Featured Product

    FED Publishes Financial Stability Report in November 2020

    FED published the financial stability report, which presents an assessment of the resilience of the financial system in U.S. The report examines vulnerabilities related to valuation pressures, borrowing by businesses and households, financial leverage, and funding risk. It also highlighted several near-term risks, which, if realized, could interact with such vulnerabilities. FED also published a Federal Register notice to make corrections to information collections published with a proposal dated October 07, 2020. The proposal updates the capital planning requirements to reflect the new framework that sorts large banks into different categories based on their risks, with rules that are tailored to the risks of each category. This correction adds the OMB control number for the reporting form FR LL and provides a corrected burden estimate, as the previously published document incorrectly listed the estimated recordkeeping burden associated with the FR YY information collection.

    The financial stability report highlights that FED is evaluating and investing in ways to deepen its understanding of the full scope of implications of climate change for markets, financial exposures, and interconnections between markets and financial institutions. The assessment found that business and household earnings have fallen while business borrowing has risen, thus leaving households and firms more vulnerable to future shocks. Banks absorbed large losses related to the pandemic but remained well-capitalized; moreover, capital ratios have since generally recovered to the pre-pandemic levels. However, the COVID-19 shock highlighted how vulnerabilities related to leverage and funding risk at nonbank financial institutions could amplify shocks in the financial system during times of stress. The key findings of the report include the following:

    • Asset valuations. The elevated levels of asset prices in various markets likely reflect the low level of Treasury yields while measures of the compensation for risk appear roughly aligned with historical norms. Given the high level of uncertainty associated with the pandemic, assessing valuation pressures is particularly challenging, and asset prices remain vulnerable to significant declines should investor risk sentiment fall or the economic recovery weaken.
    • Borrowing by businesses and households. Debt owed by businesses, which was already historically high before the pandemic, has risen sharply, as businesses increased borrowing to weather the period of weak earnings. The general decline in revenues associated with the severe reduction in economic activity has weakened the ability of businesses to service these obligations. So far, strains in the business and household sectors have been mitigated by significant government lending and relief programs and by low interest rates. Some households and businesses have been substantially more affected to date than others, suggesting that the sources of vulnerability in these sectors are unevenly distributed.
    • Leverage in the financial sector. The pandemic stressed the resilience of banks, which remain well-capitalized. Leverage at broker-dealers also remains low. In contrast, measures of leverage at life insurance companies are at post-2008 highs and remain elevated at hedge funds relative to the past five years. Some nonbank financial institutions experienced significant strains amid the acute period of extreme market volatility, declining asset prices, and worsening market liquidity earlier this year. Pressures eased as a result of policy actions, including FED asset purchases and repurchase agreement (repo) operations, regulatory relief for dealers affiliated with bank holding companies, and support from the emergency lending facilities.
    • Funding risk. Bank funding risk remains low, as banks rely only modestly on short-term wholesale funding and maintain large amount of high-quality liquid assets, which has helped banks to manage heightened liquidity pressures. Banks also benefited from a surge in deposit inflows through the second quarter of 2020. In contrast, large redemptions from money funds and fixed-income mutual funds, along with the need for extraordinary support from emergency lending facilities, highlighted vulnerabilities in these sectors. While in place, those facilities substantially mitigate these vulnerabilities.

    Related Links

    Keywords: Americas, US, Banking, Insurance, Securities, Financial Stability Report, CCyB, Stress Testing, Credit Risk, Climate Change Risk, ESG, Regulatory Capital, Reporting, Regulation YY, FED

    Featured Experts
    Related Articles

    EBA Clarifies Use of COVID-19-Impacted Data for IRB Credit Risk Models

    The European Banking Authority (EBA) published four draft principles to support supervisory efforts in assessing the representativeness of COVID-19-impacted data for banks using the internal ratings based (IRB) credit risk models.

    June 21, 2022 WebPage Regulatory News

    BIS Hub Updates Work Program for 2022, Announces New Projects

    The Bank for International Settlements (BIS) Innovation Hub updated its work program, announcing a set of projects across various centers.

    June 17, 2022 WebPage Regulatory News

    US Senate Members Seek Details on SEC Proposed Climate Disclosure Rule

    Certain members of the U.S. Senate Committee on Banking, Housing, and Urban Affairs issued a letter to the Securities and Exchange Commission (SEC)

    June 16, 2022 WebPage Regulatory News

    EIOPA Consults on Review of Securitization Framework in Solvency II

    The European Insurance and Occupational Pensions Authority (EIOPA) published a consultation paper on the advice on the review of the securitization prudential framework in Solvency II.

    June 16, 2022 WebPage Regulatory News

    UK Authorities Issue Regulatory and Reporting Updates for Banks

    The Prudential Regulation Authority (PRA) issued a statement on PRA buffer adjustment while the Bank of England (BoE) published a notice on the statistical reporting requirements for banks.

    June 15, 2022 WebPage Regulatory News

    BaFin Consults on Resolvability Requirements for Resolution Planning

    The Federal Financial Supervisory Authority of Germany (BaFin) proposed to amend the “Capital Investment Conduct And Organization Ordinance” and issued a draft circular on the minimum resolvability requirements for resolution planning.

    June 10, 2022 WebPage Regulatory News

    EBA Consults on Certain Standards and Guidelines Under CRR and BRRD

    The European Banking Authority (EBA) proposed guidelines, for the resolution authorities, on the publication of the write-down and conversion and bail-in exchange mechanic, with the comment period ending on September 07, 2022.

    June 08, 2022 WebPage Regulatory News

    OJK Publishes Regulatory Updates for Financial Sector Entities

    The Financial Services Authority of Indonesia (OJK) is strengthening cooperation with the Australian Prudential Regulation Authority (APRA) and the Japanese Financial Services Agency (JFSA)

    June 03, 2022 WebPage Regulatory News

    EU Publishes Rules on DLT and Data Governance

    The European Parliament and the Council published Regulation 2022/868 on European data governance (Data Governance Act).

    June 03, 2022 WebPage Regulatory News

    EBA Publishes Phase 2 of Reporting Framework 3.2

    The European Banking Authority (EBA) published phase 2 of its reporting framework 3.2. The technical package supports the implementation of the updated reporting framework by providing standard specifications

    June 03, 2022 WebPage Regulatory News
    RESULTS 1 - 10 OF 8267