Financial system sound, but vulnerabilities remain, Fed says in report

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Overall, the financial situation of many U.S. households has continued to improve since December, but household credit growth “has been almost exclusively among higher-rated borrowers,” the Federal Reserve said in its semiannual report. on monetary policy. Report in Congress.

“Nevertheless, some households remained financially strained and vulnerable to negative shocks during this period of heightened uncertainty,” the central bank said.

Some other highlights from the report:

  • Financial sector leverage vulnerabilities remain well below their historical range.
  • “Funding risks from domestic banks and brokers are low, but structural vulnerabilities persist in some money market funds (“MMFs”), bond funds and stablecoins.”
  • MMFs remain a “structural vulnerability due to their sensitivity to leakage”. The SEC has proposed reforms to money market funds aimed at making them more resilient to redemptions.
  • High market volatility, particularly in commodity markets, prompted central counterparties to make larger margin calls. To date, clearing members have been able to meet them.
  • Its market contact investigation highlighted several significant risks to financial stability, including spillover tensions in Europe or emerging markets related to Russia’s invasion of Ukraine; and higher or more persistent inflation and larger than expected increases in interest rates that could affect domestic economic activity, asset prices, credit quality and general financial conditions.
  • Concerns about cyber risk have also increased, prompting US government agencies and their private sector partners to step up efforts to protect the financial system and other critical infrastructure. “These risks, if they materialize, could interact with financial vulnerabilities and pose additional risks to the U.S. financial system.”
  • The invasion of Ukraine and the sanctions against Russia have led to soaring prices and increased volatility in agriculture, energy and metals markets. Transactions in these markets involve a multitude of intermediaries and financial infrastructures.
  • “Commodity-related financial market stress could disrupt the efficiency of commodity production, processing and transportation by interfering with the ability of commodity producers, consumers and traders to hedge risk. “
  • Similarly, liquidity and credit risk stresses can affect financial institutions active in commodity markets. “To date, however, financial market stress does not appear to have exacerbated the adverse effects on broader economic activity or created substantial pressure on key financial intermediaries, including banks.”

The report also discussed the potential risks of stablecoins to the financial system.


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Don F. Davis