Financial stability concerns linger after bank bailout, Fed says

Pressures on the banking system, housing strains and lingering inflation are the main financial stability concerns, though the system remains broadly stable, the Federal Reserve said in a report Monday.

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

“Topics frequently cited in this survey included persistent inflation and monetary policy tightening, strains 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 the implosion about two months ago of several leading midsize banks, including Silicon Valley Bank, a major source of funding for technology companies.

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

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

Several sectors have been identified as having a high potential for problems.

They include money market funds, stablecoins, and hedge funds, especially large corporations. However, the report also notes that leverage is generally low for household and corporate debt, including commercial real estate, a potential hot spot for the economy.

The report was released the same day the Fed’s survey of senior bank loan officers said they expected tighter lending standards and weaker demand ahead.

Loan officers’ concerns included deposit outflows, a weakening economy and bank liquidity. Commercial and industrial loans were cited as a particular pressure point, as was commercial real estate.

However, the Stability Report noted that banks’ capital ratios are around what would be considered normal, while leverage was generally lower. The bank highlighted the leverage effect of non-banking financial institutions such as hedge funds.

“Actions taken by the official sector reassured depositors, and the broader banking system remained strong and resilient. For the banking system as a whole, overall levels of bank capital were adequate,” the report said.

The Fed added that it was ready to take all necessary measures to maintain the stability of the system.