Dodd-Frank requires that the Office of Financial Research (“OFR”) annually report the state of the U.S. financial system, the status efforts of the OFR, and key findings from research regarding a robust analysis of the financial system.
The report found that threats to financial stability have “generally abated” since the previous 2012 report. However, it also found that the greatest threats that remain are the vulnerabilities in markets for securities financing transactions and credit, increases in interest rates, and uncertainty about the U.S. fiscal policy outlook. The OFR stated that there could be mispriced credit risk amid weakening standards for loan underwriting, which is reflected in looser covenants and bank lending conditions.
The report also noted that improvement must be made in the scope of data available for financial stability monitoring. It announced a new comprehensive tool to track threats, and the interplay among aggregated activities, called the Financial Stability Monitor. The monitor addresses five components of financial stability risk: macroeconomic, market, credit, funding and liquidity, and contagion.
Finally, the report outlined the top analytical and data priorities for 2014, which included:
- further developing the capacity of OFR tools to identify, assess and monitor threats to financial stability;
- improving and implementing the framework to evaluate stress tests and the macroprudential toolkit;
- following up on work on asset management to analyze new data collected from private fund advisers by the SEC;
- creating reference databases for financial entities and financial instruments;
- filling the data gaps identified for separate accounts and securities lending;
- promoting the incorporation of the LEI in market practice and regulations; and
- assisting and advising market regulators and OFR global counterparts in improving the standards needed to collect and share data measuring derivatives transactions and positions collected in trade and swap data repositories.
Lofchie Comment: Before the OFR imposes massive new data collection costs on the economy, it ought to revisit (or perhaps the GAO should assess) the burdens of its current information collection efforts and whether it is actually collecting data in useful forms.