The Office of Financial Research (OFR) submitted its 2020 Annual Report to Congress today, which concluded that unexpected turbulence from the COVID-19 pandemic elevated risks across financial markets and revealed limitations in conventional market monitoring.
“The OFR’s 2020 Annual Report found that the reality of COVID-19 disruptions were worse than the most severe stress tests projected,” said Dino Falaschetti, Director of the Office of Financial Research. “As COVID-related disruptions evolve, our Office’s data and research products will continue to provide timely indicators of financial stress for the Financial Stability Oversight Council (FSOC) and its members.”
The Dodd-Frank Wall Street Reform and Consumer Protection Act requires the OFR to analyze threats to the financial stability of the United States each year and provide Congress with its key findings. This year’s report finds the COVID-19 pandemic and related economic, financial, and government policy reactions affected all OFR monitored risk categories and greatly heightened overall uncertainty. The report also discusses how traditional market monitoring can miss vulnerabilities that are fundamentally difficult to anticipate.
In the 2020 Annual Report to Congress, the OFR highlights these key research findings:
- Threats to financial stability can arise from vulnerabilities exposed by unexpected events. The effects of the COVID-19 pandemic were global and had devastating health, economic, and financial effects. The pandemic and efforts to contain the health threat drastically curtailed economic activity and severely stressed financial markets. While the economy and financial markets quickly made partial but substantial recoveries, this required extraordinary government and monetary policy support, which could risk distorting competitive markets if maintained too long.
- Risks to financial stability are elevated. Potential risks to financial stability remain elevated in most financial risk categories. These areas of risk include macroeconomic, credit, market, liquidity and funding, leverage, insolvency and potential contagion, cybersecurity, and others.
- Information markets for systemic risk may improve market assessments. The pandemic illustrated the difficulty for conventional financial stability monitoring to identify true vulnerabilities. About 30 prominent financial stability assessments in 2019 attempted to size up and anticipate systemic risk, yet not one discussed the potential for a new pandemic to threaten financial stability. Developing an information market for systemic risk management may help reveal costly or otherwise hidden information that can play a fundamental role in creating systemic risks.
The report also discusses many significant downside risks to financial stability that persist. Economic and financial decisions, including consumer spending and business investment, face pervasive uncertainty about the course of the pandemic and its consequences. The possibility remains of heavy ongoing credit losses and failures.
“When and where financial stability is compromised, economic opportunities go missing throughout our society,” Falaschetti said.
The full report is available here.