OFR_2016_Financial-Stability-Report

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Contagion Risks Remain, but Are Difficult to Measure Contagion risk is the risk that financial stress spreads across markets, institutions, or other entities. A key focus of our research has been to find new ways to measure and assess risk. The potential contagion risks posed by a troubled bank, insurer, or central counterparty (CCP) are discussed in Chapter 2. Figures 18 and 19 show three contagion risk metrics for leading financial firms. The three metrics are the distress insurance premium, SRISK, and conditional Value-at-Risk. Each metric evaluates different aspects of the contribution an individual firm makes to financial stability risk. (These metrics are described further in Section 2.5.) All three are market based, and they tend to be coincident rather than predictive measures. In other words, they can help compare the risks posed by individual firms, but they are less reliable at identifying vulnerabilities in advance of a stress — they tend to rise only when risks are realized. Indeed, they may indicate low risks precisely when risks are building. For example, Figure 18 shows the three metrics were negative for the six largest bank holding companies during the runup to the financial crisis, then jumped in 2008. Figure 18 also shows that these measures generally register lower risk today than during the financial crisis. Using the same three risk measures, Figure 19 compares eight leading U.S. financial firms in the first quarter of 2016, including four banks and four insurance companies. In this figure, larger triangles signal greater risk. The figure shows that banks dominate across all three measures. However, the insurance companies also rank high on some measures. Potential financial stability risks from large U.S. life insurers and banks are discussed in Sections 2.5 and 2.6. An earlier OFR working paper proposed an index that ranks a different aspect of risk — banks’ financial connectivity. The index measures the fraction of a bank’s liabilities held by other financial institutions. All else being equal, the default of a bank with a higher connectivity rank would have a greater impact as its shortfall would spill over to other connected financial institutions. By this measure, Bank of New York Mellon is the most connected bank. Since 2013, most banks have become less connected; Goldman Sachs and Wells Fargo have become more connected; and Morgan Stanley has become much less connected (see Figure 20) (see Glasserman and Young, 2013). Figure 18. Measures of Joint Distress for the Six Largest U.S. Bank Holding Companies (Z-scores) Joint distress metrics jumped in recent equity sell-offs, then quickly reversed 4 3 2 1 0 -1 Conditional Value-at-Risk Distress insurance premium SRISK -2 2006 2008 2010 2012 2014 2016 Note: Equal-weighted average. The six large bank holding companies are Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Wells Fargo. Z-score represents the distance from the average, expressed in standard deviations. Sources: Bloomberg L.P., Markit Group Ltd., the Volatility Laboratory of the NYU Stern Volatility Institute (https://vlab.stern.nyu.edu), OFR analysis 18 2016 | OFR Financial Stability Report
Figure 19. Top Systemic Risk Scores DIP 1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 JPMorgan Chase Bank of America Citigroup Wells Fargo MetLife Prudential American International Group Berkshire Hathaway SRISK CoVaR Note: Data as of June 30, 2016. Distress insurance premium (DIP), conditional Value-at- Risk (CoVaR), and SRISK are measures of systemic risk. For purposes of comparison, the normalized systemic risk measures are calculated as fractions of the highest score for each metric at that time. Sources: Bloomberg Finance L.P., Markit Group Ltd., the Volatility Laboratory of the NYU Stern Volatility Institute (https://vlab.stern.nyu.edu), OFR analysis Figure 20. OFR Financial Connectivity Index (percent) Goldman Sachs and Wells Fargo have grown more connected, while Morgan Stanley and others have grown less Bank of New York Mellon Citigroup State Street Goldman Sachs JPMorgan Chase 2013 2014 2015 Bank of America Morgan Stanley Wells Fargo 0 5 10 15 20 25 Note: G-SIB stands for global systemically important bank. The OFR Financial Connectivity Index measures the fraction of a bank’s liabilities held by other financial institutions. Sources: Federal Reserve Form Y-15, OFR analysis Financial Stability Assessment 19
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 and 22: An earlier OFR paper proposed an ac
Page 23: Figure 17. Size, Liquidity, and Con
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
Page 72 and 73: 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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