Fed Flags Elevated Asset Prices, High Debt as U.S. Financial Risks--Update
November 15 2019 - 02:59PM
Dow Jones News
By Andrew Ackerman
WASHINGTON -- The Federal Reserve identified elevated asset
prices and historically high debt owed by U.S. businesses as top
vulnerabilities facing the U.S. financial system, according to the
latest copy of the central bank's financial stability report.
The Fed cited potential risks tied to borrowing by companies not
in the financial sector, particularly leveraged loans -- a $1.1
trillion market that the Fed warned is growing quickly despite
consistently "weak" credit standards.
Fed Gov. Lael Brainard, in a statement, said low credit spreads
-- measured as the gap between yields on U.S. Treasurys and assets
such as corporate debt -- combined with high levels of indebtedness
among "risky" nonfinancial corporates, including through leveraged
loans, "merits heightened vigilance."
She added that the "low-for-long" interest rate environment and
the associated incentives to reach for yield and take on additional
debt "could increase financial vulnerabilities."
Still, Friday's report suggested overall risks were fairly
moderate. "The core of the financial sector appears resilient, with
leverage low and funding risk limited relative to the levels of
recent decades," the report said.
The document is the latest evolution in the Fed's efforts to
spotlight financial stability monitoring and follows years of more
intense in-house research. It comes as investors' recent recession
fears have waned on a series of economic reports that turned out
better than investors had feared.
In congressional testimony Thursday, Fed Chairman Jerome Powell
said the central bank is optimistic its interest-rate cuts this
year would buoy the U.S. economy against lingering headwinds. The
Fed has cut its benchmark interest rate three times since July to
cushion the economy against risks of a sharp slowdown from
weakening business investment and global growth.
In Friday's report, officials said deteriorating liquidity -- or
the ability to easily buy or sell -- in the U.S. Treasury and
equity-futures markets could lead to greater incidence of flash
events in which prices move abruptly and sizably and then quickly
revert.
"Flash events may undermine confidence in trading venues and
financial markets even if the price dislocations are short-lived,"
the Fed said, adding that because trading is increasingly connected
across markets, flash events in one market could affect trading and
liquidity in others.
While the banking sector overall is well-capitalized, the Fed
said several large banks have announced plans to distribute capital
to their shareholders in excess of expected earnings, "implying
that capital at those banks will decrease."
The stability report also identified potential economic shocks
that could test the stability of the U.S. financial system,
including slowing global economic growth and trade tensions.
Write to Andrew Ackerman at andrew.ackerman@wsj.com
(END) Dow Jones Newswires
November 15, 2019 14:44 ET (19:44 GMT)
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