The Federal Reserve says vulnerabilities in the U.S. financial system remain "notable".

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ME News Message, May 21 (UTC+8), the Federal Reserve's April meeting minutes showed that officials updated their assessment of the stability of the U.S. financial system. Overall, financial vulnerabilities in the U.S. financial system remain "notable." Asset valuation pressures are at elevated levels, with housing valuation indicators near historical highs. Vulnerabilities related to non-financial corporate and household debt were assessed as "moderate." Household balance sheets remain strong, with substantial housing equity. Although overall corporate debt growth has been relatively moderate in recent years, private credit has grown rapidly. Some private credit instruments experienced net fund outflows in the first quarter, partly due to concerns that AI could disrupt the business models of certain industries (especially the software industry), thereby affecting credit quality. Vulnerabilities related to financial sector leverage were assessed as "notable." Hedge fund leverage remains elevated, particularly in leveraged trading in the U.S. Treasury market. Life insurance companies' leverage also remains high. In contrast, bank regulatory capital ratios remain relatively high compared to historical levels. However, market-adjusted bank capital ratios declined in the first quarter and remain below pre-2022 levels, although they are significantly above the lows of a few years ago. Bank asset durations have fallen back to pre-pandemic levels, indicating that their interest rate risk exposure has eased compared to recent years. Vulnerabilities related to funding risks were assessed as "moderate." (Source: Jin Shi)
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