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
Previous ArticleHKMA Proposes Changes to Module on Supervision of Concentration Risk
The Board of Governors of the Federal Reserve System (FED) adopted the final rule on Adjustable Interest Rate (LIBOR) Act.
The European Central Bank (ECB) published an updated list of supervised entities, a report on the supervision of less significant institutions (LSIs), a statement on macro-prudential policy.
The Hong Kong Monetary Authority (HKMA) published a circular on the prudential treatment of crypto-asset exposures, an update on the status of transition to new interest rate benchmarks.
The European Commission (EC) adopted the standards addressing supervisory reporting of risk concentrations and intra-group transactions, benchmarking of internal approaches, and authorization of credit institutions.
The China Banking and Insurance Regulatory Commission (CBIRC) issued rules to manage the risk of off-balance sheet business of commercial banks and rules on corporate governance of financial institutions.
The Hong Kong Monetary Authority (HKMA) made announcements to address sustainability issues in the financial sector.
The European Banking Authority (EBA) published regulatory standards on identification of a group of connected clients (GCC) as well as updated the lists of identified financial conglomerates.
The General Board of the European Systemic Risk Board (ESRB), at its December meeting, issued an updated risk assessment via the quarterly risk dashboard and held discussions on key policy priorities to address the systemic risks in the European Union.
The Financial Conduct Authority (FCA) is seeking comments, until December 21, 2022, on the draft guidance for firms to support existing mortgage borrowers.
The Financial Stability Board (FSB) published a report that assesses progress on the transition from the Interbank Offered Rates, or IBORs, to overnight risk-free rates as well as a report that assesses global trends in the non-bank financial intermediation (NBFI) sector.