Treasury Report: Threats to Financial Stability Edge Higher

Threats to U.S. financial stability remained within a medium range, but edged higher in 2015, the Treasury Department’s Office of Financial Research reported today. The increase was largely due to rising credit risk, the current low interest rate environment and the uneven resilience of the financial system in the aftermath of the financial crisis.

In recent years, persistently low interest rates have incentivized risk-taking and borrowing while credit underwriting standards have relaxed, making credit more broadly available, OFR said. At the same time, slowing global growth, low inflation and plunging commodity prices have weakened the capacity of many borrowers in the U.S. and emerging markets to service debts. The report said that these factors could be a threat to financial stability should the economy experience a shock that impairs U.S. or emerging market credit quality in the future.

While the report argued that regulations and new risk management practices have contributed to financial stability since the crisis, the resilience of the financial system has remained uneven. The migration of financial risk to the shadow banking sector, fragile liquidity conditions and interconnectedness among financial firms also continue to pose threats to financial stability, the report said.