Earlier this week, the Federal Reserve Board (“FRB”) issued its latest semi-annual Financial Stability Report.
As it has in past iterations, the Report notes that the FRB’s monitoring framework “distinguishes between shocks to, and vulnerabilities of, the financial system,” and “focuses primarily on assessing vulnerabilities, with an emphasis on four broad categories and how those categories might interact to amplify stress in the financial system.” The four categories of vulnerabilities are (1) valuation pressures, (2) borrowing by businesses and households, (3) leverage within the financial sector, and (4) funding risks.
The overview of the Report notes the bank failures that have occurred since the November 2022 report was released, as well as actions taken by the FRB, Federal Deposit Insurance Corporation and the Department of Treasury in response in order “to protect bank depositors and support the continued flow of credit to households and businesses.” The Report went on to note that “banking and financial markets normalized, and deposit flows have stabilized since March, although some banks that experienced large deposit outflows continued to experience stress” and that “[t]hese developments may weigh on credit conditions going forward.”
The report identified several near-term risks identified by the FRB’s survey respondents that could interact with the four financial vulnerabilities, including “more restrictive policy to address persistent inflation, banking-sector stress, commercial and residential real estate, and geopolitical tensions.”