In uncertain economic times, monitoring financial crisis risks becomes crucial. This report focuses on measuring the overall risk status of U.S. financial markets using 12 core indicators across 8 key areas. Through in-depth analysis of June 2020 indicator data, we identify major risk sources in financial markets and compile them into a comprehensive "Risk Indicator of Financial Crisis (RIOFC)" that reflects market risk levels and crisis probability. The June 2020 results show a slight increase in overall risk levels across U.S. financial markets.
I. Core Indicator Monitoring for U.S. Financial Markets
1. Indicators in the Safe Zone
(A) Indicators Showing Improvement:
- Interbank Funding Market Spread: The 3-month LIBOR to 3-month Treasury (TED) spread monthly average declined from 0.275% in May to 0.15%, remaining in the safe zone and reflecting stable risk conditions in dollar interbank markets.
- Non-Financial Commercial Paper Spread: The 30-day non-financial commercial paper A2/P2 to AA spread monthly average dropped significantly from 0.588% to 0.25%, moving from the unstable zone back to safety, demonstrating improved conditions in non-financial money markets.
- Bank Deposit Ratio: Increased from 75% in May to 76.7%, maintaining safe zone status and indicating improved quality of bank liabilities.
- Monetary Policy Effectiveness: The effective federal funds rate monthly average rose to 0.0768%, approaching the midpoint target and highlighting the Federal Reserve's policy success.
(B) Indicators Showing Deterioration:
- FX Market Volatility: The CVIX index measuring dollar volatility against major currencies rose to 7.69 monthly average, remaining in the safe zone but signaling increased market risk.
2. Indicators in the Unstable Zone
(A) Indicators Showing Improvement:
- Treasury Yield Curve: The 10-year to 3-month Treasury spread monthly average slightly increased to 0.569%, suggesting improving economic prospects.
- Corporate Credit Markets: The CDX.NA.IG credit derivative index retreated from 0.888% to 0.748%, reflecting eased corporate credit risk.
3. Indicators in the Danger Zone
(A) Indicators Showing Improvement:
- Corporate Bond Spreads: Moody's 10-year Aaa corporate bond spreads declined but remained in the danger zone, indicating persistent high corporate credit risk.
- Macroeconomic Conditions: The New York Fed's Weekly Economic Index slightly improved to -8.3, showing economic activity recovery though still far below normal levels.
- Bank Systemic Risk - Default Distance: The banking sector default distance indicator modestly recovered to 4.91 but stayed in the danger zone, suggesting continued systemic risk potential.
(B) Indicators Showing Deterioration:
- Equity Market Volatility: The S&P 500 volatility index rose slightly to 31.1, indicating increased market turbulence.
- Bank Stock Index: Both banking sector and Dow Jones indices declined in June, with banks underperforming the broader market, failing to restore investor confidence.
II. Overall Risk Assessment
Between May and June 2020, 9 of the 12 core indicators showed improvement while 3 deteriorated, with none remaining unchanged. While risk increases across sectors were modest, the overall market situation displayed signs of recovery, particularly in interbank funding markets and non-financial commercial paper markets.
The Financial Crisis Risk Indicator (RIOFC) rose from 53 in May to 54 in June, remaining in the unstable zone. Although the moving average showed slight decline, market risks still warrant close monitoring. Currently, U.S. financial markets are experiencing complex dynamics - while liquidity risk, currency risk and credit risk have improved, the mounting risks in bank equities demand heightened vigilance.