OFR Financial Stability Assessment: Risks in Medium Range But U.K. Vote Weighs

WASHINGTON – The U.S. Office of Financial Research released today its mid-year summary assessment of threats to U.S. financial stability, concluding that overall risks remain in the medium range but have been pushed higher by the United Kingdom vote to exit the European Union.

“The result of the U.K. referendum surprised financial markets and was a negative shock to investor confidence. It introduces months or years of uncertainty about the rules governing the U.K.’s investment, financing, and trade relations with Europe and the rest of the world,” said OFR Director Richard Berner.

“Larger shocks to confidence are possible as those deliberations and negotiations play out,” Berner said. “Because the U.K. economy and especially the U.K. financial system are highly connected with the rest of Europe and the United States, severe adverse outcomes in the U.K. and spillovers to Europe could pose a risk to U.S. financial stability.”

The key vulnerabilities discussed last December in the OFR’s 2015 Financial Stability Report also remain.

  1. Credit risks in U.S. nonfinancial businesses and in some major foreign markets are still elevated.
  2. Long-term U.S. interest rates have declined to ultra-low levels, which can motivate excessive risk-taking and borrowing; many key foreign interest rates are now negative, with uncertain consequences for financial stability.
  3. Uneven resilience persists in the U.S. financial system.

These vulnerabilities are weaknesses in the financial system that can originate, amplify, or transmit shocks, whether those shocks come from the United States, U.K., or elsewhere.

Today’s mid-year summary report supplements the OFR’s comprehensive Financial Stability Report, published at the end of each year. The assessment is based on the OFR’s Financial Stability Monitor — a heat map of key risk indicators — as well as the OFR’s broad surveillance of the financial system, research, and data analysis.

The report is available here. The Financial Stability Monitor heat map is available here.