Following the publication of its inaugural Supervision and Regulation Report, the Federal Reserve has now published its first Financial Stability Report. This new report summarizes the agency’s framework for monitoring and assessing the stability of the U.S. financial system. The framework focuses on vulnerabilities, or features of the financial system that can amplify sudden changes to financial and economic conditions, referred to as triggers or shocks. At present, the Federal Reserve's overall assessment is that the U.S. financial system is far more resilient than it was before the crisis due in large part to post-crisis reforms, including those in the areas of capital and liquidity, stress-testing, resolution and recovery planning, money market funds, and derivatives.
The framework covers four broad categories of vulnerabilities. Federal Reserve Chair Jerome Powell stated there is not yet any generally accepted standard for assessing the level at which these vulnerabilities begin to pose serious stability risks so cases in which the vulnerabilities “rise well beyond historical norms” are highlighted in the report. He added that, in his opinion, “while risks are above normal in some areas and below normal in others, overall financial stability vulnerabilities are at a moderate level.”
The Federal Reserve notes that it is working to develop resiliency expectations and measures for risks associated with cybersecurity and crypto-assets.
In addition to the four vulnerabilities, the monitoring framework includes an assessment of developments in domestic and international markets that the Federal Reserve believes could serve as triggers to distress in the U.S. financial system. The current report outlines potential near-term risks related to the Brexit negotiations, U.S. trade negotiations, emerging market economies, geopolitical uncertainties, and rising interest rates.