OFR_2016_Financial-Stability-Report

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Figure 31. U.S. Nonfinancial Corporate Debt Growth by Type (annual percentage change) Corporate bonds and loans continue to expand at a rapid pace 12 8 4 0 -4 -8 -12 -16 -20 Debt securities Loans (including mortgages) -24 2010 2011 2012 2013 2014 2015 2016 Note: Data as of June 30, 2016. Does not include trade debt. Sources: Haver Analytics, OFR analysis and may lead to lower recovery rates for creditors in the event of default. Firm leverage as measured by the ratio of debt-toearnings is historically high and rising. This measure of leverage is driven by debt growth and by the sharp decline in energy firms’ earnings since oil prices collapsed. However, the high leverage in this cycle has been broadbased, not just at energy firms (see Figures 32 and 33). It has included investment-grade and speculative-grade bonds and loans. For the median speculative-grade firm, the ratio since 2013 has been above its level in previous cycles, both on a gross basis and net of the borrowing firm’s cash balances. For the median investment-grade firm, the gross ratio also is at a multi-decade high. The net ratio is elevated but below 2001-03 levels because many investment-grade firms have large cash balances. The ratio of debt to assets is another measure of firm leverage but is not influenced by earnings volatility. This ratio is elevated for speculative-grade firms, Figure 32. Speculative-Grade U.S. Energy and Ex-Energy Debt-to-EBITDA (ratios) Speculative-grade debt-to-earnings is at record highs, even for nonenergy firms Figure 33. Investment-Grade U.S. Energy and Ex-Energy Debt-to-EBITDA (ratios) Investment-grade debt-to-earnings also high and rising for nonenergy firms 6 5 Energy median gross leverage Ex-energy median gross leverage 6 5 Energy median gross leverage Ex-energy median gross leverage 4 4 3 3 2 2 1 1995 1999 2003 2007 2011 2015 Note: Data as of June 30, 2016; financials excluded. EBITDA is an indicator of a company’s operating performance; it stands for earnings before interest, taxes, depreciation, and amortization. Speculative grade includes all firms rated BB+ and below, including firms not rated. Sources: S & P Capital IQ, OFR analysis 1 1995 2000 2005 2010 2015 Note: Data as of June 30, 2016; financials excluded. EBITDA is an indicator of a company’s operating performance; it stands for earnings before interest, taxes, depreciation, and amortization. Investment grade includes all firms rated BBB- or higher. Sources: S & P Capital IQ, OFR analysis 32 2016 | OFR Financial Stability Report
ut less so for investment-grade firms. For the median speculative-grade firm, the ratio reached multi-decade highs in 2013 and has climbed steadily since (see Figure 34). For the median investment-grade firm, the ratio is above financial crisis highs, but climbing more slowly and still below levels of the late 1990s (see Figure 35). Potential Related Risks: Elevated U.S. Equity Prices and Commercial Real Estate Prices The financial stability risks from a sharp increase in defaults on nonfinancial corporate debt could be made worse by declines in U.S. equity prices and commercial real estate prices. Both have risen rapidly in recent years and appear elevated by some metrics (for more on equities, see Chapter 1; for more on real estate, see Commercial Real Estate Prices Have Risen Rapidly). If corporate defaults rise, equity prices would be expected to decline, as both the debt and equity of defaulting firms are exposed to losses. Commercial real estate values might also decline, as current property values reflect the level of business activity sustained by ample credit, a condition that would change in a downturn. In the last three decades, corrections in corporate debt, equity prices, and commercial real estate prices have often coincided. Each spike in corporate default rates since 1980 has coincided with a sell-off in U.S. equity markets. Each correction in commercial real estate prices has coincided with a surge in default rates on corporate bonds and commercial real estate debt, and a sell-off in equity prices (see Figure 36). Continued low interest rates likely have strengthened the links among these markets. Low long-term interest rates have increased incentives for businesses to take on debt and for investors to pay more for higher-yielding assets such as equities and commercial real estate. Economic theory suggests that correlations among asset prices should be greater when real interest rates are low. Asset prices reflect the net present value of Figure 34. Speculative-Grade U.S. Nonfinancial Corporate Debt-to-Assets (percent) Speculative-grade debt-to-asset ratios are also at record highs Figure 35. Investment-Grade U.S. Nonfinancial Corporate Debt-to-Assets (percent) Investment-grade debt-to-asset ratios are higher than previous cycle but below historic peak 50 50 40 40 30 30 20 Median gross ratio Median net ratio 20 Median gross ratio Median net ratio 10 1995 2000 2005 2010 2015 Note: Data as of June 30, 2016. Excludes unrated firms. Net ratio is the ratio of net debt to earnings before interest, taxes, depreciation, and amortization (EBITDA), where net debt is total debt less cash and short-term investments. Sources: S & P Capital IQ, OFR analysis 10 1995 2000 2005 2010 2015 Note: Data as of June 30, 2016. Net ratio is the ratio of net debt to earnings before interest, taxes, depreciation, and amortization (EBITDA), where net debt is total debt less cash and short-term investments. Sources: S & P Capital IQ, OFR analysis Key Threats to Financial Stability 33
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 and 24: Figure 17. Size, Liquidity, and Con
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 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
Page 74 and 75: 2.6 Systemic Footprints of Largest
Page 76 and 77: Interest Rates and Derivatives Expo
Page 78 and 79: Figure 63. Components of U.S. G-SIB
Page 80 and 81: Figure 66. Five-Year Changes to G-S
Page 82 and 83: 2.7 Deficiencies in Data and Data M
Page 84 and 85: Figure 68. Examples of Key Post-Cri
Page 86 and 87: Broader Adoption of Data Standards
Page 88 and 89:
Better Regulatory Sharing Needed Th
Page 90 and 91:
The U.S. Census Bureau surveys publ
Page 92 and 93:
The group will also consider how th
Page 94 and 95:
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
Page 101 and 102:
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
Page 109 and 110:
Stress Test Supplemental Leverage R
Page 111 and 112:
Bibliography Adrian, Tobias, and Ma
Page 113 and 114:
Board of Governors of the Federal R
Page 115 and 116:
www.richmondfed.org/~/media/richmon
Page 117 and 118:
Her Majesty’s Government and Mars
Page 119 and 120:
Paul, Ruma. “Bangladesh hopes to
Page 121:
Zetter, Kim. “That Insane, 18M Ba
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