The Fed published the May 2023 issue of its Financial Stability Report, which includes assessments of the current situation in the American financial system.
The report reminded that after November last year when the previous report was published, Silicon Valley Bank (SVB), Signature Bank and First Republic Bank went bankrupt after significant deposit outflows caused by concerns about mismanagement of interest rate and liquidity risks.
In March, the Fed, together with the Federal Deposit Insurance Corporation (FDIC) and the Treasury Department, took steps to protect bank depositors and support the continuous flow of credit to households to prevent wider spillovers in the banking system, the report said. “Finance markets have returned to normal and deposit flows have stabilized since March. However, some banks with large deposit outflows continued to experience stress. These developments may put pressure on loan conditions going forward.” evaluation was made.
In the report, it was noted that Treasury bond yields fell in March due to increased market volatility, and stock prices remained above the historical media.
In the report, which stated that the valuations of residential real estates remained high despite the weakening in activity, it was reported that the vulnerabilities arising from the borrowing of non-financial businesses and households had changed little since November last year.
In the report, it was stated that the increase in commercial debt remained high compared to the gross domestic product, and the ratio of household debt remained at moderate levels.
“The banking sector maintained its resilience”
“Overall, the banking sector has remained resilient with significant loss-covering capacity,” the report said, pointing out that over-reliance on uninsured deposits and concerns about poor risk management led market participants to reassess the strength of some banks. expression was used.
The report noted that significant withdrawals of uninsured deposits contributed to the bankruptcies of SVB, Signature Bank and First Republic Bank, leading to increased funding shortages for some other banks, particularly those that rely heavily on uninsured deposits and are exposed to significant interest rate risk. .
Underlining that policy interventions by the Fed and other institutions have helped alleviate these pressures, the report noted that money market funds and other cash investment instruments remain vulnerable to “runs” and contribute to the fragility of short-term funding markets.
The debt limit dilemma is also among the risks.
While the report also discussed the short-term risks to the US financial stability, the risks frequently cited included persistent inflation and tighter monetary policy, banking sector stress and geopolitical tensions.
In the report, which also referred to the research on significant risks to financial stability, it was noteworthy that almost half of the respondents stated that the US debt limit stalemate was among the possible risks.
In the report, it was stated that if the US debt limit ceiling is not raised on time, the negative consequences of a possible default include disruptions in the financing market and tighter financial conditions.