ANNUAL REPORT
TO CONGRESS2020

OFR 2020 Annual Report to Congress

The Office of Financial Research’s 2020 Annual Report found that unexpected turbulence from the COVID-19 pandemic elevated risks across financial markets and revealed limitations in conventional market monitoring.

The Dodd-Frank Wall Street Reform and Consumer Protection Act requires the OFR to analyze threats to the financial stability of the United States each year and provide Congress with its key findings. The 2020 Annual Report found the COVID-19 pandemic and related economic, financial, and government policy reactions affected all OFR monitored risk categories and greatly heightened overall uncertainty. The report also discussed how traditional market monitoring can miss vulnerabilities that are fundamentally difficult to anticipate.

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Report Highlights

Assessing financial risk
in a turbulent year

  • The effects of the COVID-19 pandemic were global and had devastating health, economic, and financial effects.
  • The pandemic and efforts to contain the health threat drastically curtailed economic activity and severely stressed financial markets.
  • While the economy and financial markets quickly made partial but substantial recoveries, this required extraordinary government and monetary policy support, which could risk distorting competitive markets if maintained too long.
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Risks to financial
stability are elevated

  • Potential risks to financial stability remain elevated in most financial risk categories.
  • These areas of risk include macroeconomic, credit, market, liquidity and funding, leverage, insolvency and potential contagion, cybersecurity, and others.
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Exploration of
Information markets

  • The pandemic illustrated the difficulty for conventional financial stability monitoring to identify true vulnerabilities.
  • About 30 prominent financial stability assessments in 2019 attempted to size up and anticipate systemic risk, yet not one discussed the potential for a new pandemic to threaten financial stability.
  • Developing an information market for systemic risk management may help reveal costly or otherwise hidden information that can play a fundamental role in creating systemic risks.
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Report Contents

Director’s Letteri Summary: OFR 2020 Annual Report to Congress3 Assessing Financial Risks in a Turbulent Year4 Assessing Financial Risks and Key Findings5 Exploration of Information Markets6 The OFR’s Performance7 Part 1: Assessing Financial Risks in a Turbulent Year11 COVID-19 and the Financial Crisis of 202011 Financial Stability and Economic Opportunity21 Why Is Financial Stability Important?21 How Does the COVID-19 Pandemic Threaten that Stability?21 How Have Previous Crises Threatened Financial Stability and Economic Opportunity?22 How Can Financial Stability Be Maintained?24 Part 2: Assessing Financial Risks and Uncertainty29 Summary of Risks29 Macroeconomic Risk30 U.S. Economic Conditions31 Global Economic Conditions34 Policy Responses36 Uncertainty Prevails37 Credit Risk38 Nonfinancial Corporate Credit39 Household Credit53 Residential Real Estate56 State and Local Debt60 Pension Funds62 Foreign Government Debt65 Market Risk68 Stock Markets68 Derivatives Markets69 Bond Markets70 Liquidity and Funding Risk73 Financial Institutions73 Financial Markets77 Leverage in the Financial System84 Banks84 Insurance Companies85 Hedge Funds85 Financial Firm Insolvency Risk and Potential Contagion89 Financial Firm Insolvency Risk89 Contagion Risk Within the Financial System94 Cybersecurity Risk98 Financial Services Sector Use of Information Technology99 Cyber Contagion and Concentration Risks100 Emerging Quantum Computing Risk101 Improving Financial System Cybersecurity102 Additional Risks102 Natural Disasters102 Transition from LIBOR to Alternative Reference Rates103 U.K. Exit from the European Union105 Part 3: Exploration of Information Markets109 The Roots of Systemic Risk110 How Information Markets Might Complement Systemic Risk Management112 Part 4: The OFR’s Performance119 A Year of Mission Focus119 A New Strategic Plan119 Steady Progress119 International Leadership in Cross-border Financial Data Standards119 Greater Adoption of the Legal Entity Identifier (LEI) by Governments and the Private Sector119 Improved LEI Data Quality120 Establishment of New Cross-border Financial Data Standards120 Data Products and Innovations121 U.S. Repo Markets Data Release and the Short-term Funding Monitor (STFM)122 Financial Stress Index (FSI)124 U.S. Money Market Fund (MMF) Monitor124 Interagency Data Inventory124 Bank Systemic Risk Monitor (BSRM)124 Financial Instrument Reference Database (FIRD)125 Collaboration126 Support for the Financial Stability Oversight Council and Its Members126 Financial Research Advisory Committee (FRAC)126 Standards Bodies and Public Forums126 Conferences Cosponsored128 Information Technology (IT)128 Cloud Resources and Increased Capabilities128 Remote Capabilities128 Data Collection and Management128 Data and Information Security129 OFR Organization129 Growth Management130 Budget131 Glossary135 Endnotes153 Bibliography167

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