Fed Board, Report: Financial Stability Report
“A summary of the developments in the four broad categories of vulnerabilities since the last report is as follows:”
“1. Asset valuations. Yields on Treasury securities declined in March amid heightened financial market volatility. Measures of equity prices relative to expected earnings were volatile over the period but remained above their historical median, while risk premiums in corporate bond markets stayed near the middle of their historical distributions. Valuations in residential real estate remained elevated despite weakening activity. Similarly, commercial real estate (CRE) valuations remained near historically high levels, even as price declines have been widespread across CRE market segments (see Section 1, Asset Valuations).”
“2. Borrowing by businesses and households. On balance, vulnerabilities arising from borrowing by nonfinancial businesses and households were little changed since the November report and remained at moderate levels. Business debt remained elevated relative to gross domestic product (GDP), and measures of leverage remained in the upper range of their historical distributions, although there are indications that business debt growth began to slow toward the end of last year. Measures of the ability of firms to service their debt stayed high. Household debt remained at modest levels relative to GDP, and most of that debt is owed by households with strong credit histories or considerable home equity (see Section 2, Borrowing by Businesses and Households).”
“3. Leverage in the financial sector. Concerns over heavy reliance on uninsured deposits, declining fair values of long-duration fixed-rate assets associated with higher interest rates, and poor risk management led market participants to reassess the strength of some banks (discussed in the box “The Bank Stresses since March 2023”). Overall, the banking sector remained resilient, with substantial loss-absorbing capacity. Broker-dealer leverage remained historically low. Leverage at life insurance companies edged up but stayed below its pandemic peak. Hedge fund leverage remained elevated, especially for large hedge funds (see Section 3, Leverage in the Financial Sector).”
“4. Funding risks. Substantial withdrawals of uninsured deposits contributed to the failures of SVB, Signature Bank, and First Republic Bank and led to increased funding strains for some other banks, primarily those that relied heavily on uninsured deposits and had substantial interest rate risk exposure. Policy interventions by the Federal Reserve and other agencies helped mitigate these strains and limit the potential for further stress (discussed in the box “The Federal Reserve’s Actions to Protect Bank Depositors and Support the Flow of Credit to Households and Businesses”). Overall, domestic banks have ample liquidity and limited reliance on short-term wholesale funding. Structural vulnerabilities remained in short-term funding markets. Prime and tax-exempt money market funds (MMFs), as well as other cash-investment vehicles and stablecoins, remained vulnerable to runs. Certain types of bond and loan funds experienced outflows and remained susceptible to large redemptions, as they hold securities that can become illiquid during periods of stress. Life insurers continued to have elevated liquidity risks, as the share of risky and illiquid assets remained high (see Section 4, Funding Risks).”