OFR_2016_Financial-Stability-Report

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Figure 15. Qualifying Hedge Fund Leverage by Fund Gross Assets (ratio) The largest hedge funds use more leverage 25 20 15 10 5 Funds Ranked 1-10 Funds Ranked 11-50 Funds Ranked 51+ 0 2013 2014 2015 2016 Note: Fund size ranked by gross assets. Leverage is calculated as the ratio of gross assets to net assets. The average of fund leverage ratios are shown for each group. Sources: SEC Form PF, OFR analysis Figure 16. Runnable Liabilities in the U.S. Financial System (percent of GDP) Runnable liabilities declined during the crisis and have not returned to precrisis levels 100 80 60 40 20 0 2002 2004 2006 2008 2010 2012 2014 Note: Data as of Dec. 31, 2015. Runnable liabilities include repurchase agreements (repos), securities lending, commercial paper, money market funds, and uninsured bank deposits. Repos reflect “Federal Funds & Security Repurchase Agreements” from the Financial Accounts of the United States, minus the repo liabilities of the Federal Reserve System and total Federal Funds purchased reported by bank holding companies on Form Y-9C. Uninsured deposits reflect total “Domestic Office Deposits” minus “Estimated Insured Deposits” from the Federal Deposit Insurance Corporation Statistics on Banking. GDP stands for gross domestic product. Sources: Federal Reserve Board of Governors, Financial Stability Oversight Council, Haver Analytics, OFR analysis reflect synthetic leverage through the use of derivatives. Life insurers’ reported leverage has been stable in recent years. Like hedge funds, their leverage including securities lending, derivatives, and other off-balance-sheet transactions would be higher (see Fitch, 2015). Funding and Market Liquidity Risks Remain In our assessment, funding and liquidity risks persist in the U.S. financial system. Specifically, in a number of areas discussed below we remain concerned about run risk — the risk that investors will lose confidence and pull their funding from a firm or market — and asset fire sale risk — the risk that market participants won’t be able to sell securities without creating a downward price spiral. These risks are structural and slow to change. Meanwhile, our heat map shows some incremental improvement in average liquidity conditions since our 2015 Financial Stability Report. In the market liquidity subcategory, average trading volume for major U.S. asset classes edged higher and some trading costs declined. In the intermediation category, the securities inventories of U.S. primary dealers increased. Figure 16 shows “runnable” liabilities, which are payable on demand and not backed by the government. These liabilities include repurchase agreements, securities loans, commercial paper, money market funds, and uninsured bank deposits. They were the object of runs and fire sales during the crisis, but have declined since then. The decline is partly due to post-crisis reforms that sought to reduce run risk in these markets (see Monitoring Shadow Banking Risks). (The increase in 2013 reflects the reclassification of uninsured bank deposits when temporary unlimited deposit insurance under the Dodd-Frank Act ended.) Liquidity transformation can create a vulnerability for some open-ended mutual funds in the form of redemption risk. The assets under management in this sector were close to $16 trillion in June 2016, nearly doubled since the end of 2008. Potential risks are most acute for funds that hold limited cash buffers and invest in less-liquid asset classes, such as high-yield bonds, 16 2016 | OFR Financial Stability Report
Figure 17. Size, Liquidity, and Concentration of U.S. Open-End Funds in Select Asset Class Categories (percent and $ billions) Low cash buffers and high fund-manager concentration may pose asset firesale risk (size of circle indicates assets under management) Concentration 80 40 Corporate bond funds $84 U.S. large cap equity funds $4,041 Bank loan funds $91 High-yield bond funds $258 Inflation-protected bond funds $93 Municipal bond funds $657 World & emerging market bond funds $257 Commodities funds $24 Alternative funds $173 0 0 10 20 30 40 50 60 Liquidity Note: Data as of July 31, 2016. Liquidity is defined as the average percentage of cash and cash equivalents for all funds in each category. Concentration is defined as the top three managers’ share of category assets, in percent. Sources: Morningstar, OFR analysis bank loans, and municipal bonds. These funds may be challenged to meet investor redemptions in stressed markets. The concentration of fund managers in some asset classes also may make these markets more vulnerable to stress. For example, just three asset management firms manage nearly 40 percent of municipal bond and bank loan funds (see Figure 17). The Securities and Exchange Commission (SEC) finalized rules in October 2016 that will require mutual funds and exchange-traded funds that redeem shares in cash to hold more liquid assets as a buffer against large redemptions. Although market liquidity has generally been sufficient during normal market conditions, it has fallen sharply during some moderate stress events (see OFR, 2015). Steps are underway to improve data to monitor liquidity risk. The U.S. Treasury recently sought public comment on the changing structure of the U.S. Treasury market. Also, the Financial Industry Regulatory Authority (FINRA) recently announced it will expand the Trade Reporting and Compliance Engine (TRACE) to include most secondary market transactions in marketable U.S. Treasuries (see FINRA, 2016b). Financial Stability Assessment 17
Page 1: OFFICE OF FINANCIAL RESEARCH 2016 F
Page 5: Contents Executive Summary ........
Page 8 and 9: Chapter 2 provides deeper analysis
Page 10 and 11: of sharp decreases in U.S. equity a
Page 13 and 14: 1 Financial Stability Assessment Ov
Page 15 and 16: Figure 3. Real GDP Growth (year-ove
Page 17 and 18: Figure 8. Ten-Year U.S. Treasury Yi
Page 19 and 20: Monitoring Shadow Banking Risks The
Page 21: An earlier OFR paper proposed an ac
Page 25: Figure 19. Top Systemic Risk Scores
Page 28 and 29: The analysis pointed to seven key t
Page 30 and 31: could. In early 2016, investor conc
Page 32 and 33: earnings or share issuance. But red
Page 34 and 35: Fund Monitor, the OFR assessed expo
Page 36 and 37: 2.2 Risks in U.S. Nonfinancial Corp
Page 38 and 39: Figure 31. U.S. Nonfinancial Corpor
Page 40 and 41: Figure 36. U.S. Corporate Bond Defa
Page 42 and 43: Commercial Real Estate Prices Have
Page 44 and 45: 2.3 Cybersecurity Incidents Affecti
Page 46 and 47: Hackers Breach Bangladesh’s Centr
Page 48 and 49: Figure 42. Banks that Include an Op
Page 50 and 51: The industry is working with the pu
Page 52 and 53: Figure 46. U.S. Financial Regulator
Page 54 and 55: 48 2016 | OFR Financial Stability R
Page 56 and 57: eleased the results of an unprecede
Page 58 and 59: Figure 49. CCP Default Waterfall ($
Page 60 and 61: Figure 50: CCP Ratios and Amounts f
Page 62 and 63: cause more-prudent CCPs to appear m
Page 64 and 65: 2.5 Pressure on U.S. Life Insurance
Page 66 and 67: The experience of Japan’s life in
Page 68 and 69: 2015). These benefits are effective
Page 70 and 71: Figure 55. Life Insurance Securitie
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Drivers of Insurers’ Systemic Ris
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2.6 Systemic Footprints of Largest
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Interest Rates and Derivatives Expo
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Figure 63. Components of U.S. G-SIB
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Figure 66. Five-Year Changes to G-S
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2.7 Deficiencies in Data and Data M
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Figure 68. Examples of Key Post-Cri
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Broader Adoption of Data Standards
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Better Regulatory Sharing Needed Th
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The U.S. Census Bureau surveys publ
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The group will also consider how th
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and contracts would be crucial. The
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Figure 72. Scaling of Data Validati
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Glossary 10-Year, 10-Year Forward R
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Conditional Value-at-Risk (CoVaR) C
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Fire Sale Form N-MFP Form PF Fundin
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Liquidity Risk Liquidity Transforma
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Pension Funded Ratio Pension Risk T
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Stress Test Supplemental Leverage R
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Bibliography Adrian, Tobias, and Ma
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Board of Governors of the Federal R
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www.richmondfed.org/~/media/richmon
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Her Majesty’s Government and Mars
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Paul, Ruma. “Bangladesh hopes to
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Zetter, Kim. “That Insane, 18M Ba
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