WASHINGTON–A new Fed report has identified the most salient risks facing financial institutions include inflation, potential large losses in both commercial and residential real estate, and financial stability.
According to the Fed’s new Financial Stability Report, 72% of respondents cited both “persistent inflation/monetary tightening” and “commercial and residential real estate” as salient risks to the financial system.
That’s an increase from what the same report found earlier this year, when 56% and 52% of respondents, respectively, reported similar sentiments.
‘Persistent and Reaccelerating’
“Contacts continued to highlight the risk of persistent or reaccelerating inflationary pressures, particularly in the U.S. amid a more resilient economic outlook, that could lead to further monetary policy tightening and volatile market conditions,” the Fed report states. “Some contacts worried that persistent elevated inflation might entrench expectations of higher inflation, which could lead to higher realized inflation and require an even more restrictive monetary policy stance that could either induce or exacerbate a recession.”
Other Issues
The report also found:
- Respondents said real estate is a “potential trigger” for systemic stress, most notably in the commercial sector. Respondents specifically viewed small and regional domestic banks as particularly vulnerable due to their higher concentration of CRE exposures.
- Concerns were expressed over the re-emergence of banking-sector stress at smaller and regional banks as the result of renewed deposit outflows, primarily uninsured deposits; market liquidity strains and volatility and weakness in the Chinese economy and financial sector.
The survey was conducted from Aug. 10 to Oct. 4.
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