The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 established the Office of Financial Research (OFR) to support the Financial Stability Oversight Council, the Council’s member organizations, and the public.
The OFR is charged with promoting financial stability by looking across the financial system to measure and analyze risks, perform essential research, and collect and standardize financial data.
The Financial Systems Vulnerabilities Monitor is an indexed-based monitoring tool that monitors (6) categories of risk:
Macroeconomic – Contains measures of macroeconomic risks to the financial system such as inflation, excessive government borrowing, and excessive reliance on cross-border financing.
Market – Contains measures of market risk such as excessive valuations, low risk premiums, and excesses in financial risk appetite and risk-taking.
Credit – Contains measures of credit risk in the real economy — the risk of widespread credit defaults or delinquencies by households and nonfinancial businesses.
Solvency and Leverage – Contains measures of excessive leverage at financial institutions or other risks to their solvency.
Funding and Liquidity – Contains measures of risks in short-term funding arrangements and liquidity for financial markets and financial institutions.
Contagion – Contains measures of potential vulnerabilities from stress transmission across financial institutions and markets, within concentrated financial sectors, and from other countries to the U.S. financial system.
The latest indexes released (3rd quarter of 2017) indicates that Market risk (described above) is high. This indicator is based on U.S. equity valuations, U.S. Treasury term premium, U.S. corporate bond spread, U.S. mortgage-backed security spread, U.S. house price/rent ratio, U.S. house price/income ratio, U.S. CRE capitalization spread, U.S. bond investor duration, and U.S. equity market volatility.
Although not currently rated as high, the Monitor also shows that Credit Risk and Funding and Liquidity Risk have been trending higher since 2013. The graph below shows the historical trends in the indexes. A snapshot of the FSVM can be accessed: https://www.financialresearch.gov/financial-vulnerabilities/#/.
FINANCIAL SYSTEMS VULNERABILITIES MONITOR TRENDS
Source: Office of Financial Research, available at https://www.financialresearch.gov/financial-vulnerabilities/#/historical-view.