Blog: Federal Reserve Issues Latest Financial Stability Report – Financial Services – United States – Mondaq

United States:

Federal Reserve Issues Latest Financial Stability Report

16 November 2022

Cadwalader, Wickersham & Taft LLP

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At the end of last week, the Federal Reserve Board
(“FRB”) issued its semi-annual Financial Stability Report.

In a statement issued with the report, FRB Vice
Chair Lael Brainard stated that over the past six months,
“household and business indebtedness has remained generally
stable, and on aggregate households and businesses have maintained
the ability to cover debt servicing, despite rising interest
rates.” She also noted that “[t]oday’s environment of
rapid synchronous global monetary policy tightening, elevated
inflation, and high uncertainty associated with the pandemic and
the war raises the risk that a shock could lead to the
amplification of vulnerabilities, for instance due to strained
liquidity in core financial markets or hidden leverage.”

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 that since the May report was
released, “the economic outlook has weakened and uncertainty
about the outlook has remained elevated, noting that
“[i]nflation remains unacceptably high in the United States
and is also elevated in many other countries.”

Related to the funding risk vulnerability (and perhaps showing
some prescience to our lead story on FTX this week), the Report
noted that stable coins remained vulnerable to runs. The Report
included a highlighted discussion of digital assets and financial
stability noting trouble and volatility in the crypto market in the
spring of this year. That discussion noted that the “[t]he
turmoil in the digital asset ecosystem did not have notable effects
on the traditional financial system because the digital assets
ecosystem does not provide significant financial services and its
interconnections with the broader financial system are
limited.” However, the report noted that as digital assets
grow, so too will the risks to financial stability, and cited the
October FSOC Report on Digital Asset Financial Stability
Risks and Regulation
in addressing those risks and regulatory

The Report identified several near-term risks that “could
be amplified” through the four financial vulnerabilities,
including high inflation, geopolitical risks (noting Russia’s
invasion of Ukraine), market fragilities, and possible shocks
caused by a cyber event.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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