OFR Issues Paper on the Financial System Vulnerabilities Monitor
OFR published a paper describing the purpose, construction, interpretation, and use of its Financial System Vulnerabilities Monitor. The monitor, a heat map of 58 quantitative indicators, is a starting point for assessing vulnerabilities in the U.S. financial system. OFR launched the monitor in 2017 to help fulfill its mandate to measure and monitor risks to U.S. financial stability.
The paper is designed to provide early warning signals of potential financial system vulnerabilities that merit investigation. It begins by describing the motivation for creating a heat map and comparing this heatmap to other financial stability heat maps. It then describes how the heat map is constructed, explaining how indicators are selected and scored. The paper explains how the indicator scores are combined to create aggregate scores for each of the six risk categories; the six risk categories are macroeconomic risk, market risk, credit risk, solvency/leverage risk, funding/liquidity risk, and contagion risk. Next, the paper describes the performance of the heat map and describes some limitations of the Monitor. That it cannot cover all potential vulnerabilities is one limitation of the monitor. Another limitation is that, as a quantitative tool, it does not incorporate qualitative information that can be essential to financial stability analysis. Finally, the paper describes how the monitor should be interpreted and used.
Related Link: Paper on Vulnerabilities Monitor
Keywords: Americas, US, Banking, Insurance, Securities, Financial Stability, Financial System, Vulnerability Monitor, OFR
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