The Office of Financial Research (OFR) in its annual report to US Congress stated that the Federal Reserve’s annual check of the banking system’s financial health, stress tests, fell short on several counts.
The annual report, issued five years after the end of the financial crisis of 2007-09, highlights three specific areas of concern:
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- Excessive risk-taking during an extended period of low interest rates and low volatility
- An increase in market fragility resulting in declining market liquidity and persistent risks of asset fire sales and runs, and
- The migration of financial activity away from banks toward less regulated parts of the financial system where threats could be significant, but are more difficult to assess
OFR director Richard Berner said: "Threats to financial stability are moderate, our tools for spotting them are better, and the financial system in many ways is more resilient compared with just before the financial crisis.
"But as the financial system evolves and innovates, we must be especially watchful for important new vulnerabilities that are emerging in dynamic financial companies and markets."
The report says that, in addition to those new vulnerabilities, gaps remain in the analysis, data, and policy tools aimed at spotting and addressing them, despite progress in narrowing those gaps.
Moreover, many new policy tools designed to make the financial system stronger and more transparent are still largely untested and may have unintended side effects, the reported noted.
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By GlobalDataAlso, the development and implementation of other policy tools to respond to threats to US financial stability remains incomplete.
The OFR was established after the 2007-09 financial crisis to assist regulators gain better insight into the financial system.
