“This third annual report of the Office of Financial Research (OFR) assesses threats to U.S. financial stability, outlines OFR research that supports the assessment, and describes the OFR’s progress in meeting our mission. The report also evaluates policy initiatives for promoting financial stability and describes our work to improve the quality and scope of financial data and analysis. The OFR, financial regulators, and other policy institutions have made significant progress since our last annual report in assessing the buildup of vulnerabilities in the financial system, improving the quality and scope of financial data, and developing and implementing new policy tools that — although largely untested — are designed to make the financial system stronger and more transparent. However, several threats to financial stability have risen over the past year. This report highlights three specific risks. First, we see material evidence of excessive risk-taking during the extended period of low interest rates and low volatility. Second, markets have become more brittle because liquidity may be less available in a downturn and the risk of asset fire sales and runs in short-term wholesale funding markets remains unresolved. Third, we are concerned that financial activity is migrating toward areas of the financial system where threats are more difficult to assess because information is not available, and that activity may be consequential. Gaps in analysis, data, and policy also persist, despite progress in narrowing them. If left unaddressed, these threats could adversely affect financial stability.

This annual report describes our:
• Financial Stability Monitor and other tools to help policymakers and market participants understand and assess vulnerabilities and potential threats to financial stability;
• analysis of the macroprudential policy toolkit regulators are developing, including key areas of progress and remaining issues, such as market liquidity risks, risks of runs and asset fire sales, and the need to address cyclical market excesses;
• work to make data standards in general and the Legal Entity Identifier in particular widespread in regulatory reporting and market practice, and OFR collaboration with the Commodity Futures Trading Commission (CFTC) to promote data standards across derivatives markets; and
• efforts to address data gaps, such as the OFR’s new collaboration with the Federal Reserve to gather data about repurchase agreement (repo) markets.”