Treasury Report: Global Factors Threaten US Financial Stability

Threats to U.S. financial stability remained within a medium range in 2016, though the financial system continues to face risks from a number of global and domestic factors, the Treasury Department’s Office of Financial Research reported today.

OFR noted the resilience of the financial markets following the aftershocks of the “Brexit” vote in June, but added that disruptions to the global economy still present the greatest macroeconomic risk to the U.S. financial system. As the U.K. prepares to exit from the European Union, further uncertainty in international markets could cause slower growth and higher inflation, which could have bearing on domestic markets, the report said.

The persistently low interest rate environment also continues to be a point of concern. While long-term interest rates received a slight boost in 2016, they remain near historic lows, incentivizing risk-taking and borrowing, particularly among nonfinancial institutions. This acceleration in nonfinancial corporate debt could leave the financial system more susceptible to shock in the event of a severe downturn, OFR said.

In addition, the financial system must improve its ability to recover if faced with a large-scale cyber incident, OFR said. While the report acknowledged that firms and regulators have taken steps to build up sector-wide resilience, it emphasized that more work is needed to strengthen links between financial institutions to ensure that consumers can continue to have access to financial services after a cyberattack. ABA and the Financial Services Information Sharing Analysis Center are partnering on “Sheltered Harbor,” an initiative to improve access to account information in the wake of an attack that is expected to become operational in 2017.