OFR Flags Macroeconomic, Credit Risk in Annual Report

The Office of Financial Research flagged macroeconomic risk and credit risk as top areas of concern as the nation continues to deal with the economic stresses caused by COVID-19. In its annual report to Congress, OFR noted that macroeconomic risk is heightened due to the uncertain trajectory of the virus and the economic recovery, and warned that “government interventions provide support, but could come at the cost of higher inflation.”

Meanwhile, leverage remains high among nonfinancial corporations, OFR said. “U.S. corporate leverage was already high entering into 2020, especially among companies with credit ratings below investment grade. Those same companies may now face operating challenges as the ability to service debt or take on additional debt declines.”

The report added that “as has been the case in past financial crises, commercial real estate is expected to be a prime source of potential credit problems.” OFR noted that large CRE exposures—those exceeding three times tangible common equity—“are concentrated among hundreds of smaller banks that hold a small, but not insignificant portion of industry assets.” The report also cited outside research that suggested that “bank CRE loan defaults may not peak until late 2020 or early 2021.”

In addition to those two high-risk areas, OFR said that, among other things, market risk is elevated, liquidity and funding risks are moderate, while cyber risks continue to grow, “both in volume and sophistication.”