Government report finds stability of US financial system at risk

We’re not trying to be alarmist, but here’s some real talk: A giant tangle of risks are coming together to threaten the stability of the financial system.

Not that another 2007/2008-style financial meltdown is definitely imminent, but a government report released last week found that risks to the stability of the financial system increased in 2022.

The Office of Financial Research (OFR) found in its 2022 Annual Report to Congress that slow economic growth, interest rate hikes, inflation, the war in Ukraine, volatility in the financial markets, and corporate credit risk combined to elevate stress on the financial system.

It’s not just the usual suspects, either; the report found a series of emerging risks threatening the financial system. The OFR cites the potential for a successful major cyberattack, especially a state-sponsored attack, that could wreak havoc on both organizations and the financial system.

While it hasn’t happened yet, cryptocurrency’s 2022 face plant could also leave a massive hole in the financial system, according to OFR. And there could also be a catastrophic climate event that causes severe physical and financial damage.

“The OFR’s 2022 Annual Report to Congress examined the headwinds posed by the macroeconomic and geopolitical environment and the risks stemming from market volatility and evolving technology—all of which could threaten our economic resilience,” said James Martin, the OFR’s deputy director of operations, performing the duties of the director in a release.

The stress on the financial system really took off with the launch of the war in Ukraine in February 2022, according to the OFR. The war spiked energy prices, fueling inflation, and disrupted supply chains around the world, which led to further price increases.

A tight labor market, slow overall economic growth, and rising interest rates threatened corporate balance sheets, which, in turn, increased the risk to financial institutions and investors, according to the OFR. However, the OFR also found that the banking sector was relatively healthy and maintaining capital ratios above legally required minimums.

The OFR was created by the Dodd-Frank Act in the aftermath of the 2008 financial crisis and is legally mandated to produce an annual report for Congress on threats to the financial system.—DA