Published: December 5, 2017
We prepared this 2017 Annual Report to Congress to meet the requirement in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 for the OFR to prepare and submit a report to Congress within 120 days after the end of each fiscal year.
As in previous years, the report’s three main chapters assess the state of the United States financial system, including:
Analysis of Threats to the Financial Stability of the United States
Overall risks to financial stability remain in the medium range. We reached this assessment by weighing the financial system’s resilience against its vulnerabilities.
The system is far more resilient than it was when the financial crisis loomed a decade ago, but new vulnerabilities have emerged, including in the last fiscal year.
For example, vulnerabilities from excessive leverage (when resources are low relative to investment exposures) could be exploited by risks that are high and rising from the potential for a sudden drop in prices of assets in financial markets, particularly stock markets and bond markets.
The chapter highlights three key threats to the U.S. financial system:
- Vulnerabilities to Cybersecurity Incidents
- Obstacles to Resolving Failing Systemically Important Financial Institutions
- Structural Changes in Markets and Industry
We chose these key threats based on their potential impact, probability of occurring, proximity (could they happen soon?), and the preparedness of industry and government to manage them.
We also introduce new risk-assessment tools developed by the OFR — our Financial System Vulnerabilities Monitor and our Financial Stress Index — and discuss the insights from them that contribute to our assessment of financial stability.
We base our overall assessment of U.S. financial stability on many inputs, including an evaluation of the six categories of risk in the vulnerabilities monitor and our research, analysis, and surveillance of the financial system.
Key Findings from the OFR’s Research and Analysis of the Financial System
This chapter discusses key findings in six areas:
- Network Analysis to Identify Cybersecurity Vulnerabilities and Operational Risk – Network analysis combined with maps of the financial system populated by real-world data may help identify potential systemic vulnerabilities to cybersecurity threats.
- Reducing Regulatory Reporting Burdens – Preliminary OFR analysis indicates that examples cited by industry about duplicative, conflicting, and inconsistent regulatory reporting requirements merit further exploration.
- LIBOR Alternative – Alternatives to LIBOR are needed. One milestone for achieving a smooth transition to any alternative is that officials and market participants must help develop active derivatives markets that use the new rate. LIBOR, formerly known as the London Interbank Offered Rate, but now called ICE LIBOR (Intercontinental Exchange LIBOR), is an interest rate benchmark.
- Legal Entity Identifier – To realize the full potential of the Legal Entity Identifier (LEI), a financial data standard, strategic regulatory mandating of the LEI is required, according to industry advocates. The LEI is like a bar code for precisely identifying parties to financial transactions.
- Assessing the Systemic Importance of Banks – A multifactor approach that captures risk is superior to using asset size alone to determine the systemic footprint of U.S. banks. The asset-size threshold could subject some large U.S. banks with traditional business models to costs for complying with regulations that are not aligned with their risks.
- Financial Data Services Initiatives – The Financial Stability Oversight Council (FSOC) and its member agencies could increase efficiency by adopting initiatives to facilitate appropriate data sharing and reduce the indirect and potentially direct costs of financial data acquisition.
Status of the Efforts of the OFR in Meeting Its Mission
This chapter discusses how we are serving our stakeholders: the FSOC, FSOC members, the Treasury Department, Congress, the financial services industry, and the public. It also describes our efforts to continue adjusting our focus on meeting the needs of those key stakeholders.
In addition, the chapter discusses our national and international collaboration over the past fiscal year, current staffing levels, our budget, and information technology projects.
OFR staff experts and leaders participate in a wide variety of events related to financial stability research, data, and analysis. Collaboration with researchers, regulators, and industry experts domestically and abroad is crucial to our success. We also receive valuable suggestions and recommendations from our Financial Research Advisory Committee, a group of 29 experienced professionals with experience in business, economics, finance, data science, risk management, and information technology. Committee members are drawn from industry, academia, and the policy community.
Our research and data agenda requires advanced and secure information technology tools. We bring large quantities of data into our analytical environment, which was designed and built specifically for the OFR to securely support computing-intensive work with large datasets. The need to keep these data secure and safeguard against breaches drives much of our security work.