Office of Financial Research Issues 2015 Annual Report to Congress: Report Analyzes Threats, Describes Progress, and Presents 2016 Agenda

WASHINGTON – The Office of Financial Research (OFR) issued its fourth Annual Report to Congress today. The report fulfills the OFR’s statutory responsibility to report on potential threats to U.S. financial stability, key research findings, and progress in meeting its mission. The report also describes the 2016 agenda of the Office.

Threats to financial stability arise when shocks expose vulnerabilities in the financial system. The report says threats to U.S. financial stability have edged higher since last year’s report, but remain in the medium, or moderate, range; that assessment has not changed since the Federal Reserve incrementally increased short-term interest rates last month.

In December, the OFR released its first Financial Stability Report. The Financial Stability Report complements this Annual Report to Congress with in-depth analyses of threats to financial stability, evaluation of financial stability policies, assessments of work on financial data gaps and standards, and research topics.

“I hope that, taken together, the two reports will help us communicate with a wide range of stakeholders while ensuring that we are transparent and accountable in our work and the ways we pursue it,” said OFR Director Richard Berner.

The OFR develops tools to assess and monitor threats to financial stability, and evaluates the effectiveness of policy tools designed to improve the resilience of the U.S. financial system. The OFR also has a mandate to improve the scope, quality, and accessibility of financial data for the benefit of the Financial Stability Oversight Council and the public.

The OFR is advancing its mission by implementing a programmatic approach to its work, focusing initially on eight programs in core areas: monitors; central counterparties; data quality, scope, and accessibility; stress tests; risks in changing market structure; and risks in financial institutions.

“Through our team of diverse, talented, and dedicated professionals, the OFR has made remarkable strides toward meeting our mission,” Berner said. “I am confident that our work will continue to help make our financial system more resilient.”

In the 2015 Annual Report to Congress, the OFR also highlights key research findings:

1. Policymakers have taken important steps to eliminate the implied taxpayer support for large, complex financial institutions whose serious distress — or whose size, complexity, or interconnectedness — could threaten financial stability.
2. OFR research found that U.S. banking activity remains highly concentrated in eight global systemically important banks and that changes in regulation appear to have reduced the perception of competitive advantages for them.
3. Our research also found that clearing derivatives trades through central counterparties (CCPs) has significant benefits in reducing the risks to counterparties of default — as long as the CCP has the resources to meet payment obligations in the event of member default. But a CCP can also be a single point of vulnerability for failure and creates the potential for propagation of risks.
4. Stress testing is an effective tool for testing the safety and soundness of individual financial institutions, and we offer approaches to “macroprudential” stress testing that spans the financial system.

The 2015 Annual Report to Congress is available here.