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Brexit increased risks to US financial stability, OFR finds

The U.K. vote to leave the European Union increased risks to U.S.financial stability, but overall risk remains in the medium range, a mid-yearreview from the Office of Financial Research found.

"Because the U.K. economy and especially the U.K.financial system are highly connected with the rest of Europe and with theUnited States, severe adverse outcomes in the U.K. and spillovers to Europecould pose a risk to U.S. financial stability," OFR Director RichardBerner told reporters on July 25.

The uncertainty around Brexit could remain for months oreven years, Berner cautioned.  

OFR staff found that shocks from the U.K. and the EU couldimpact the U.S. through trade, financial exposures and global investorconfidence. The U.S. has $2.1 trillion of financial claims on U.K. and EUentities, representing 11.3% of U.S. GDP, the report states.

The OFR also found that vulnerabilities identified in its December2015 report remain, including credit risks in nonfinancial businesses,long-term low interest rates and uneven resilience, Berner said. Disruptions innonfinancial business credit could cause losses in the commercial real estatesector, the report found.

Financial regulators have noted that at banksremains a concern, and the OFR continues to monitor CRE lending, Berner said. WhileCRE exposures look benign on the surface, he said traditional valuation metricssuch as cap rates are low.

"The fact that valuations are getting extended and thefact that there is a lot of development, a lot of lending going on, that'ssomething that banking regulators are watching and we also are continuing towatch closely," he said.

The Dodd-Frank Act established the OFR to promote financialstability. Twice a year the agency publishes a report on risks to U.S.financial stability.