OFR Finds Elevated Threats to U.S. Financial Stability Due to Inflation, Ongoing Geopolitical Risks, and Global Conflicts

Contact: OFR Public Affairs

WASHINGTON, DC – The OFR published its 2023 Annual Report to Congress today, which concluded that financial stability risks to the U.S. financial landscape have increased since last year and remain elevated in 2023. The report examined these risks to financial stability between October 1, 2022 – September 30, 2023.

“Persistent and emerging risks are contributing to uncertainty within our financial system,” said James Martin, Acting Director of the Office of Financial Research. “Through this year’s Annual Report to Congress, the OFR demonstrates commitment to promoting financial stability through our work in monitoring and analyzing risks, performing essential research, and shining a light in the dark corners of our financial system. We hope the analysis provided in this report, as well as the research and monitoring tools made available by the OFR, aid policymakers and others responding to financial stability risks.”

The OFR’s 2023 Annual Report to Congress found that multiple indicators signal an upcoming economic slowdown—potentially magnified by persistent inflation, ongoing geopolitical risks, and global conflicts. The report also discussed the threats posed by risk areas such as commercial real estate, cybersecurity, and digital assets.

In its 2023 Annual Report to Congress, the OFR highlighted key findings, including:

Persistent high inflation and interest rates created challenging financial conditions for companies and households and raised the prospect of a recession.

A robust labor market and sustained consumer spending offset the probability of a recession in the U.S. in the near term, but the persistence of high inflation and interest rates has created challenging conditions and raised the prospect of a recession in the medium term. The policy posture of the Federal Reserve to manage core inflation by raising interest rates has increased borrowing costs for both companies and households, potentially dampening economic growth. Capital goods orders and shipments appear to have peaked through this year, with business capital investment falling as prices continue to rise. Higher prices for food, services, and shelter affected household balance sheets throughout the year and will likely result in diminished household savings and retail consumer spending. While the economy has proven to be resilient, forecasters have a dim outlook for GDP growth in 2024.

Central Bank policies may have resulted in turbulence for the banking, funding, and real estate markets.

The monetary tightening policies begun in 2022 by the Federal Reserve may have created stressors for the banking, funding, and real estate markets in 2023. Many banks’ fixed-income securities portfolios showed large unrealized losses due to rising rates, which contributed to the demise of some of those banks. Following the regional banking crisis in the first half of 2023, banks’ balance sheets shrunk and lending to small, medium, and (to a lesser extent) large corporations declined. As mortgage rates reach their highest levels in 23 years, the inventory of homes for sale remains tight, pushing prices higher and contributing to the decline in home affordability. Due to rising claims costs, the property insurance sector also experienced unprecedented stress that is expected to continue for an extended period.

Ongoing geopolitical risks and global conflicts resulted in increased economic uncertainty for advanced foreign economies and exposed U.S. financial institutions to greater risk.

The continuation of Russia’s war against Ukraine led to continuing supply chain frictions and uncertainty for European economies. As a result, some advanced European economies are beginning to falter as their consumers experience declines in economic growth coupled with persistent inflation. The economic vulnerabilities of the European Union (EU) are important given our interdependency in the global economy via trade and the large exposures to the EU that U.S. banks and bankholding companies have via debt and derivatives claims. In addition, tensions between the U.S. and China, plus China’s economic slowdown and deepening debt problems, also contribute to global economic uncertainty.

The commercial real estate (CRE) market struggled with higher credit risks and difficult financial conditions due to decreased demand and lower valuation.

Credit risks have built up in the CRE sector as borrowing rates have increased, pushing valuations significantly lower. In particular, the office sector continues to face difficult financial conditions and struggles with weak demand, increased tenant vacancies, and declines in valuation following the rise of the work-from-home trend. Regional, smaller, and community banks are more exposed to CRE lending and, therefore, more vulnerable to increased default rates than the largest banks.

The emerging risk areas of digital assets and cybersecurity continued to evolve and impact financial institutions.

Turmoil in the digital assets market exposed and even elevated the high level of interconnectedness between digital assets firms and traditional markets, highlighting the impact of digital assets on financial institutions. An increase in cybersecurity threats from financially motivated groups also placed financial institutions at increased risk. The percentage of organizations affected by ransomware rose from 79% to 87% in 2023, the highest proportion of data breaches in the financial services industry since 2018.

The 2023 report also discussed several significant OFR accomplishments. The OFR completed the initial build and testing of its Data Collection Utility, which is designed to facilitate the collection of data directly from external entities and may include noncentrally-cleared bilateral repo data. In addition, the OFR launched the Joint Analysis Data Environment (JADE)—a secure, cloud-based platform designed to provide the Financial Stability Oversight Council and its member agencies, with access to analysis-ready data, analytical software, and high-performance computing. JADE will enable collaborative, interdisciplinary research on financial stability and allow Council member agencies to jointly analyze financial stability risks. Further, the OFR updated its Financial Stress Index monitoring tool to prepare for the transition from the London Interbank Offered Rate (LIBOR) to the Secured Overnight Financing Rate (SOFR).

Read the report.


The OFR helps promote financial stability by looking across the financial system to measure and analyze risks, perform essential research, and collect and standardize financial data, principally to support the Financial Stability Oversight Council and its member agencies. In addition, 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 a report to Congress with its key findings. For more information, visit us at https://www.financialresearch.gov/.