WASHINGTON (Reuters) – The U.S. financial system appears stable overall, though high levels of corporate debt, the impact of an extended period of low global interest rates, and emerging “stablecoin” proposals could pose risks, the Federal Reserve reported on Friday.
In its latest twice-yearly review of financial stability, the Fed said that conditions had changed little since its last report in May, and that “the core of the financial sector appears resilient.”
Some asset values are high, the Fed noted, pointing in particular to commercial real estate values. But “risk appetite” was felt to be in line with “historical norms,” household debt “at a modest level relative to income,” leverage levels low among the largest banks, and the use of potentially volatile short-term funding posing only a modest risk to financial institutions.
But the report highlighted the Fed’s ongoing concern with record high levels of corporate debt, which some Fed officials worry could go bad if business slows and worsen any economic downturn. In addition, the Fed said low global borrowing costs could over time erode bank, insurance company, and pension fund returns, prompting them to take more risks.
Over time, emerging financial technologies, such as the “stablecoin” crypto currency network proposed by Facebook, could cause trouble.
“The current combination of very low credit spreads and high levels of indebtedness among risky nonfinancial corporates, including through leveraged loans, merits heightened vigilance,” Fed Governor Lael Brainard said in a prepared statement. “Over the medium term, the low-for-long environment and the associated incentives to reach for yield and take on additional debt could increase financial vulnerabilities.
“Looking farther ahead, the emergence of a stablecoin network with global reach could pose important risks to financial stability.”
(Reporting by Howard Schneider; Editing by Andrea Ricci)