FRB Identifies Risks to U.S. Financial System Stability

The Federal Reserve Board ("FRB") identified significant risks to the stability of the U.S. financial system. In its May 2023, Financial Stability Report, the FRB highlighted the following risks:

• Asset Valuations. The FRB reported uncertainty of valuations due to "financial market volatility" and a decline in both house prices and commercial property prices.
• Business and Household Borrowing. The FRB said that household debt was modest, while interest coverage ratios at publicly traded firms had declined and riskier companies were issuing less debt.
• Leverage in the Financial Sector. The FRB maintained that aggregate bank capital levels are "ample." The FRB reported that while broker-dealer leverage has remained low, there are vulnerabilities associated with intermediation in fixed-income markets during periods of stress. Meanwhile, the FRB reported that some nonbank financial institutions were operating with high leverage.
• Funding Risks. The FRB concluded that SVB's and Signature Bank's failures demonstrated vulnerabilities associated with high concentrations of uninsured deposits. FRB stated, however, that SVB’s and Signature Bank's "heavy reliance" on uninsured deposits make them "outliers" in comparison to other banks which have a "much more balanced mix of liabilities."