The OFR Blog

This blog explains how Proof-of-Stake, which requires capital to validate crypto asset transactions, has a higher risk of runs in which stakers exit.

This blog introduces a new OFR paper on whether performance-based compensation incentives influence a hedge fund manager’s investment strategy and the associated risk. The blog discusses how different hedge fund characteristics like redemption policies and ownership structure affect the way managers respond to underperformance and how those investment strategies can amplify portfolio volatility as they attempt to achieve certain returns.

Investors continued to pour cash into U.S. money market funds ahead of anticipated interest rate cuts. The cash influx pushed money market fund assets to a record $6.6. trillion on July 31, 2024.

This blog highlights the role wealth plays in workers’ job-switching decisions. Higher wealth helps workers switch to higher-paying jobs because these workers can take on more labor market risk. The research shows that this channel matters, particularly during downturns.

In April 2024, OFR enhanced its Bank Systemic Risk Monitor to include the Supplementary Leverage Ratio which measures a bank's Tier 1 Capital relative to its total leverage.

Understanding why so few homeowners insure their flood risk is important for understanding how increasing flood risk could affect financial markets.

A new OFR Working Paper shows that natural disasters affect global banks’ lending in unexpected ways.

In a recent OFR working paper, the authors study how banks adjust their lending behavior when a new risk emerges, such as climate change.

U.S. Money Market Funds were an attractive investment vehicle in Q1 2024. The cash influx pushed Money Market Fund assets to a record $6.5 trillion.

U.S. money market funds, an important source of short-term funding to the financial system, saw record inflows and aggregate net assets in 2023.

The UPI became a required data element under SEC and CFTC rules for recordkeeping and data reporting for all new and existing OTC derivatives swap transactions.

Lenders decide whether to enforce upon borrower breach of covenants. These decisions imply that lenders value borrower relationships at 11% of loan principal.

An OFR Working Paper uses a model and empirical tests to show four ways intermediary network density affects market liquidity and derivatives trade costs.

The financial press is a conduit for popular narratives that reflect collective memory about historical events. Some collective memories relate to major stock market crashes, and investors may rely on associated narratives—or crash narratives—to inform their current beliefs and choices. Using recent advances in computational linguistics, we develop a higher-order measure of narrativity based on newspaper articles that appear following major crashes. We provide evidence that crash narratives (1) propagate broadly among the public once they appear in news articles and (2) significantly explain predictive variation in market volatility. We exploit investor heterogeneity using survey data to distinguish the effects of narrativity and fundamental conditions and find consistent evidence. Finally, we develop a measure of pure narrativity to examine when the financial press is more likely to employ narratives.

Review of the rising premium costs and reduced availability of U.S. property insurance and its growing impact on real estate owners, lenders and governments.

An OFR working paper presents a new model to analyze the effects of trend inflation on macroeconomic stability in New Keynesian models. The authors' key innovation is to incorporate more realistic assumptions about human decision-making in an otherwise standard macroeconomic model that features trend inflation.

An OFR blog discusses a recent working paper that quantifies the impacts of short-selling restrictions to illuminate the role these limits could play during financial downturns and periods of market turmoil.

Last month marked the 13th anniversary of the Office of Financial Research (OFR) and approximately 12 years since the OFR began to assess financial stability risks in earnest. Our job is to research, investigate, and report on risks to the financial system; assess how much of a threat such risks might pose; and provide policymakers with financial analysis, information, and evaluation of policy tools to mitigate those risks.

There is growing apprehension over conditions in U.S. commercial real estate (CRE), and for good reason—U.S. financial institutions hold more than $5.6 trillion of mortgage debt secured by CRE, and prior CRE downturns have generated financial instability. Like many markets, CRE is multifaceted, and to understand the threat to financial stability this market poses, we must evaluate each of its sectors individually.

Per CSBS, reporting standards for the NMLS MSB Call Report are still under development and reporting is also still being reviewed through the supervisory process. Accordingly, CSBS has advised that the 2021 MSB Call Report data can be used on a limited basis to estimate the: (i) total volume for MSB companies in the United States; and (ii) number of companies reporting in each MSB activity. Disclaimers have been made where appropriate to identify the limits of the NMLS MSB Call Report and its focus on money transmission.

The past century has witnessed rapid population growth, increased resource use, accelerating climate change, and the possibility of nuclear warfare. It has also seen a rise in economic growth and innovation that has transformed human lives around the globe. Given these competing forces, it is natural to wonder whether current decisions are sustainable, in the sense that they are expected to leave future generations at least as well off as present generations in expectation. We investigate this question with the help of a model that captures the key economic forces of growth, savings decisions, and risk.

Differences in haircuts, margining, and netting are primary factors that drive dealers to use the non-centrally cleared bilateral repurchase agreements (NCCBR) over other segments of the repurchase agreement (repo) market.

A convergence of events caused a 2019 spike in repo rates, according to a new OFR Working Paper. On Sept. 17, 2019, intraday repo rates rose to more than 300 basis points above the upper end of the federal funds target range. This was 30 times larger than the same spread during the preceding week.

The working paper presents a model and theory that simultaneously produces both a flat Phillips curve with respect to demand disturbances and significant inflation in response to realistic supply disturbances. This model is based on the strategic price-setting decisions of firms.

Markets for safe assets can be fragile, due to strategic interactions among investors who hold Treasury securities for their liquidity characteristics. The standard flight-to-safety in times of stress can have a destabilizing effect and trigger a dash for cash or even a market run by liquidity investors. This explanation offers valuable insights for policymakers on how to support Treasury market liquidity going forward.

Neither the commercial real estate (CRE) nor the residential real estate market poses a significant risk to the U.S. financial system in the foreseeable future. While these markets have shown resilience until recently, their strength will be tested if a recession occurs.

Theoretical results suggest that financial frictions may limit the potential benefits of digital currencies. Financial system volatility decreases when digital currencies are fully integrated, and household welfare improves, yet banking-sector stability suffers.

Neither the commercial real estate (CRE) nor the residential real estate market poses a significant risk to the U.S. financial system in the foreseeable future. While these markets have shown resilience until recently, their strength will be tested if a recession occurs.

In its 2022 Annual Report to Congress, the Office of Financial Research discussed how inflation, monetary tightening, and market volatility elevated financial system risk in 2022. As we begin 2023, OFR’s senior financial analysts Dagmar Chiella, Hashim Hamandi, and Ruth Leung explain five areas of risk they’re currently monitoring.

The Office of Financial Research (OFR) will host two events in 2023 for new and aspiring PhD scholars: the PhD Symposium on Financial Stability and the OFR’s Rising Scholars Conference. These events allow new and aspiring PhD scholars in the fields of economics and finance to present their research to senior-level economists from the OFR and other federal agencies, as well as from academia, and receive these experts’ feedback.

In 2022, there were no reported defaults by central counterparties (CCPs) members or their clients, and there were also very few serious disruptions. One exception was the closure of the nickel market on the London Metal Exchange (LME). This blog post discusses the heighted risk factors that this incident exposed. A more detailed discussion is included in OFR’s 2022 Annual Report.

If decentralized finance (DeFi) continues to grow in size and scope, and if it continues to lack the guardrails that exist for traditional finance, then it could become a threat to financial stability. This blog post summarizes three channels through which threats could emerge in the DeFi market.

The March 2020 stress on the U.S. Treasury market raised questions about the role of hedge funds in the financial system and whether their activities can increase systemic risk. Using a sample of regulatory hedge fund data that spanned eight years, Ram Yamarthy and Ron Alquist found that hedge funds play a significant and consistent role in influencing the U.S. Treasury yield curve alongside other market players and forces. Their findings were published in a recent OFR working paper, Hedge Funds and Treasury Market Price Impact: Evidence from Direct Exposures.

The repurchase agreement (repo) market is a foundational component of the U.S. financial system, providing trillions of dollars of daily funding and facilitating liquidity for U.S. Treasuries and other securities. The repo market allows participants to borrow cash against securities pledged as collateral, with an obligation to repurchase those securities in the future.

In a recent working paper analyzing who banks chose as counterparties in the over-the-counter (OTC) derivatives market, the authors found that banks are more likely to choose riskier nonbank counterparties that are already heavily connected and exposed to other banks, which leads to an even more densely connected network. Furthermore, banks do not hedge these exposures, but rather increase them by selling rather than purchasing credit derivative swaps against these counterparties. Finally, the authors found that common counterparty exposures are correlated with systemic risk measures despite greater regulatory oversight following the 2008 financial crisis.

For years, regulators have called for greater insight and transparency into the U.S. repurchase agreement (repo) market. As a crucial source of funding and liquidity for the U.S. financial system, repos provide short-term financing to banks, securities dealers, and other financial institutions to fund their liquidity provisions and leveraged investments. Currently, the daily volume of transactions on all U.S. repo markets exceeds $4 trillion.

A well-designed central bank digital currency may enhance rather than weaken financial stability, according to an OFR working paper released in July. As central banks consider whether the benefits of creating digital cash outweigh the risks, the paper finds that at least one risk—bank runs—is not as big as initially feared.

To ensure that the OFR hears from a variety of external experts with diverse viewpoints, the OFR established the Financial Research Advisory Committee. The advisory committee provides advice, recommendations, analysis, and information directly to the OFR. The OFR may share the Committee’s advice and recommendations with the Secretary of the Treasury or other Treasury officials.

While the insurance industry has been subject to stresses recently, it is unlikely to affect the stability of the U.S. financial system in the near term. During the prolonged low-interest rate environment, certain investment strategies were adopted, widely, by insurers in an attempt to boost yields. However, enhanced yields do not come without trade-offs, such as increased risk and reduced liquidity. We explain three insurance industry investment trends of which policymakers should be mindful.

Despite the 2020 economic downturn and uptick in remote work, the U.S. commercial real estate (CRE) market held strong. While the $5.2 trillion CRE loans market has historically posed risks to banks and other financial institutions during recessions, most of these institutions weren’t forced to absorb large CRE-related credit losses this time, which helped maintain financial stability. We explore the economic conditions, financial environment, and policy decisions that supported CRE after the 2020 recession in our OFR Brief released today.

Cash is necessary for companies’ operations. Firms use cash to make payments, finance investments, and manage risk. But holding cash comes at a cost: its low pecuniary return. Published today by the OFR, the working paper, “Cash-Hedged Stock Returns,” shows that the cash returns of publicly traded, non-financial firms are correlated. Since cash returns are a part of equity returns, investors that are using equity return correlations to measure risk can mismeasure risk.

Sources of two disruptions to the Treasury market over 60 years apart stemmed from similar vulnerabilities, such as low margins, little market transparency, and reliance on market-based financing.

This essay puts the depository institutions industry into broad historical perspective, looking at the fifty year changes from 1970 to 2020.

New data on the world's largest banks show the increasing systemic importance of Asian banks. The data also show that U.S. banks' systemic footprint still dominates the global totals. Indeed, eight U.S. banks are still considered global systemically important banks (G-SIBs). G-SIBs must hold more capital than other banks. Among the U.S. banks in the tier below G-SIBs, the U.S. operations of a few foreign banks rank as the most systemically important.

Open-end mutual funds and exchange-traded funds pose more risks when a small number of investors own much of the fund. These funds could receive unexpected requests for large redemptions. A Securities and Exchange Commission rule requires these funds to have liquidity management programs in part to account for this investor concentration risk.

Delivered at the meeting on November 16, 2017, of the principals of the Financial Stability Oversight Council (FSOC or Council)

For years, we have recognized the enormous potential benefits of the Legal Entity Identifier (LEI). Establishment of this fundamental data standard was one of the key steps the G-20 took after the financial crisis to retool the global financial infrastructure, and the LEI now serves as a linchpin for making sense of derivatives data stored in repositories around the globe. The LEI, like a bar code for financial market participants, now identifies firms from almost 200 countries — more than 700,000 LEIs in all.

Many derivatives trades that would have been conducted directly between the buyer and seller before the financial crisis now go through central counterparties (CCPs). Reforms after the financial crisis promoted the use of CCPs. This arrangement improves transparency and reduces counterparty risk, as long as market participants manage that risk properly. If they don’t, a CCP’s links to member firms could increase systemic risk.

Money market funds long sold shares in normal times at a stable price, usually $1.00. But in the financial crisis, one fund "broke the buck" and investors fled. A new rule requires shares of some types of funds to trade at a market-based net asset value. The OFR’s analysis finds that so far these values have not varied much.

Since the financial crisis, regulators have subjected the largest U.S. banks to stress tests to ensure they can withstand major shocks. They have also introduced the concept of "capital buffers," extra cushions of capital held by banks to absorb potential losses under stress.

Three of the biggest U.S. banks have moved up in systemic risk ratings, according to new international data the OFR added today to its online interactive chart. The risk ratings of Chinese banks also rose, continuing a three-year trend.

Assets of U.S. prime money market funds have decreased by more than $700 billion since the beginning of the year, while assets of government money market funds have increased by about the same amount, according to the OFR’s monthly U.S. Money Market Fund Monitor. This trend accelerated in August.

The financial crisis showed that over-the-counter (OTC) derivatives can create risks for the financial system. G-20 reforms have sought to reduce those risks by requiring central clearing of standardized contracts. They also set higher capital and collateral requirements for derivatives that are not centrally cleared. Part of the motivation for those requirements is to create an incentive for banks to clear through central counterparties (CCPs).

The Office of Financial Research today released its Money Market Fund Monitor, a set of interactive charts for exploring the portfolios of U.S. money market funds.

Scientists have long used network analysis to track and contain the spread of disease. A new OFR brief applies a similar approach to identify potential paths of contagion in the U.S. financial system.

A messy but important problem for OFR researchers and data experts is linking information about a financial services company from diverse sources. Regulators, investors, and the public face the same issue.

What would happen if a large U.S. bank were to fail?

The Dodd-Frank Act of 2010 requires the largest U.S. banks to submit plans to regulators on how they could be wound down after a potential failure without disrupting the financial system. These plans are known as resolution plans or living wills. Eight global systemically important banks (G-SIBs) are based in the United States.

The Dodd-Frank Act of 2010 required federal financial regulators to drop references to credit ratings from their regulations. An OFR brief by John Soroushian, released today, describes the alternatives to credit ratings that regulators have adopted. It also analyzes some of the challenges they face.

We recently posted the 2016 update to the Interagency Data Inventory on the OFR's website. This inventory, which contains basic information about data collected by agencies of the Financial Stability Oversight Council, or FSOC, plays an important role in facilitating access to data for analyzing threats to financial stability.

The OFR released a brief today that analyzes new data about global systemically important banks (G-SIBs). The OFR also introduced an onlineinteractive chart for users to compare data about the 30 G-SIBs. A G-SIB is a large bank or bank holding company whose failure could pose a threat to the global financial system.

The working paper analysis reveals that funds with identical Form PF filings could have significantly different risk exposures. The form allows such significant tolerance for risk exposures to differ among funds that it does not adequately reflect the differences. This tolerance is much larger among funds with derivatives.

An OFR working paper published today uses data about the credit default swap (CDS) market to evaluate the impact on banks from default of their largest counterparties. It also takes a macroprudential perspective to consider not only the impacts on individual banks, but on the financial system as a whole.

An OFR brief released today analyzed new data about a critical part of the U.S. financial system. The brief provides the first statistics on the U.S. market for bilateral repurchase agreements (repos).

An OFR working paper published today documents that the amount of a key type of short-term borrowing by foreign-owned broker-dealers has declined by about 10 percent at the end of each quarter since July 2008 and rebounded at the beginning of each following quarter.

The OFR released a working paper today that reviews the rapidly expanding research on network models of the financial system.

An OFR working paper released today illustrates some of the complexities in interpreting the Liquidity Coverage Ratio (LCR), a new standard set by bank regulators after the financial crisis to help ensure banks maintain enough liquid assets to cover their financial obligations during times of stress.

Concern has focused recently on the apparent fragility of market liquidity, which refers to the ability to buy and sell securities with a minimal price impact and is essential for markets to operate efficiently. Although liquidity may seem adequate under normal conditions, it seems to disappear abruptly in times of stress.

A financial company reference database envisioned by the Dodd-Frank Act has become a reality. The international database is free, frequently updated with new information, and available.

The OFR released two working papers today that focus on the potential risks of central clearing of over-the-counter derivative transactions.

A recent paper funded by the OFR through its joint grant program with the National Science Foundation offers insights into the impact on the financial system of high-frequency trading, contributes to developing technologies for working with large datasets, and fosters understanding of market liquidity.

The OFR released a brief today analyzing new data about the nation’s most systemically important bank holding companies — financial institutions whose failure could pose the greatest threat to the international financial system.

The Office of Financial Research (OFR) capped a year of progress in promoting financial stability a few weeks ago by releasing its 2014 Annual Report to Congress, a publication that highlights our important work.

The global project to assign unique identifiers to parties in financial transactions has turned a corner, bringing the world closer to mapping connections in the financial system and cutting industry costs for cleaning, aggregating, and reporting data.

In the past week, the global Legal Entity Identifier (LEI) system crossed the threshold to move from a start-up initiative to an operational, steady state.

The defining moment was the inaugural meeting of the Board of Directors of the Global Legal Entity Identifier Foundation on June 26 in Zurich, Switzerland. Under the continued oversight of the LEI Regulatory Oversight Committee (ROC), the Foundation will now begin to assume management of LEI operations across the globe.

As global acceptance continues to spread, governance for the Legal Entity Identifier (LEI) system advanced today. The LEI, like a bar code identifier for entities that engage in financial market transactions, promises to be a linchpin for making connections in the massive volumes of financial data that course through the international economy every day.

​The Financial Stability Board (FSB), an international coordinating body established by the G-20 to promote global financial stability and regulatory coordination, endorsed today the nomination of 16 directors for the Global LEI Foundation (GLEIF), a key element for governance and a critical step forward.

This past year, the Office of Financial Research​ (OFR or Office) has advanced substantive work to achieve its mission, building on its progress since being established by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The OFR, led by Director Richard Berner, is ramping up its services to the Financial Stability Oversight Council (Council), Council member agencies, and the public by working to improve the quality and scope of financial data available to policymakers and to conduct and foster sophisticated analysis of the financial system.

Last week, the OFR submitted its 2013 Annual Report to Congress, fulfilling a requirement to annually assess the state of the United States financial system and analyze threats to U.S. financial stability. The report describes a prototype Financial Stability Monitor, a comprehensive new tool developed by the OFR for tracking threats and the interplay among them.

This is an exciting time for those of us at the Treasury’s Office of Financial Research ​and others around the world who have been working to establish a global system for precisely identifying parties to financial transactions.

The Legal Entity Identifier, or LEI, is like a bar codea unique ID for companies participating in global financial markets. The need for an LEI system has long been recognized. However, the recent financial crisis exposed the critical nature of that need, when government regulators and market participants were unable to quickly assess exposures to failing firms or the network of interconnections among financial companies and markets.

How might the dynamics of a flock of birds in flight, a group of drivers in a traffic jam, or a panicked crowd of stampeding people inform our analysis of threats to financial stability?

In the third paper of our Working Paper Series - Using Agent-Based Models for Analyzing Threats to Financial Stability​ - the staff of the Office of Financial Research (OFR) explores these questions as we seek better ways to monitor risk to the financial system.

The Financial Stability Board (FSB), which brings together global financial regulators and policymakers, reached a critical milestone this week in the initiative to establish a worldwide standard for uniquely identifying parties to financial transactions. This linchpin for financial data, known as the Legal Entity Identifier (LEI), will allow financial companies and financial regulators to better understand true exposures and counterparty risks across the global financial system.

During the financial crisis neither institutions nor regulators were able to accurately assess direct or indirect global exposures to troubled companies, hampering efforts to manage, and to respond to, risks. A major reason was the absence of a consistent way of identifying counterparties in the numerous and disparate databases that financial firms and regulators maintain for tracking global financial instruments and positions. By filling this critical gap, the LEI will be a valuable tool for identifying risks associated with these exposures and helping to prevent such critical failures in the future.

A key part of the mission of the Office of Financial Research (OFR) is to promote best practices in financial risk management. Today, in the second paper of its Working Paper Series, the OFR issued a paper that provides a broad assessment of risk management practices and how risk management can be improved: Forging Best Practices in Risk Management.

The paper approaches risk management from three perspectives: risk measurement by individual firms, governance and incentives, and systemic concerns. Although the paper separately evaluates each approach, it also includes a discussion on the importance of considering these three dimensions of best practices in risk management as interrelated. The paper concludes by defining important areas for continued research and for modifying the role of risk management in financial firms’ business decisions.

Key international regulators and policymakers have taken another step forward in the global initiative to increase transparency in financial transactions. The Financial Stability Board (FSB) recently announced progress in making the global financial system more transparent and less vulnerable to excessive risk-taking through the creation of a Legal Entity Identifier (LEI) Expert Group. The formation of the LEI Expert Group will build on the work of Treasury’s Office of Financial Research (OFR) and its global counterparts in advancing the LEI initiative. The OFR has played an active role to help build international consensus and facilitate adoption of a global LEI standard and we are excited to support the Expert Group in its efforts.

The Dodd-Frank Act created the Office of Financial Research (OFR) because policymakers and the public need better data and analysis to help them assess and respond to threats to financial stability. With that goal in mind, the OFR is launching a Working Paper Series that will make available the OFR’s work on the analytics and measurement of such threats in depth. Today, we release our first Working Paper – A Survey of Systemic Risk Analytics, by Dimitrios Bisias (MIT), Mark Flood (OFR), Andrew W. Lo (MIT), and Stavros Valavanis (MIT).