By Jeffry Bartash
The financial system is better able to deal with stress
Households, businesses and banks are in fairly good financial shape and do not appear to pose a major threat to the U.S. economy, a senior Federal Reserve official said Monday.
“In my view, our financial system is much more resilient than it was in the mid-2000s,” Fed Governor Lisa Cook said in a speech at Duke University.
Cook said household debt levels such as auto loans, credit cards and mortgages remain “at modest levels.”
Additionally, most of the debt is owned by people with “strong credit or significant home equity,” she said.
Corporate debt is near historic highs, she noted, but companies appear to have the means to pay their bills due to robust profits. So far, rising interest rates have hardly hurt them.
Banks and most other financial institutions “continue to be sound and resilient overall,” she said, with ample financial cushions that often exceed regulatory requirements.
“In the banking sector, the deposit volatility that we saw earlier in the year has abated,” Cook said, pointing to a brief surge in deposits following the failure of Silicon Valley Bank.
Still, Cook said she and other senior Fed officials are closely watching the financial system for emerging signs of stress.
She said the amount of leverage, or money invested in potentially risky investments, is “increased” at private hedge funds, which typically serve retail clients.
She also said lending to commercial real estate companies was riskier because demand for office space in major cities and coastal areas had weakened since the start of the pandemic and many people continued to work from home.
If there were more defaults, it could put more pressure on the financial system, she said.
Rising long-term bond yields are another threat, she said, but added that expectations of “higher short-term interest rates do not appear to be the cause of the increase.”
But even if the current risks appear low, the Fed must remain vigilant, Cook said. The bankruptcy of Silicon Valley Bank at the beginning of the year, for example, surprised the central bank.
“We cannot and do not anticipate all potential risks. The financial system is too complex and evolving too quickly for this to be possible,” Cook said.
“What we can do is remain vigilant against emerging vulnerabilities and strengthen resilience to a wide range of potential shocks.”
-Jeffry Bartash
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06/23/11 1214ET
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