Report sees monetary policy, inflation, cyberattacks as risk drivers

(Nov. 19, 2021) Monetary policy, inflation, and cyberattacks could heighten risk to the financial system, according to the annual report issued this week by the Treasury office tasked with conducting financial research.

The report also raised concerns about risks related to low bank profitability, commercial real estate performance and hedge fund strategies.

According to the Office of Financial Research (OFR) annual report to Congress, the economy has rebounded and volatility caused by the pandemic has subsided. However, the other challenges to the financial system mean the overall risks to the financial system remain in the medium range.

According to the OFR press release, the report, highlights three key research findings related to financial system vulnerabilities:

  • Macroeconomic uncertainty remains about the continuing impact of the coronavirus and the “pattern of inflation.”
  • Cyber risk has grown from mounting economic costs inflicted by cyberattacks and the increasing expense required to guard against them.
  • The potential risk from climate change – which has introduced vulnerabilities – is still difficult to identify, assess and forecast for the financial system.

About “sector-specific” risk, the report notes that risks tied to low rates on banks’ profits should be closely monitored. “Higher interest rates on longer-term investments, such as 10-year Treasuries, did not increase net interest margins,” OFR said. “While further research is necessary, possible explanations include lower loan demand and less willingness on the part of banks to lend at longer maturities or take on more deposits.”


Office of Financial Research Finds COVID Headwinds Eased, But Other Financial System Vulnerabilities Are Taking Shape