Experts say the banking sector remains stable after multiple regional banks collapsed, prompting government officials to intervene to reassure depositors, a new report from the Federal Reserve shows. But concerns linger.
The Federal Reserve’s latest Financial Stability Report, released Monday, offers the latest assessment of the stability of the U.S. financial system and biggest fears about current conditions, based on a survey of market experts, economists, academics, and others.
“Overall, the banking sector remained resilient, with substantial loss-absorbing capacity,” the report said. “Policy interventions by the Federal Reserve and other agencies helped mitigate these strains and limit the potential for further stress.”
Since the last Financial Stability Report in November 2022, three regional banks—Silicon Valley Bank,
Signature Bank,
and First Republic Bank—failed after “concerns over poor management of interest rate risk and liquidity risk” prompted significant deposit withdrawals, the report said.
To prevent those failures from affecting the broader banking system, the Fed, the Federal Deposit Insurance Corp., and the Treasury Department in March “took decisive actions to protect bank depositors and support the continued flow of credit to households and businesses,” according to the report.
Their actions and the resilience of the banking and financial sector helped financial markets to normalize, per the report. Deposit flows have since stabilized, although some banks that saw large deposit outflows are still experiencing stress. “These developments may weigh on credit conditions going forward,” the report said.
The report reviews conditions affecting financial stability by analyzing vulnerabilities related to valuation pressures, borrowing by businesses and households, financial-sector leverage, and funding risks.
Although Treasury yields declined sharply following the Silicon Valley Bank and Signature Bank failures, particularly for shorter-maturity securities, asset valuation pressures remained moderate, the report said.
The report noted that some sectors, including money-market funds, stablecoins and hedge funds, have elevated potential for trouble, and said that debts owed by households and businesses, as well as exposure to commercial real estate debt, appear resilient. Lenders with a high concentration of commercial real estate loans have raised concerns after the pandemic reshaped the office landscape.
The potential risks to U.S. financial stability most cited over the next 12 to 18 months by the Federal Reserve Bank of New York’s survey of 25 market contacts—not Federal Reserve officials—were: persistent inflation and monetary tightening, banking-sector stress, and U.S.-China geopolitical tensions, followed by commercial and residential real estate, and the Russia-Ukraine war.
“Many contacts saw real estate as a possible trigger for systemic risk, particularly in the commercial sector, where respondents highlighted concerns over higher interest rates, valuations, and shifts in end-user demand. Some market participants associated risks in real estate with the emergence of banking-sector stress, noting some bank exposures to underperforming CRE assets could prompt instability,” the report said.
After Silicon Valley Bank closed on March 10, “a large majority of respondents highlighted the risk of additional banks coming under renewed stress,” the report said.
“Many noted vulnerabilities in real estate markets, with some highlighting the potential for commercial real estate exposures to trigger further banking sector concerns. Respondents also continued to focus on geopolitical risks, especially the possibility of heightened tensions between the U.S. and China and a further escalation of Russia’s war in Ukraine.”
Write to Janet H. Cho at janet.cho@dowjones.com
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