Fed says vulnerabilities in U.S. financial system remain 'notable'

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ME News, May 21 (UTC+8), the minutes of the Federal Reserve's April meeting showed that officials updated their assessment of the stability of the U.S. financial system. Overall, financial vulnerabilities in the U.S. financial system remained "notable." Asset valuation pressures remained elevated, with housing valuation indicators near historical highs. Vulnerabilities related to nonfinancial corporate and household debt were assessed as "moderate." Household balance sheets remained strong, with significant housing equity. Although overall corporate debt growth has been relatively moderate in recent years, private credit has grown rapidly. Some private credit instruments saw net outflows in the first quarter, partly due to concerns that AI could disrupt business models in certain sectors (especially software), thereby affecting credit quality. Vulnerabilities related to financial sector leverage were assessed as "notable." Hedge fund leverage remained high, particularly in leveraged Treasury transactions. Life insurance companies' leverage also remained elevated. In contrast, bank regulatory capital ratios remained relatively high compared to historical levels. However, mark-to-market adjusted bank capital ratios declined in the first quarter and remained below pre-2022 levels, although they were significantly higher than the lows of a few years ago. Bank asset duration has fallen back to pre-pandemic levels, indicating that interest rate risk exposure has eased compared to recent years. Vulnerabilities related to funding risks were assessed as "moderate." (Source: Jin10)
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