MNI: Fed Warns Ongoing Banking Stresses Could Lead To Slowdown

Ongoing stresses in the banking system could lead to a broader contraction in credit, resulting in a marked slowdown in economic activity, according to the Federal Reserve's May Financial Stability Report released Monday.

Despite decisive actions by the Federal Reserve, the FDIC, and the Treasury Department, concerns about the economic outlook, credit quality, and funding liquidity could lead banks and other financial institutions to further contract the supply of credit to the economy, the report said about near-time risks to the financial system.

"A sharp contraction in the availability of credit would drive up the cost of funding for businesses and households, potentially resulting in a slowdown in economic activity," the Fed said soon after releasing the April Senior Loan Officer Opinion Survey showing across-the-board tightened lending standards.

The Fed's semiannual report on financial stability said residential real estate remained elevated despite weakening activity and CRE valuations remained near historically high levels, even as price declines have been widespread across CRE market segments.

"In response to concerns about CRE, the Federal Reserve has increased monitoring of the performance of CRE loans and expanded examination procedures for banks with significant CRE concentration risk," the report said.