OFR Flags Market Risk, Leveraged Lending in Annual Report

Noting that economic indicators are exceptionally positive, the Treasury’s Office of Financial Research flagged market risk, credit risk and cybersecurity as high or moderate concerns in its annual financial stability report today. Market risk has remained elevated over the past few years, OFR said, with stock market valuations, Treasury term premium and bond duration signaling the most risk.

OFR also highlighted leveraged loans to corporations as a high risk factor within credit risk, which overall remains moderate. OFR noted that as much as two-thirds of leveraged loans issued in 2018 have been “covenant-lite,” with fewer protections for issuers should the loans default. It also noted other signs of deterioration in leveraged loan quality.

OFR noted that solvency, financial sector leverage, funding and liquidity risks remain low. The report also summarizes several changes at OFR over the past year, including the reduction of its staff by nearly 50 percent; the departure of former director Richard Berner, who served for nearly five years in the role; and the office’s refocus on supporting the Financial Stability Oversight Council.