FED published the financial stability report, presenting the 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 assessment of vulnerabilities helps identify salient risks that can be included in the scenarios.
The report states that investor appetite for risk generally appears to have returned to a level in the middle of its historical range but remains elevated for some important classes of assets. Debt loads of businesses are historically high. The core of the financial sector appears resilient, with leverage low and funding risk limited relative to the levels of recent decades. Overall, the level of vulnerabilities in the financial system has moved little since the publication of the financial stability report in May 2019. Stresses in Europe, such as those related to Brexit; stresses in emerging markets; and an unexpected and marked slowdown in U.S. economic growth are among the near-term risks that have the potential to interact with the vulnerabilities and pose risks to the financial system. The key findings of the report include the following:
- Asset valuations. Asset prices remain high in several markets relative to income streams. However, risk appetite measures that account for the low level of long-term yields on U.S. Treasury securities are more aligned with the historical norms for most markets. With the exception of riskier corporate debt, commercial real estate (CRE), and farmland markets, these measures point to a reduction in risk appetite from the elevated levels of 2017 and 2018.
- Borrowing by businesses and households. Borrowing by businesses is historically high, with the most rapid increases in debt concentrated among the riskiest firms amid weak credit standards. In contrast, household borrowing has risen in line with incomes and is concentrated among borrowers with low credit risk. Credit risk of outstanding mortgages remains generally low.
- Leverage in the financial sector. The largest U.S. banks remain strongly capitalized and the leverage of broker-dealers is at historically low levels. However, several large banks have announced plans to reduce their voluntary capital buffers. Leverage among life insurance companies is moderate, while hedge fund leverage remains elevated relative to the past five years.
- Funding risk. Estimates of the total amount of financial system liabilities that are most vulnerable to runs, including those issued by non-banks, remain modest. 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, CCyB, Stress Testing, Brexit, Credit Risk, FED
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