April 25, 2013, 5:10 PM
The 7 Biggest Risks to Financial Stability
The Financial Stability Oversight Council, which features leaders of the Treasury, Fed and other regulators, highlighted a number of potential risks for the financial system as it approved its third annual report.
These are the seven themes around which the council organized its recommendations and findings:
1) The vulnerability to runs in wholesale funding markets that can lead to destabilizing fire sales;
2) The housing finance system that continues to rely heavily on government and agency guarantees, while private mortgage activity remains muted;
3) Operational risks that can cause major disruptions to the financial system;
4) The reliance on reference interest rates, which recent investigations have demonstrated were manipulated, particularly in the case of the London Interbank Offered Rate (Libor);
5) The need for financial institutions and market participants to be resilient to interest rate risk;
6) Long-term fiscal imbalances, as the absence of bipartisan agreement on U.S. fiscal adjustment has raised questions about whether long-term fiscal problems may be resolved smoothly; and
7) The United States’ sensitivity to possible adverse developments in foreign economies.
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