New Fed Report Signals Confidence in Highly Capitalized Financial Sector

The nation’s largest banks are strongly capitalized and are holding more liquid assets than they were in the leadup to the financial crisis, the Federal Reserve noted today in its inaugural report on financial stability. The report — which will be published twice a year — examines the resilience of the financial system and highlights potential vulnerabilities that could affect financial stability.

While regulators expressed confidence overall in the health of the financial sector, they are concerned about a rise in riskier business debt — including high-yield bonds and leveraged loans — which has increased in recent quarters and now totals $2 trillion. They also noted that credit standards for some business loans have loosened. Meanwhile, household borrowing has grown at a low-to-moderate pace relative to income, the report noted.

In the near term, regulators noted that Brexit and uncertainties in the Eurozone could pose potential risks to the financial system, as could an economic slowdown in China. In addition, uncertainties related to U.S. trade policies and geopolitical uncertainties could also make investors more risk averse in the months ahead, the Fed said.