OFR Financial Stability Update: Risks Remain Moderate

WASHINGTON – The U.S. Office of Financial Research released today an update to its assessment of threats to financial stability, concluding that overall risks to financial stability remain moderate.

“The current moderate level of threats to financial stability should not be cause for complacency,” said OFR Director Richard Berner. “Our analysis suggests the need to remain vigilant about emerging threats.”

OFR concerns about such threats continue to include increased risk taking in a climate of persistently low interest rates, fragile and fragmented market liquidity in some securities markets, and continued migration of financial activity outside the banking system. The OFR cited these risk themes in its 2014 Annual Report.

The OFR’s latest assessment of vulnerabilities in the financial system was informed by updating the OFR Financial Stability Monitor and the monitor’s underlying data. The monitor is a tool the OFR developed to display a high-level summary of five areas of risk: macroeconomic, market, credit, funding and liquidity, and contagion. By looking across the financial system at functional categories of vulnerabilities, the monitor can help identify potential threats in the financial system wherever they arise.

Risks aren’t significantly more elevated in any one of the five risk areas than in our last update six months ago. However, key risks within these main areas include elevated U.S. equity price valuations, low risk premiums in U.S. government bonds, weakness in U.S. corporate credit fundamentals, and fragile liquidity in some securities markets.

The Financial Stability Monitor was an analytical centerpiece of the OFR’s annual reports for 2013 and 2014. Updates to the monitor are ongoing. The latest version is interactive and online on the OFR website at www.financialresearch.gov. The online version allows users to explore the monitor’s risk categories and subcategories, drill down to its underlying risk indicators, and view its historical performance for forensic analysis. The release of the Web-based monitor marks the first time the OFR has made public an interactive online tool for visualizing data related to financial stability.

Along with the online monitor, the OFR published today a brief analysis of specific risks that merit attention.

The OFR will continue to provide comprehensive, biannual analyses of financial stability risks and will concurrently present updated work on the Financial Stability Monitor.

The new online Financial Stability Monitor is available here. The companion analysis paper is available here.