highest risk from markets and low risk from financial institutions' solvency and leveraging, the Office of Financial Research said in its annual report to Congress released Thursday.
The highest risk is from markets, with historically high stock prices and sensitivity of bond prices to changes in interest rates, while credit risk is moderate, the report states.
Risks from liquidity, solvency and leverage are low, "although some large banks, insurers and hedge funds could be vulnerable to impacts of severe stress," said the report, which is mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
Contagion risks are moderate for the largest U.S. banks, the report said, while derivatives exposures still pose some contagion risk throughout the financial system.
Other risks to watch are cybersecurity and digital assets. The latter "are not a concern at this point, but are worth monitoring because their use is rapidly growing and evolving," the report said.
OFR Acting Director Ken Phelan, who is also the Treasury Department's chief risk officer, noted in the report that the office is now working more closely with the Financial Stability Oversight Council to tailor data and research agendas to support FSOC priorities.