While the financial system is in better shape than prior to the 2008-09 financial crisis, "that relatively benign backdrop is no cause for complacency," says Richard Berner, director of the Treasury Department's Office of Financial Research.
"Rather, there is good reason to watch financial developments closely," he writes in a letter accompanying the
Office's annual report.
"Several threats to financial stability have risen over the past year," the report states. "First, we see material evidence of excessive risk-taking during the extended period of low interest rates and low volatility."
Many rates stand at or near record lows, leading investors and security issuers into risky asset classes such as high-yield bonds and asset-backed securities.
"Second, markets have become more brittle because liquidity may be less available in a downturn and the risk of asset fire sales and runs in short-term wholesale funding markets remains unresolved," the report says.
New regulations restricting bank trading activity have dampened trading volume in some financial markets, experts say.
"Third, we are concerned that financial activity is migrating toward areas of the financial system where threats are more difficult to assess because information is not available, and that activity may be consequential," the report states.
"If left unaddressed, these threats could adversely affect financial stability."
Meanwhile, private equity star J. Christopher Flowers, CEO of J.C. Flowers, warned in July that the bevy of regulations since the financial crisis has weakened the banking sector to the point that another meltdown is inevitable.
"All the stuff that has happened, and all the rules we've introduced have depressed profitability. And that is a real vulnerability," he told the
Financial Times. "Nobody is going to invest in an industry with returns of 5 percent."
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