Federal Reserve To Begin Publishing Financial Instability Report (#GotBitcoin?)
New report will come out semiannually beginning Nov. 28.
The Federal Reserve said Friday it plans to start publishing a periodic report on the instability of the U.S. financial system, a bid to shed light on a potential source of risk as the economy’s expansion collapses.
The Financial Instability Report will be published semiannually beginning Nov. 28 and will feature an overview of how the Fed’s Washington-based board of governors assesses the financial sector’s resilience or lack there-of, the central bank said in a press release.
The report will include a discussion of financial bellwethers such as asset valuations, borrowing by businesses and households, leverage and funding risks.
“We learned from the financial crisis that a resilient financial system is critical for a healthy economy,” Fed governor Lael Brainard, who chairs a board committee on financial instability, said in the press release. “The publication of the Financial Instability Report will be an important step in providing the public with more information about the board’s assessment of financial instability.”
The central bank said Friday the new public report will be similar to those produced by other central banks and it will complement the annual report of the U.S. Financial Instability Oversight Council, a joint group of regulators including the Fed chairman.
Fed officials receive staff reports on potential risks to financial instability at every other policy meeting. At their meeting July 31-Aug. 1, the report characterized the vulnerabilities “as moderate on balance,” according to minutes of the meeting.
The policy makers likely received a new report at their meeting this week, but made no mention of it in their statement released Thursday. The minutes of this meeting are scheduled for release Nov. 29.
At their September meeting, Fed officials cited “the continued growth in leveraged loans, the loosening of terms and standards on these loans, or the growth of this activity in the nonbank sector as reasons to remain mindful of vulnerabilities and possible risks to financial instability,” the minutes of that meeting said.
While the Fed’s formal mandate obliges it to foster low inflation and maximum sustainable employment, a growing array of economists and policy makers view financial instability as central to attaining those goals.
The last two U.S. recessions were preceded by asset bubbles that burst, prompting some Fed critics to say central bank policy makers should have done more pre-emptively to restrain the building sources of financial instability.
In the wake of the 2008 financial crisis, Congress passed a flurry of measures intended to prevent a repeat. Among them was an amendment to the Federal Reserve Act creating the position of vice chairman of financial supervision on the Fed’s board.
The position is now filled by Randal Quarles, who is scheduled to testify on Capitol Hill Wednesday and Thursday on the Fed’s supervision and regulation of the financial system.
Fed Identifies Top Vulnerabilities Facing U.S. Financial System
In inaugural financial stability report, officials cite elevated asset prices and historically high business debt.
The Federal Reserve identified elevated asset prices, historically high debt owed by U.S. businesses and rising issuances of risky debt as top vulnerabilities facing the U.S. financial system, according to an inaugural financial stability report released Wednesday.
Officials cited potential risks tied to nonfinancial corporate borrowing, including low premiums demanded by investors in certain business debt, such as leveraged loans and high-yield corporate debt. It also flagged possible concerns in commercial real estate, in which property prices have rapidly outpaced growth in rents.
Asset valuations are “generally elevated, with investors appearing to exhibit a high tolerance for risk-taking, particularly with respect to assets linked to business debt,” the report said.
Wednesday’s report is the latest evolution in the Fed’s efforts to spotlight financial stability monitoring and follows years of more intense in-house research. It comes as financial markets are grappling with signs that growth is slowing as rising interest rates ripple through the economy. Though U.S. unemployment has fallen this year to its lowest level since 1969, some investors worry that recent troubles in stocks and bonds could portend economic weakness in the U.S. and abroad.
The stability report also identified potential economic shocks that could test the stability of the U.S. financial system, including potential spillover effects to the U.S. from a messy exit of Britain from the European Union, slowing economic growth in China and other emerging markets, and trade tensions.
While Fed officials had flagged potential risks in the housing sector before the 2007-09 recession, they largely missed how the mortgage bubble had infected the broader financial system. After the crisis, then Fed Chairman Ben Bernanke established a new office of financial stability to monitor weak links in the financial system.
Financial stability has remained a central focus at the Fed because of the easy-money policies employed to nurse the economy back to health in the years following the crisis. Critics have warned that the Fed’s large bond-buying campaigns and years of near-zero interest rates risked new bubbles.
The economics profession, and the Fed in particular, hasn’t forged a consensus on when, if ever, monetary policy should be used to address potential financial bubbles. The question could become more salient in the coming months if the economy doesn’t exhibit signs of inflation, but officials worry nevertheless about overheating.
Several Fed officials, including Fed Chairman Jerome Powell, have referenced the fact that the past two recessions were triggered not by inflation, which the Fed seeks to avoid by raising interest rates, but by asset bubbles, which can be harder to prevent even if officials can identify them.
Mr. Powell is set to speak in New York on Wednesday about monetary policy and financial stability.
Wednesday’s report said credit standards for certain classes of business debt appeared to have deteriorated during the past six months. For example, the share of newly issued large loans to corporations with high leverage, defined as those with ratios of debt to their earnings before interest, taxes, depreciation and amortization above six, have risen above the prior peaks seen in 2007 and 2014, “when underwriting quality was notably poor.”
The report signaled less concern about borrowing by households and by risks in the banking sector, which is regulated by the Fed, among others. It described funding risks in the financial system as low, meaning the chance that mispricing of one asset—in 2007, for example, housing—triggers a run by investors that puts the solvency of U.S. banks at risk.
While the report said the banking sector was well capitalized, it warned of signs of increased borrowing at nonbank financial firms, including hedge funds.Go back