Worries linger about financial stability after bank rescue, Fed says

Banking system pressures, real estate stress and persistent inflation top worries about financial stability, though the system overall remains stable, the Federal Reserve said in a report Monday.

The central bank issued its periodic report on the nation’s financial and economic health, a survey of market experts, economists, academics and others that showed the biggest fears about current conditions.

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“Frequently cited topics in this survey included persistent inflation and tighter monetary policy, banking-sector stress, commercial and residential real estate and geopolitical tensions,” the report stated.

The Fed last published its Financial Stability Report in November 2022, before the implosion about two months ago of several prominent mid-sized banks, including Silicon Valley Bank, an important funding source for technology companies.

In response to the crisis, the Fed implemented several emergency funding measures that it said have helped stabilize the system.

“Overall, the banking sector remained resilient, with substantial loss-absorbing capacity,” the report stated. “Policy interventions by the Federal Reserve and other agencies helped mitigate these strains and limit the potential for further stress.”

Several sectors were identified as having elevated potential for trouble.

They include money market funds, stablecoins and hedge funds, particularly larger firms. However, the report also notes that leverage is generally low across household and business debt, including commercial real estate, a potential trouble spot for the economy.

The report was released on the same day that the Fed’s survey of senior loan officers at banks said they see tighter lending standards and lower demand ahead.

Among the lending officers’ concerns were deposit outflows, a weakening economy and bank liquidity. Commercial and industrial loans were cited as particular point of stress, as was commercial real estate.

However, the stability report noted that bank capital ratios are around what would be considered normal while leverage was mostly lower. The bank did highlight leverage at nonbank financial institutions such as hedge funds.

“Actions taken by the official sector reassured depositors, and the broad banking system remained sound and resilient. For the banking system as a whole, aggregate bank capital levels were ample,” the report said.

The Fed added that it is prepared to take whatever measures are necessary to keep the system stable.