“The Office of Financial Research (OFR) unveiled its first annual Financial Stability Report today, saying threats to the stability of the U.S. financial system have edged higher over the past year… In the Financial Stability Report, the OFR assessed vulnerabilities and resilience in the financial system, highlighting these areas of concern:

1. Credit risks are elevated and rising for U.S. nonfinancial businesses and in many emerging markets. In the U.S., nonfinancial business debt is growing rapidly, boosting leverage; in relation to gross domestic product, it is at a historically elevated level.
2. Persistently low interest rates and suppressed risk premiums in U.S. fixed-income markets contribute to excessive risk-taking and borrowing that could pose financial stability risks.
3. The resilience of the financial system has improved significantly since the financial crisis, but it is uneven. Vulnerabilities persist and some new ones have emerged. Financial activity and risks have migrated outside the regulatory perimeter, market liquidity appears to have become more fragile in recent years, and interconnections among financial firms and markets are evolving in ways not fully understood.
4. Central clearing of derivatives has benefits for risk management, but concentrates risk in central counterparties, or CCPs, and may transmit or amplify stress in new ways.
5. Derivatives data reported to registered swap data repositories still have significant room for improvement. Further development of the framework to standardize and validate data is essential to improve data quality.
6. Enhanced capital and leverage requirements have made banks more resilient, but they also can have unintended consequences. OFR analysis shows areas where these requirements may increase incentives for risk-taking by large, complex banking firms.”