WASHINGTON–With the anticipation underwriting standards will tighten as the economy slows, the Federal Reserve’s November financial stability report has found domestic banks have maintained high levels of liquid assets and stable funding over the last six months.
The report also found banks’ risk-based capital ratios have remained in the middle of the range in place in 2010, with stress tests showing the system “remains resilient to a severe recession.”
But there are concerns.
“A weaker outlook, higher interest rates, and elevated uncertainty have contributed to a substantial tightening in financial conditions,” the report states. “Economic, financial, and geopolitical risks also have risen across advanced and emerging market economies (EMEs), further contributing to asset price declines and periods of significant market volatility. These developments, and future shocks, have the potential to be amplified by vulnerabilities associated with asset valuations, borrowing by households and businesses, financial-sector leverage, and funding risks.”
Added Fed Vice Chair Lael Brainard, in a statement, “(Today’s environment of) “rapid synchronous global monetary policy tightening, elevated inflation, and high uncertainty associated with the pandemic and the war raises the risk that a shock could lead to the amplification of vulnerabilities, for instance due to strained liquidity in core financial markets or hidden leverage.”
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