2023 Annual Report to Congress

The 2023 OFR Annual Report discusses our assessment of risks associated with the U.S. financial system and the performance of the OFR.

Financial stability risks have increased since last year's report and remain elevated in 2023. Multiple indicators signal an upcoming economic slowdown—potentially magnified by persistent inflation, ongoing geopolitical risks, and global conflicts.

From the Office of the Director

It is my pleasure to deliver the Office of Financial Research's 2023 Annual Report to Congress. Approaching my second year as Acting Director of the OFR, I continue to lead the talented and dedicated OFR staff with a principal focus on supporting the Financial Stability Oversight Council (Council) and its member agencies.

As noted in this year's report, the information we cover describes our research and analysis as of September 30, 2023, the end of the fiscal year (FY). In an ever-changing environment, however, we recognize that much has evolved since that time. The OFR will continue to monitor and analyze risks to financial stability, remaining agile to identify and examine emerging threats as they arise now and in the future...

Read the Director's letter

Report Highlights

Economic Indicators

  • To manage core inflation, the Federal Reserve and other central banks are intent on keeping policy rates higher for longer. This policy posture has the effect of increasing borrowing costs for both companies and households, potentially dampening economic growth.
  • Credit risks have built up in the commercial real estate (CRE) sector as borrowing rates have increased, pushing valuations significantly lower. Of particular concern is the decline in valuations of office space, as vacancy rates have increased following the rise of the work-from-home (WFH) trend.
  • As labor markets remain tight, consumer spending and liquidity remain resilient, but consumer debt has risen while household savings have declined. This is particularly true for households with weaker credit. Delinquencies for certain segments have reverted to prepandemic levels, though they remain within historically low ranges overall.

Financial Institutions

  • Several regional banking institutions failed or self-liquidated in the first half of 2023—largely due to an influx of deposits during the pandemic, followed by the banks’ failure to manage interest rate risks as financial conditions reversed.
  • The property insurance sector is facing unprecedented stress that is expected to continue for an extended period. While P&C insurers have benefited from increased investment income from rising interest rates, this benefit has often been offset by rapidly rising claims costs, especially in property-exposed lines such as homeowners' insurance. While insurers may have been able to pass some of their increased costs on to consumers, some insurers have instead opted to exit certain states more prone to natural catastrophes.
  • The level of Treasury market implied volatility exceeded those seen in March 2020—when a flight to cash led to the unwinding of positions to meet margin payments, which put more downward pressure on Treasury prices, thus increasing Treasury yields.

Financial Markets

  • Higher rates and the Federal Reserve’s quantitative tightening have been accompanied by volatility in the bond and equity markets.
  • Banks experienced a large-scale outflow of deposits, with much of the funds going into MMFs and other passive investment vehicles.
  • Banks also provide substantial lending to small and medium-sized companies, and tighter credit conditions as banks curtail lending can potentially destabilize such companies with weaker balance sheets. Similar trends exist in the leveraged loan markets, where borrowing costs have risen sharply during a period of weaker earnings growth.

Digital Assets & Cybersecurity

  • Over the past year, turmoil in the digital assets markets has exposed and even increased the high level of interconnectedness between digital asset firms and traditional markets, highlighting the impact of digital assets on financial institutions.
  • The percentage of organizations affected by ransomware has risen from 79% to 87% in 2023. This surge in ransomware attacks has resulted in the highest proportion of data breaches in the financial services industry since 2018.