May 06, 2019

FED published its financial stability report, which presents the current assessment of the resilience of the U.S. financial system. The report analyzes vulnerabilities related to valuation pressures, borrowing by businesses and households, financial leverage, and funding risk. It also highlights several near-term risks that, if realized, could interact with such vulnerabilities. The assessment of financial vulnerabilities by FED informs the design of stress-test scenarios and decisions regarding the countercyclical capital buffer (CCyB).

The report reveals that investor appetite for risk appears elevated by several measures and the debt loads of businesses are historically high. However, the financial sector appears resilient, with low leverage and limited funding risk. Despite the volatility in financial markets late last year, the assessment of each of the four vulnerability categories has changed little since the November 2018 financial stability report. The following are the key findings of the report:

  • Asset valuations. Valuation pressures remain elevated in a number of markets, with investors continuing to exhibit high appetite for risk, although some pressures have eased a bit since the November 2018 financial stability report.
  • Borrowing by businesses and households. Borrowing by businesses is historically high relative to the gross domestic product (GDP), with the most rapid increases in debt concentrated among the riskiest firms amid signs of deteriorating credit standards. In contrast, household borrowing remains at a modest level relative to incomes while the debt owed by borrowers with credit scores below prime has remained flat.
  • Leverage in the financial sector. The largest U.S. banks remain strongly capitalized and the leverage of broker-dealers is substantially below the pre-crisis levels. Insurance companies appear to be in relatively strong financial positions. Hedge fund leverage appears to have declined over the past six months.
  • Funding risk. Funding risks in the financial system are low. Estimates of the outstanding total amount of financial system liabilities that are most vulnerable to runs, including those issued by nonbanks, remain modest relative to levels leading up to the financial crisis. Short-term wholesale funding continues to be low compared with other liabilities and the ratio of high-quality liquid assets to total assets remains high at large banks.

 

Related Link: Report (PDF)

 

Keywords: Americas, US, Banking, Insurance, Securities, Financial Stability Report, Financial Leverage, Financial Stability, CCyB, FED

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