The
Earlier versions of the budget bill signed on July 4 would have eliminated the OFR entirely and crippled the
The OFR's mission is analytical, not regulatory, as my former colleagues and I wrote in
And the timing could not be worse. Congress established the OFR and the Council after regulators failed to recognize the systemic risks building in derivatives, securitization and short-term funding markets in the years before the financial crisis.
Today, the financial system is again undergoing profound changes, especially in two booming markets: private credit and
Private credit, in which asset managers lend directly to businesses and other borrowers, is already a $2 trillion market, and it's growing 20% per year. Major players are promising to expand from the original niche in corporate lending to asset-backed loans, infrastructure, consumers and even mortgages. Some predict the market could reach $30 to $40 trillion in the near future.
In theory, this tectonic shift in lending from banks to asset managers could reduce financial fragility, since asset managers don't rely on demand deposits and their clients understand the risks. "Move along, nothing to see here," was the advice one industry leader gave regulators at a conference earlier this year.
The legislation would direct the department to assess the federal government's ability to respond to a host of systemic challenges including war, pandemic and financial crisis.
There's some merit to that view. On the other hand, any financial market of that size and growing at that speed demands some analysis. The OFR, FSOC, and Federal Reserve all noted the opacity and potential risks of private credit in their most recent financial stability reports. They highlighted the rapid growth in bank lending to private credit funds, the close connections between those funds and insurance companies, and the rise of withdrawal-prone investment products that could amplify stress. But they also noted that they didn't have enough data to fully understand what's going on.
Second, of course, is the market for stablecoins and other digital assets. Now that Congress has clarified their regulatory framework in the GENIUS Act, there is likely to be a stampede of stablecoin proposals from banks and nonbanks, tech firms and others. It's possible that stablecoins, now mostly used as an on-ramp to crypto trading, will prove useful to businesses and consumers in new ways and become deeply engrained in the payment system. But stablecoins also introduce operational, liquidity and cybersecurity risks.
Because of its data-focused mandate and lack of regulatory authority, the OFR is uniquely positioned to provide regulators with the tools they need to analyze the potential risks around private credit and stablecoins and develop an appropriate response that addresses risks without stifling innovation. These are just the types of issues Congress created the OFR to address.
The GENIUS Act affirms this role, requiring the Fed and the Office of the Comptroller of the Currency to submit annual reports on stablecoin-related risks not only to Congress but also directly to the OFR, including any confidential data and assessments. Congress clearly still sees value in the OFR's expertise.
Since its founding, the OFR has repeatedly demonstrated the power of nonpartisan, data-driven analysis. OFR researchers were the first to master new post-GFC datasets on derivatives, repurchase agreements, money market funds and hedge funds in the 2010s. They raised early warnings about the Treasury-futures basis trade between hedge funds and other asset managers, long before the pandemic cash crunch of March 2020; afterward, their research concluded that the trade had not been the biggest contributor to that stress.
In short, the OFR was created for moments like this, when financial innovation accelerates, uncertainty builds, and markets and regulators need objective, data-driven risk analysis. Weakening it now would squander more than a decade of progress and leave the U.S. flying blind just as the weather turns.
