Respondents to the Federal Reserve’s Financial Stability Survey are most concerned about the possibility of sustained inflation and high interest rates and potential damage to the commercial real estate market. The US central bank announced on Friday.
The latest edition of the central bank’s semi-annual report found that three-quarters of survey respondents cited these two issues as significant short-term risks. Roughly half of respondents cited concerns about bank stability following the collapse of three major companies this spring, similar to the level seen in the May report.
The Fed’s semi-annual survey shows that China’s economy is becoming increasingly weak, with 44% of those surveyed citing it as the biggest risk, compared with just 12% in May. However, the war between Russia and Ukraine, which was cited as the top financial stability concern a year ago, has fallen to 11th place among respondents’ most cited concerns.
The Fed noted that its review of imminent risks was completed in early October, before the outbreak of war between Israel and the Palestinian enclave of Gaza.
Overall, the Fed identified several vulnerabilities within the financial system, including historically high asset valuations such as stocks and real estate. Specifically, the Fed found that commercial real estate valuations remain high, even though prices have fallen amid high office vacancy rates.
The Fed warned that high leverage levels in general could put a strain on some companies, potentially putting them in trouble if the economy unexpectedly slows. In particular, the report notes that revisions to office real estate valuations due to a mild recession could result in “significant losses for a wide range of heavily exposed financial institutions, including some regional and community banks, and insurance companies.” He pointed out that there is a gender.
Although the overall banking system remains healthy, some banks are still suffering from “significant” declines in the fair value of some assets as interest rates rise rapidly, the Fed said. A major source of stress facing banks, including Silicon Valley Bank, which failed this spring, was large unrealized losses.
The Fed said there is plenty of liquidity across banks, and deposit outflows and volatility have declined since the spring. However, some companies remain under funding pressure as some depositors leave and banks have to make additional payments to retain them or obtain other funding. facing.
The Fed also revealed that home prices have risen from already high levels seen in May, but borrowers’ credit conditions are lower than those seen from 2007 to 2009 leading up to the subprime mortgage crisis. “It’s a lot tougher,” he said.
In fact, banks are reporting to the Fed that lending standards are now stricter than in the past across all lending categories.
The report found that despite the rise in interest rates, the debt burden of households and businesses remains moderate. But he warned that borrowers with low credit scores are starting to show some signs of stress on many types of consumer debt, including credit cards and car loans.
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