FRB Governor Jefferson: Financial Sector Remains Resilient Despite Stress Events
Federal Reserve Board ("FRB") Governor Philip N. Jefferson concluded that U.S. financial markets remain resilient, but that economic growth will likely remain slow for the rest of 2023 due to increased uncertainty, and interest rates putting greater stress on banking organizations that have a high amount of uninsured deposits.
U.S. Financial System Vulnerabilities
In a speech before the 22nd Annual International Conference on Policy Challenges for the Financial Sector, Mr. Jefferson said that the FRB uses both "microprudential and macroprudential approaches" to monitor and assess potential vulnerabilities of the financial sector, including (i) elevated valuation pressures and funding risks, (ii) excessive borrowing by both households and businesses and (iii) excessive leverage within the U.S. financial system. Mr. Jefferson highlighted recent bank failures to underscore the FRB’s focus on the "continuously changing" risks and vulnerabilities within financial markets.
He identified potential vulnerabilities the FRB is closely monitoring in the wake of recent stress events, including (i) liquidity and interest rate risks as a result of reliance on uninsured deposits and exposure to duration risk in asset holdings, (ii) changes in the financial sector, such as the use of online banks and behavioral shifts resulting from social media, and (iii) weaknesses in some sectors of commercial real estate that could put strains on lenders with high concentrations of related-loans. To underscore current financial sector resilience, he contrasted current risks across the financial sector with those of the 2008 financial crisis by saying that the financial sector today experienced "substantially" less spillovers into other areas of the economy following the recent bank failures.
Basel III Framework
Mr. Johnson also emphasized the FRB’s focus on finalizing a Basel III framework that will (i) implement "more robust and internationally consistent" capital requirements for large firms, (ii) reduce variability in capital requirements and (iii) promote transparency and public confidence in risk-weighted assets. He stated that the FRB plans to release a proposal for public comment soon.