The Fed's take was generally positive, arguing liquidity at U.S. banks remains robust. Many institutions have also reduced the portion of their asset base funded by uninsured deposits -- a primary driver of the regional banking turmoil of March 2023.
"The banking sector remained sound and resilient overall, and most banks continued to report capital levels well above regulatory requirements," the report said. "Vulnerabilities from business and household debt remained moderate."
Yet the report also flags significant losses on banks' portfolios.
HEIGHTENED SENSITIVITY
"Fair value losses on banks’ fixed-rate assets as of the start of November remained sizable, the fair value of banks’ assets continued to be sensitive to movements in long-term interest rates, and some banks still had concentrated exposures to loans backed by CRE," the Fed said.
Moreover, credit risk has risen in the consumer sector, including "signs of stress among borrowers with low credit scores." (See: MNI INTERVIEW: Ex-Fed's Blinder Sees Stagflation Shock Ahead)
Interest rate volatility also remains high by historical norms because of elevated uncertainty about the path of the economy and monetary policy.
The Fed also cited "heightened sensitivity to news about output growth, inflation, and the supply of Treasury securities."
Valuations in the equity markets remain elevated while credit spreads remain tight, the report said.
The report also includes details from outreach to academics, researchers and market contacts between late August and late October.
"In the fall survey, there were declines relative to spring in the share of respondents citing persistent inflation pressures and monetary tightening or generalized policy uncertainty as among the most notable risks to financial stability," the report said. "There were sizable increases in the share of respondents who noted among their top risks to financial stability fiscal debt sustainability, Middle East tensions, or a U.S. recession."
