The Federal Reserve in Washington, DC
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Banking system pressures, housing stress and persistent inflation are the main concerns for financial stability, although the system remains stable overall, the Federal Reserve said in a report Monday.
The central bank released its regular report on the country’s financial and economic health, a survey of market experts, economists, academics and others that revealed their top concerns about the current conditions.
“Frequently cited issues in this survey were persistent inflation and tightening monetary policy, stress in the banking sector, commercial and residential real estate and geopolitical tensions,” the report said.
The Fed last released its Financial Stability Report in November 2022, before several prominent middle-market banks imploded about two months ago, including Silicon Valley Bank, a major source of funding for tech companies.
In response to the crisis, the Fed launched several emergency funding measures that it believes have helped stabilize the system.
“Overall, the banking sector remained resilient and had significant loss-absorbing capacity,” the report said. “Policy interventions by the Federal Reserve and other agencies have helped mitigate these stresses and limit the potential for further stress.”
Several sectors were found to have an increased potential for problems.
These sectors include money market funds, stablecoins, and hedge funds, particularly larger companies. However, the report also notes that household and corporate debt, including commercial real estate, a potential trouble spot for the economy, has generally low levels of leverage.
The report was released on the same day that the Fed’s survey of senior bank loan officers said they expect tighter lending standards and lower demand.
Loan officers’ concerns included deposit outflows, a slowing economy and bank liquidity. Commercial and industrial loans as well as commercial real estate were named as particular stress points.
However, the Stability Report found that banks’ capital ratios were around what would be considered normal, while leverage was mostly lower. The bank highlighted leverage on non-bank financial institutions such as hedge funds.
“Actions taken by the public sector reassured depositors and the broad banking system remained sound and resilient.
The Fed added that it stands ready to take any action necessary to keep the system stable.