Commercial real estate and cybersecurity risks remain potential vulnerabilities for the U.S. financial system, the Office of Financial Research said in its annual report to Congress. The report also identified “data gaps” that could complicate financial stability projections, such as those for uninsured deposits at banks and activities in the nonbank sector.
The OFR concluded that current risks to the financial system have remained largely unchanged since last year. CRE is one such risk, and while the agency noted that most CRE is performing relatively well, “one or more components may be distressed and have the potential to stress financial institutions by imposing large credit losses.” The report added that some office loans are at relatively high risk for default.
Another structural vulnerability is the potential for runs and other rapid changes in the supply and demand for money market instruments such as repurchase agreements, according to OFR. Cybersecurity is another risk as technology is critical to the operation of the financial system. The agency also identified the federal government’s debt ceiling as a vulnerability. Although the failure of the government to meet its obligations is a low risk, “such a failure might be extremely disruptive to the global financial system.”
The OFR also identified three data gaps that complicate its analysis. The first is the fact that data on uninsured deposits is collected for less than 25% of banks, it said. “This data gap makes anticipating and reacting to bank runs more difficult.”
The second gap concerns the activities of some nonbank financial institutions, with private credit a rapidly growing portion of nonbank lending, according to OFR. The third gap concerns dealer margining practices, but the agency added that it plans to begin collecting data on non-centrally cleared bilateral repo, which should help close the gap.
