On July 25, 2016, the US Office of Financial Research issued its biannual update of the risks to US financial stability. The report finds that, overall, risks to US financial stability remain in the medium range but have been pushed higher by the UK vote to exit the EU. The OFR notes that, “[t]he result surprised financial markets and was a negative shock to investor confidence. It introduces months or years of uncertainty about the rules governing the UK’s investment, financing, and trade relations . . . . Because the UK economy and especially the UK financial system are highly connected with the rest of Europe and the United States, severe adverse outcomes in the UK could pose a risk to US financial stability.” The OFR report observes that the key vulnerabilities addressed in the OFR’s 2015 Financial Stability Report issued last December also persist, adding that: (i) credit risks in US nonfinancial businesses and in some major foreign markets are still elevated; (ii) long-term US interest rates have declined to ultra-low levels, which can motivate excessive risk-taking and borrowing, and many key foreign interest rates are now negative, with uncertain consequences for financial stability; and (iii) uneven resilience persists in the US financial system.
The OFR Financial Stability Monitor is available at: https://financialresearch.gov/financial-stabilitymonitor/files/FSM_072516_FINAL.pdf.