Overall risks to financial stability remain moderate, similar to a year ago, the US Office of Financial Research said in releasing its 2017 Annual Report to Congress and 2017 Financial Stability Report.
New vulnerabilities have emerged over the past year, according to the reports. Market risk — the potential for sudden changes in asset prices that could disrupt economic growth — remains elevated, particularly in the stock markets and bond markets. Cybersecurity vulnerabilities are also a concern. Meanwhile, financial-system resilience has improved.
The reports highlight three key threats to financial stability:
- Vulnerabilities to cybersecurity incidents: a large-scale cyberattack or other cybersecurity incident could disrupt the operations of one or more financial companies and markets and spread through financial networks and operational connections to the entire system, threatening financial stability and the broader economy.
- Obstacles to resolving failing systemically important financial institutions: there are two paths for the resolution of a failing systemically important financial institution that is not an insured depository institution. Both paths have shortcomings for handling the failure of the largest and most complex bank holding companies, known as global systemically important banks.
- Structural changes in markets and industry: three aspects pose threats: (1) lack of substitutability, or the inability to replace essential services if a provider fails or drops that line of business, (2) fragmentation of trading activities through multiple channels and products, and (3) the chance that the transition to a new reference rate to replace the London Interbank Offered Rate, or LIBOR, could be difficult.