Treasury Report: Brexit Bumps Up Threats to Financial Stability

Threats to U.S. financial stability remained within a medium range but edged higher with the United Kingdom’s referendum calling for an exit from the European Union, the Treasury Department’s Office of Financial Research reported today. “The referendum result was a major shock to U.K. investors and to confidence in the U.K. economy, with global effects,” OFR said. “Although other risky assets largely recovered amid expectations of policies to mitigate fallout from the referendum result, these markets may be underpricing the considerable risks ahead.”

Implications of Brexit that could affect the U.S. financial system include a potential decline in U.K. or EU trade, direct financial exposures and global investor confidence. “The uncertainty and the ultimate decisions could have major legal and economic implications for the U.K.’s very large financial services industry and for the cross-border financial flows on which the U.K. is highly dependent,” the report found.

Other factors contributing to financial stability risks included rising credit risk, the current low interest rate environment and the uneven resilience of the financial system in the aftermath of the financial crisis — all themes noted in OFR’s 2015 year-end report. Interest rate risk remained the single most elevated risk area in the report.