## financial-stability-report-20230508 ## Source details **Canonical URL:** [financial-stability-report-20230508](https://www.federalreserve.gov/publications/files/financial-stability-report-20230508.pdf) ## Other formats - [Markdown version](/publications/files/financial-stability-report-20230508.pdf.md) - [Structured JSON version](/publications/files/financial-stability-report-20230508.pdf.json) --- ### Box 1.1 — Transition to SOFR: overview and adoption - USD LIBOR submissions end after June 30, 2023, marking the end of LIBOR as a representative benchmark. - ARRC estimate: USD LIBOR is used in $74 trillion of financial contracts maturing after June 2023. - SOFR activity and adoption: - SOFR represents more than 90 percent of risk traded in new derivatives activity. - More than $60 trillion of SOFR derivatives outstanding. - $4 trillion in SOFR loans and debt instruments outstanding. - The bulk of new lending activity has moved to term SOFR rates (1-, 3-, 6-, and 12-month maturities). - CME Group, administrator of term SOFR rates, has limited use in licensing agreements to mirror ARRC recommendations. - ARRC recognizes term SOFR rates as a fallback in legacy cash products and certain new cash issuances but recommends limiting their use in derivatives and most other cash markets. - Regulatory guidance and safety warnings: - Federal Reserve, FDIC, and OCC warned that most new use of USD LIBOR in contracts after 2021 would create safety and soundness risks; almost all new transactions moved to SOFR. - Adjustable-rate retail mortgage originations and almost all floating-rate debt issuance are now based on SOFR. ### Box 1.1 — Legacy contracts, LIBOR Act, and synthetic LIBOR - LIBOR Act (Board final rule, December): directed Board to select spread-adjusted benchmark replacements based on SOFR for LIBOR contracts maturing after June 30, 2023, without clear and practicable fallback language. - Many older contracts have fallbacks suited only for temporary outages or have no fallbacks; particular problem for legacy floating-rate debt, securitizations, and consumer products. - The Board’s final rule will replace LIBOR in these products with spread-adjusted versions of CME Group’s term SOFR rates or averages of SOFR following June 30, 2023. - FCA synthetic USD LIBOR: - FCA will require administrator to continue publishing 1-, 3-, and 6-month USD LIBOR on a “synthetic” basis through September 2024. - Synthetic USD LIBOR will be nonrepresentative and align with spread-adjusted term SOFR rates selected under the LIBOR Act for most nonconsumer cash products. - Most U.S. law contracts will not be affected, but some older U.S. contracts may reference synthetic LIBOR, particularly older loan agreements that would otherwise fall back to the prime rate. ### Box 1.1 — Remediation, operational risk, and market infrastructure actions - Clearinghouse conversions: - LCH and CME Group implementing plans to convert outstanding LIBOR derivatives they clear to SOFR over April and May 2023. - Remediation efforts and risks: - The Board encouraged banks to remediate LIBOR loans ahead of June 30, 2023, citing operational risks from attempting large-scale conversions after June 2023. - Firms set deadlines to remediate outstanding LIBOR loans ahead of June 30, 2023, but risk of falling behind schedule exists. - Remediation of syndicated leveraged loans has been particularly slow; recent signs of increased pace. - Refinancing as a remediation channel has been impeded by a decline in refinancing activity over the past year. - Securities cannot easily be remediated ahead of June 30, 2023; ARRC and FSOC encouraged use of DTCC’s LIBOR Replacement Index Communication Tool to inform investors. ### Box 1.1 — Financial-stability context and CRE exposure (related observations) - Banks hold about 60 percent of nonfarm nonresidential CRE loans; more than two-thirds of those are held by banks other than Category I–IV banks. - Mortgages backed by office or downtown retail property: about one-third of each set of institutions’ CRE holdings, on average. - Construction or land development loans: about 15 percent of aggregate bank nonfarm nonresidential CRE holdings. - Current loan-to-value (LTV) ratios of mortgages backed by office and downtown retail properties: in the range of 50 to 60 percent, on average (data as of fourth quarter of 2022). - Nonfarm nonresidential CRE mortgages: small share of total assets overall but about one-fifth of total assets of banks other than Category I–IV banks. - Federal Reserve increased monitoring of CRE loan performance and expanded examination procedures for banks with significant CRE concentration risk. ### Box 3.1 — The bank stresses since March 2023: timeline and key events - March 8, 2023: Silvergate Bank (assets at end of 2022: $11 billion) announced voluntary wind down and full repayment of deposits. - March 8, 2023: SVB (assets at end of 2022: $209 billion) sold $21 billion from its AFS securities portfolio at an after-tax loss of $1.8 billion; planned to increase nondeposit borrowing from $15 billion to $30 billion; planned public offering to raise $2.25 billion. - March 9, 2023: SVB deposit withdrawals totaled $42 billion in a single business day. - March 10, 2023: SVB reported $100 billion in scheduled or expected deposit withdrawals for that day; declared insolvent and FDIC appointed receiver. - March 10, 2023: Signature Bank (assets at end of 2022: $110 billion) experienced depositors withdrawing 20 percent of deposit balances that day; closed on March 12 and FDIC appointed receiver. - March 10–16, 2023: First Republic Bank (assets at end of 2022: $213 billion) experienced notable deposit outflows; taken possession by California Department of Financial Protection and Innovation before markets opened on May 1; FDIC appointed receiver and entered purchase and assumption agreement with JPMorgan Chase Bank on May 1 with loss-sharing agreement. - March 13–19, 2023: Credit Suisse sought emergency liquidity from Swiss National Bank for up to CHF 50 billion; UBS agreed to merge with Credit Suisse with Swiss government support. ### Box 3.1 — Market effects, runs, and comparisons - Rapid loss of confidence led to sharp declines in bank stock prices and unprecedented deposit withdrawals (SVB and Signature). - Runs were facilitated by electronic withdrawal technologies and messaging apps/social media among networked uninsured depositors. - Historical comparisons: - Washington Mutual (2008): depositors withdrew about $17 billion over eight business days; largest one-day withdrawal ~ just over 2 percent of pre-run deposits. - SVB and Signature Bank (March 2023): highest one-day withdrawal rate was more than 20 percent for each bank. - Continental Illinois (May 1984): peak one-day withdrawal rate 7.8 percent of deposits. ### Box 3.1 — Policy responses and official actions - March 12, 2023: Federal Reserve, FDIC, and U.S. Department of the Treasury announced actions to protect depositors and support flow of credit. - Treasury Secretary approved a systemic risk exception enabling FDIC resolution that fully protects all depositors; depositors given full access the following Monday. - Shareholders and certain unsecured debt holders not protected; senior management removed. - FDIC later estimated losses of $22 .5 billion to be borne by the Deposit Insurance Fund, replenished by special assessments on banks as required by law. - FDIC estimates about the cost: SVB approximately $20 billion and Signature Bank $2 .5 billion. - March 12, 2023: Establishment of Bank Term Funding Program (BTFP) with Treasury Secretary approval. - BTFP features: - Offers loans up to one year to federally insured banks, savings associations, credit unions, and U.S. branches/agencies of foreign banks. - New loans can be requested until at least March 11, 2024. - Eligible collateral: any collateral eligible for Federal Reserve open market operations (U.S. Treasury securities, U.S. agency securities, U.S. agency MBS). - BTFP extends loans against the par value of eligible collateral. - Treasury committed up to $25 billion from Exchange Stabilization Fund as backstop for BTFP. - Discount window remained open; discount window margins aligned with BTFP margins. - Observed liquidity usage: - Primary credit extended through discount window increased from less than $5 billion to more than $150 billion during first week, then fell back to about $70 billion. - Credit extended through BTFP increased steadily and stabilized between $70 billion and $80 billion. - March 19, 2023: Federal Reserve and other major central banks increased frequency of seven-day U.S. dollar liquidity swap line operations from weekly to daily beginning March 20; demand ticked up slightly over $100 million then fell back; on April 25 frequency to revert to once a week beginning May 1. ### Box 3.1 — Banks’ capital, leverage, and sector outlook - As of fourth quarter of 2022, banks in aggregate well capitalized; CET1 ratio close to median of its range since 2007–09 crisis. - G-SIBs increased CET1 ratios in second half of 2022 by cutting stock repurchases and reducing risk-weighted assets. - CET1 ratios decreased at large non-G-SIB and other banks but remained above requirements. - Tangible common equity to total tangible assets: - Edged up at G-SIBs in fourth quarter of 2022. - Continued to decline at large non-G-SIB and other banks. - Aggregate credit quality in nonfinancial sector remained strong; delinquency rates increased in certain segments including auto, credit cards, and CRE loans backed by office and retail buildings. - More than 45 percent of bank assets reprice or mature within a year. - Banks added nearly $2.3 (trillion) in securities to balance sheets in 2020–2021. - By end-2022, declines in fair value: $277 (billion) in AFS portfolios and $341 (billion) in HTM portfolios; additional decline of $28 (billion) related to securities transferred from AFS to HTM. - Bank examiners increased monitoring at potentially vulnerable banks focusing on investment securities valuation, deposit trends, funding diversity, and contingency funding plans. - The Federal Reserve stands prepared to use all its tools for institutions of any size to support safety and soundness. ### Box 3.2 — Private credit funds: size, strategies, and stability assessment - Size and dry powder (as of 2021:Q4): - Private credit funds AUM: $1 trillion. - Estimated dry powder: $228 billion. - Over past decade, private credit fund assets grew at annual rate of 13 percent; leveraged loans grew at annual rate of 10 percent. - Private credit AUM similar to outstanding leveraged loans (~$1 .4 trillion) and U.S. high-yield bonds (~$1 .5 trillion) as of 2021:Q4. - Preqin estimates total AUM grew by 8.9 percent in 2022. - Business development companies managed about $180 billion in assets (for comparison). - Investment strategies and liquidity: - Direct lending funds largest category: hold senior secured, unrated, floating-rate loans to middle-market companies (annual revenues $10 million–$1 billion). - Loans largely illiquid; valuations often Level 2 or 3. - Most private credit funds closed-end with 5–10 year lockups; hedge-fund-structured funds restrict redemptions via notice periods, lockups, and gates. - Uncalled capital and investor commitments: - Pensions held $69 billion in uncalled capital commitments to private credit funds as of 2021:Q4. - Insurance companies had $23 billion in uncalled capital commitments as of 2021:Q4. - Leverage and exposures: - Most funds unlevered; a minority use modest financial/synthetic leverage. - At 95th percentile: borrowings-to-assets ~ 1.27; derivatives-to-assets ~ 0.66. - Aggregate borrowings by private credit funds: about $200 billion in 2021:Q4 (mainly from U.S. financial institutions). - Derivatives gross notional exposure: about $200 billion. - Financial stability assessment: - Vulnerabilities appear limited: most funds use little leverage and have low redemption risks. - Deterioration in credit quality and investor risk appetite could limit funds’ capacity to provide new financing. - Visibility into private credit remains limited; comprehensive data lacking on terms of financing, borrower characteristics, and default risk. ### Box 5.1 — Survey of salient risks (spring 2023 outreach) - Survey overview: - Outreach period: February to early April (spring 2023). - Number of contacts surveyed: 25. - Most-cited risks and changes since prior survey: - Persistent inflation; monetary tightening: November 2022 — 62% of contacts surveyed; May 2023 — 56% of contacts surveyed. - Banking-sector stress: November 2022 — 56% of contacts surveyed; May 2023 — 62% of contacts surveyed. - Commercial and residential real estate: November 2022 — 52% of contacts surveyed; May 2023 — 52% of contacts surveyed. - U.S.–China tensions: May 2023 — 56% of contacts surveyed. - Russia–Ukraine war: November 2022 — 42% of contacts surveyed; May 2023 — 12% of contacts surveyed. - Cross-cutting observations: - Persistence of inflation and prospect of further monetary tightening remained top concern. - SVB failure on March 10 sharpened focus on banking-sector vulnerabilities and contagion via deposit runs and mark-to-market losses on long-duration assets. - CRE vulnerabilities frequently cited as potential proximate trigger of banking stress. - Geopolitical developments (U.S.–China relations; Russia–Ukraine war) prominent nonfinancial sources of risk. ### Selected exact key statistics and market-size figures (preserved) - Key market-size (Table 1.1 outstanding, growth, average annual growth): - Residential real estate: Outstanding (billions of dollars) 55,670; Growth, 2021:Q4–2022:Q4 (percent) 10.4; Average annual growth, 1997–2022:Q4 (percent) 6.4 - Equities: Outstanding (billions of dollars) 46,819; Growth, 2021:Q4–2022:Q4 (percent) −21.0; Average annual growth, 1997–2022:Q4 (percent) 8.7 - Treasury securities: Outstanding (billions of dollars) 23,845; Growth, 2021:Q4–2022:Q4 (percent) 5.7; Average annual growth, 1997–2022:Q4 (percent) 8.1 - Commercial real estate: Outstanding (billions of dollars) 23,796; Growth, 2021:Q4–2022:Q4 (percent) −1.4; Average annual growth, 1997–2022:Q4 (percent) 6.8 - Investment-grade corporate bonds: Outstanding (billions of dollars) 7,116; Growth, 2021:Q4–2022:Q4 (percent) 4.8; Average annual growth, 1997–2022:Q4 (percent) 8.1 - Farmland: Outstanding (billions of dollars) 3,188; Growth, 2021:Q4–2022:Q4 (percent) 10.1; Average annual growth, 1997–2022:Q4 (percent) 5.7 - High-yield and unrated corporate bonds: Outstanding (billions of dollars) 1,677; Growth, 2021:Q4–2022:Q4 (percent) −6.6; Average annual growth, 1997–2022:Q4 (percent) 6.6 - Leveraged loans*: Outstanding (billions of dollars) 1,424; Growth, 2021:Q4–2022:Q4 (percent) 6.2; Average annual growth, 1997–2022:Q4 (percent) 13.9 - Price growth (real): - Commercial real estate** −1.9 (one-year growth); average annual growth 3.1 - Residential real estate*** .3 (one-year growth); average annual growth 2.5 - Outstanding nonfinancial credit (2022:Q4): - Total private nonfinancial credit: 38,832 (billions of dollars); Growth, 2021:Q4–2022:Q4: 6.0 (percent); Average annual growth, 1997–2022:Q4: 5.6 (percent) - Total nonfinancial business credit: 19,877 (billions of dollars); Growth: 5.9 (percent); Average annual growth: 5.9 (percent) - Corporate business credit: 12,765 (billions of dollars); Growth: 5.5 (percent); Average annual growth: 5.3 (percent) - Bonds and commercial paper: 7,545.7 (billions of dollars); Growth: 5.5 (percent) - Bank lending: 2,171.20 (billions of dollars); Growth: 20.9 (percent) - Leveraged loans*: 1,388 (billions of dollars); Growth: 11.3 (percent); Average annual growth (2000–2022:Q4): 14.1 (percent) - Noncorporate business credit: 7,111 (billions of dollars); Growth: 6.6 (percent); Average annual growth: 7.0 (percent) - Commercial real estate credit: 3,069 (billions of dollars); Growth: 8.1 (percent); Average annual growth: 6.3 (percent) - Total household credit: 18,955 (billions of dollars); Growth, 2021:Q4–2022:Q4: 6.2 (percent); Average annual growth, 1997–2022:Q4: 5.4 (percent) - Mortgages: 12,515 (billions of dollars); Growth: 7.2 (percent); Average annual growth: 5.6 (percent) - Consumer credit: 4,781 (billions of dollars); Growth: 7.9 (percent); Average annual growth: 5.2 (percent) - Student loans: 1,757 (billions of dollars); Growth: 1.4 (percent); Average annual growth: 8.0 (percent) - Auto loans: 1,412 (billions of dollars); Growth: 7.5 (percent); Average annual growth: 5.1 (percent) - Credit cards: 1,203 (billions of dollars); Growth: 15.5 (percent); Average annual growth: 3.5 (percent) - Nominal GDP: 26,145 (billions of dollars); Growth: 7.2 (percent); Average annual growth: 4.5 (percent) - Sector-size snapshot (2022:Q4): - Banks and credit unions: 25,594 (billions of dollars); Growth, 2021:Q4–2022:Q4: -0.1 (percent); Average annual growth, 1997–2022:Q4: 6.1 (percent) - Mutual funds: 17,333 (billions of dollars); Growth: -22.0 (percent); Average annual growth: 8.9 (percent) - Insurance companies: 11,867 (billions of dollars); Growth: -8.5 (percent); Average annual growth: 5.5 (percent) - Life: 8,844 (billions of dollars); Growth: -10.3 (percent); Average annual growth: 5.6 (percent) - Property and casualty: 3,023 (billions of dollars); Growth: -2.5 (percent); Average annual growth: 5.5 (percent) - Hedge funds*: 9,067 (billions of dollars); Growth: -5.7 (percent); Average annual growth: 7.9 (percent) - Broker-dealers**: 4,927 (billions of dollars); Growth: -0.7 (percent); Average annual growth: 4.8 (percent) - Securitization outstanding: 13,161 (billions of dollars); Growth: 9.1 (percent); Average annual growth: 5.6 (percent) - Agency: 11,698 (billions of dollars); Growth: 9.5 (percent); Average annual growth: 6.1 (percent) - Non-agency***: 1,464 (billions of dollars); Growth: 5.8 (percent); Average annual growth: 3.6 (percent) *Federal Reserve Board, Financial Stability Report (excerpt; information in this excerpt reflects material available as of April 21, 2023).* ### Box 1 .1 . Update on the Transition to the Secured Overnight Financing Rate . . . . . . . . . . . .13 ### Box 1 .1 . Update on the Transition to the Secured Overnight Financing Rate ### Location and context - Listed in the report’s table of contents as: "Box 1 .1 . Update on the Transition to the Secured Overnight Financing Rate . . . . . . . . . . . .13" - The report note: "This report generally reflects information that was available as of April 21, 2023 ." ### Relevant report context and surrounding themes (from same source pages) - The report’s monitoring framework emphasizes four categories of vulnerabilities: valuation pressures; borrowing by businesses and households; excessive leverage within the financial sector; and funding risks. - Since the November 2022 Financial Stability Report, Silicon Valley Bank (SVB), Signature Bank, and First Republic Bank failed following substantial deposit outflows prompted by concerns over poor management of interest rate risk and liquidity risk. - In March, to prevent broader spillovers in the banking system, the Federal Reserve, together with the Federal Deposit (text truncated in source). - Selected vulnerability observations from the report overview: - "Yields on Treasury securities declined across all maturities in March amid heightened financial market volatility." - "Risk premiums in equity and corporate bond markets continued to be near the middle of their historical distributions." - "Real estate valuations remained very elevated even though activity weakened. Both house prices and commercial property prices have shown recent declines." - "The ratio of total private debt to gross domestic product (GDP) edged down but was still at a moderate level." - "The business debt-to-GDP ratio remained at a high level, but debt issuance by the riskiest companies slowed markedly. Interest coverage ratios for publicly traded firms declined a bit from historically high levels." - "Household debt remained at modest levels relative to GDP and was concentrated among prime-rated borrowers." - "Poor management of interest rate risk and liquidity risk contributed to three sizable bank failures since March." ### Implications for the SOFR transition (contextual points present in source) - The SOFR transition box appears in a report that is focused on financial stability vulnerabilities including interest rate and liquidity risk, which are relevant contextual factors for reference rate transitions. - The report’s emphasis on monitoring funding risks and valuation pressures provides the framework within which changes in short-term reference rates, such as the transition to SOFR, would be assessed for financial-stability implications. *Federal Reserve Board, Financial Stability Report (information in this excerpt reflects material available as of April 21, 2023).* ### 2023. Concerns over ### 2023. Concerns over ### Overview and recent developments - Concerns over broader spillovers in the banking sector led to official interventions by the Federal Reserve, the Federal Deposit Insurance Corporation, and the U.S. Department of Treasury. - The official actions protected bank depositors and supported the continued flow of credit to households and businesses; financial markets normalized and deposit flows stabilized since March, although some banks that experienced large deposit outflows continued to experience stress. - Summary of vulnerabilities since the prior report: - Asset valuations: Yields on Treasury securities declined in March amid heightened financial market volatility. Measures of equity prices relative to expected earnings were volatile but remained above their historical median. Risk premiums in corporate bond markets stayed near the middle of their historical distributions. Valuations in residential real estate remained elevated despite weakening activity. Commercial real estate (CRE) valuations remained near historically high levels even as price declines were widespread across CRE market segments. - Borrowing by businesses and households: Vulnerabilities were little changed and remained at moderate levels. Business debt remained elevated relative to GDP, and measures of leverage remained in the upper range of historical distributions, with indications that business debt growth began to slow toward the end of last year. Household debt remained at modest levels relative to GDP, with most of that debt owed by households with strong credit histories or considerable home equity. - Leverage in the financial sector: Market reassessment of some banks followed concerns over heavy reliance on uninsured deposits, declining fair values of long-duration fixed-rate assets, and poor risk management. The banking sector remained resilient with substantial loss-absorbing capacity. Broker-dealer leverage remained historically low. Leverage at life insurance companies edged up but stayed below its pandemic peak. Hedge fund leverage remained elevated, especially for large hedge funds. - Funding risks: Substantial withdrawals of uninsured deposits contributed to the failures of SVB, Signature Bank, and First Republic Bank and increased funding strains for some other banks, primarily those with heavy reliance on uninsured deposits and substantial interest rate risk exposure. Policy interventions by the Federal Reserve and other agencies helped mitigate these strains. Overall, domestic banks have ample liquidity and limited reliance on short-term wholesale funding. Structural vulnerabilities remained in short-term funding markets: prime and tax-exempt money market funds (MMFs), other cash-investment vehicles, and stablecoins remained vulnerable to runs. Certain types of bond and loan funds experienced outflows and remained susceptible to large redemptions. Life insurers continued to have elevated liquidity risks as the share of risky and illiquid assets remained high. ### Banking stresses and official interventions - Some banks experienced notable funding strains following the failures of Silicon Valley Bank and Signature Bank. - Actions by the official sector reduced funding strains in the banking system. - The box “The Bank Stresses since March 2023” discusses market reassessments of bank strength. - The box “The Federal Reserve’s Actions to Protect Bank Depositors and Support the Flow of Credit to Households and Businesses” details policy interventions that helped mitigate strains. ### Asset valuation findings and market functioning - Treasury securities: - Yields on Treasury securities declined across all maturities on net since the November report; declines were sharp in March following SVB and Signature Bank failures. - The two-year Treasury yield fell by more than 60 basis points on March 13 (the single largest daily decline since 1987). - A model-based estimate of the nominal Treasury term premium remained low relative to its long-run history. - Treasury market volumes, particularly in the on-the-run segment, increased dramatically in March. - Interest rate volatility implied by options remained well above its historical median. - Treasury market liquidity: market depth in on-the-run Treasury securities fell substantially in mid-March; bid-ask spreads rose marketwide with notable increases for shorter-maturity notes; intraday volatility of bid-ask spreads on short-maturity securities rose to levels last seen in March 2020. By early April, the most acute strains had dissipated and liquidity conditions returned to prior levels. - Equity markets: - Equity prices in the banking sector fell following the SVB and Signature Bank failures; broad equity indexes were volatile but up a bit from the previous report. - Equity market valuation pressures increased modestly as equity price growth outpaced growth in earnings forecasts, pushing the forward price-to-earnings ratio higher to a level notably above its historical average. - An estimate of the expected equity premium declined since the November report to somewhat below its historical median. - Equity market volatility remained elevated during the first quarter of 2023 but fell to near its historical median in April. - Corporate and leveraged credit: - Yields on corporate bonds fell since the November report and by more than yields on comparable-maturity Treasury securities; corporate bond spreads were moderately lower and near historical average levels. - The excess bond premium stayed near its historical average. - Spreads on leveraged loans declined modestly and were near their average over the past decade; the excess loan premium increased notably during March and remained at an elevated level. - The trailing 12-month loan default rate increased moderately but remained somewhat below its historical median; the year-ahead expected default rate rose moderately. - The transition away from LIBOR in the leveraged loan market was nearly complete, with almost all new leveraged loan activity being conducted using SOFR. ### Commercial and residential real estate - CRE: - Aggregate CRE prices adjusted for inflation declined since the November report but remained at high levels. - Capitalization rates at property purchase turned up modestly from historically low levels. - Price declines were widespread across property types; fundamentals in the office sector were particularly weak for central business district offices, with vacancy rates increasing further and rent growth declining. - In the January 2023 Senior Loan Officer Opinion Survey (SLOOS), banks reported weaker demand and tighter standards for all CRE loan categories. - Residential real estate: - Valuations remained near all-time highs despite weakening activity and falling prices in recent months. - Farmland: - Farmland prices were historically elevated relative to rents, reflecting higher crop prices and limited inventories of land. ### Leverage, liquidity, and structural vulnerabilities - Broker-dealer leverage rested near historically low levels; the limited willingness and ability of dealers to intermediate during times of distress can amplify volatility. - Hedge fund leverage remained elevated, especially among large hedge funds. - Bank lending to nonbank financial institutions stabilized at high levels. - Structural vulnerabilities persisted at money market funds, other cash-management vehicles, and stablecoins. - Certain mutual funds and certain types of bond and loan funds continued to be susceptible to large redemptions. - Liquidity risks for life insurers remained elevated as the share of illiquid and risky assets continued to edge up. ### Survey of salient risks to the U.S. financial system - Survey respondents (outreach conducted from February to April) frequently cited these risks: - Persistent inflation; monetary tightening: November 2022 — 62% of contacts surveyed; May 2023 — 56% of contacts surveyed. - Banking-sector stress: November 2022 — 56% of contacts surveyed; May 2023 — 62% of contacts surveyed. - Commercial and residential real estate: November 2022 — 52% of contacts surveyed; May 2023 — 52% of contacts surveyed. - U.S.–China tensions: May 2023 — 56% of contacts surveyed. - Russia–Ukraine war: November 2022 — 42% of contacts surveyed; May 2023 — 12% of contacts surveyed. ### Key market-size statistics (Table 1.1: Outstanding, growth, and average annual growth) - Residential real estate: Outstanding (billions of dollars) 55,670; Growth, 2021:Q4–2022:Q4 (percent) 10.4; Average annual growth, 1997–2022:Q4 (percent) 6.4 - Equities: Outstanding (billions of dollars) 46,819; Growth, 2021:Q4–2022:Q4 (percent) −21.0; Average annual growth, 1997–2022:Q4 (percent) 8.7 - Treasury securities: Outstanding (billions of dollars) 23,845; Growth, 2021:Q4–2022:Q4 (percent) 5.7; Average annual growth, 1997–2022:Q4 (percent) 8.1 - Commercial real estate: Outstanding (billions of dollars) 23,796; Growth, 2021:Q4–2022:Q4 (percent) −1.4; Average annual growth, 1997–2022:Q4 (percent) 6.8 - Investment-grade corporate bonds: Outstanding (billions of dollars) 7,116; Growth, 2021:Q4–2022:Q4 (percent) 4.8; Average annual growth, 1997–2022:Q4 (percent) 8.1 - Farmland: Outstanding (billions of dollars) 3,188; Growth, 2021:Q4–2022:Q4 (percent) 10.1; Average annual growth, 1997–2022:Q4 (percent) 5.7 - High-yield and unrated corporate bonds: Outstanding (billions of dollars) 1,677; Growth, 2021:Q4–2022:Q4 (percent) −6.6; Average annual growth, 1997–2022:Q4 (percent) 6.6 - Leveraged loans*: Outstanding (billions of dollars) 1,424; Growth, 2021:Q4–2022:Q4 (percent) 6.2; Average annual growth, 1997–2022:Q4 (percent) 13.9 - Price growth (real): Commercial real estate** −1.9 (one-year growth); average annual growth 3.1; Residential real estate*** .3 (one-year growth); average annual growth 2.5 - *The amount outstanding shows institutional leveraged loans and generally excludes loan commitments held by banks. - **One-year growth of commercial real estate prices is from December 2021 to December 2022; average annual growth is from 1998:Q4 to 2022:Q4. - ***One-year growth of residential real estate prices is from December 2021 to December 2022; average annual growth is from 1997:Q4 to 2022:Q4. *Financial Stability Report — 2023 (excerpt).* ### Box 1.1. Update on the Transition to the Secured Overnight ### Box 1.1. Update on the Transition to the Secured Overnight Financing Rate ### Transition overview - Banks contributing to the U.S. dollar (USD) LIBOR rates are due to end their submissions after June 30, 2023, marking the end of LIBOR as a representative benchmark. - The ARRC has estimated that USD LIBOR is used in $74 trillion of financial contracts maturing after June 2023, and it is also used extensively in nonfinancial contracts. ### New activity and adoption of SOFR - Following guidance from the Federal Reserve, FDIC, and Office of the Comptroller of the Currency warning that most new use of USD LIBOR in contracts after 2021 would create safety and soundness risks, almost all new transactions have moved to SOFR. - Adjustable-rate retail mortgage originations and almost all floating-rate debt issuance are now based on SOFR. - SOFR represents more than 90 percent of risk traded in new derivatives activity. - Despite SOFR beginning publication in 2018, there are now: - more than $60 trillion of SOFR derivatives outstanding, and - $4 trillion in SOFR loans and debt instruments outstanding. - The bulk of new lending activity has moved to term SOFR rates. Term SOFR rates are forward-looking benchmarks with 1-, 3-, 6-, and 12-month maturities similar to LIBOR and are derivatives products based on futures markets for SOFR rather than directly on overnight repo transactions. - CME Group, the administrator of the term SOFR rates, has moved to explicitly incorporate limits on the use of its rates in licensing agreements that mirror the ARRC’s recommendations. - The FSOC and Financial Stability Board have recognized limited uses of term rates in legacy LIBOR cash products and some business loans but warned against more widespread use. - The ARRC has recognized term SOFR rates as a fallback in legacy cash products and certain new issuances of cash products, particularly business loans, but has recommended limiting their use in derivatives and most other cash markets. ### Legacy products and regulatory response - In December, the Board issued its final rule implementing the Adjustable Interest Rate (LIBOR) Act (LIBOR Act). - The LIBOR Act directed the Board to select spread-adjusted benchmark replacements based on SOFR for LIBOR contracts that mature after June 30, 2023, and do not have clear and practicable fallback language. - Many older contracts only have fallbacks appropriate for a temporary outage of LIBOR rather than its permanent cessation, and some contracts do not have any fallbacks at all. This is a particular problem for legacy floating-rate debt, securitizations, and consumer products, which are difficult to amend. - The Board’s final rule will replace (or allow for the replacement of) LIBOR in these products with spread-adjusted versions of CME Group’s term SOFR rates or averages of SOFR following June 30, 2023. ### Synthetic USD LIBOR and cross‑jurisdiction issues - The U.K. Financial Conduct Authority (FCA) announced it will require the administrator of LIBOR to continue publishing 1-, 3-, and 6-month USD LIBOR on a “synthetic” basis for an additional 15 months, through September 2024. - The FCA has stated these synthetic LIBOR rates will be nonrepresentative and intends their publication to help the transition of legacy contracts not subject to U.S. law and therefore not covered by the LIBOR Act. - The synthetic USD LIBOR will be published as LIBOR but would match the spread-adjusted term SOFR rates that the Board has selected under the LIBOR Act as the benchmark replacement applicable to most nonconsumer cash products. - Most contracts under U.S. law will not be affected by the publication of these synthetic rates either because they have more recent fallback language or because they are covered by the LIBOR Act. Nonetheless, some contracts issued under U.S. law that would fall back to a non-LIBOR rate may reference the synthetic LIBOR rates, primarily older loan agreements that otherwise would fall back to the prime rate (which is much higher than LIBOR) if LIBOR is unavailable. ### Remediation efforts and operational risks - LCH and CME Group are implementing plans to convert outstanding LIBOR derivatives that they clear to SOFR over April and May 2023. - The Board has encouraged banks to remediate their LIBOR loans ahead of June 30, 2023, where feasible, citing operational risks from attempting to convert a large book of LIBOR loans in a short period after June 2023. - Firms have set deadlines to complete remediation of outstanding LIBOR loans ahead of June 30, 2023, but there are risks they will fall behind schedule. - Progress in remediating syndicated leveraged loans, which can require consent or nonobjection from a majority of lenders—including nonbank financial institutions (NBFIs)—has been particularly slow, although there have been recent signs the pace may be increasing. - Many firms had planned to use refinancing as an opportunity to move these loans off LIBOR, but refinancing activity has declined over the past year. - Securities cannot easily be remediated ahead of the June 30, 2023, deadline; the ARRC and FSOC have encouraged issuers and other relevant parties to use the Depository Trust and Clearing Corporation’s LIBOR Replacement Index Communication Tool to inform investors about rate changes taking effect after June 2023. ### Financial stability and CRE exposure context (related observations in the surrounding material) - Banks hold about 60 percent of nonfarm nonresidential CRE loans, of which more than two-thirds are held by banks other than Category I–IV banks. - Mortgages specifically backed by offi ce or downtown retail property tend to be about one-third of each set of institutions’ CRE holdings, on average. - Loans for construction or land development of nonfarm nonresidential properties are about 15 percent of aggregate bank nonfarm nonresidential CRE holdings. - As of the fourth quarter of 2022, current loan-to-value (LTV) ratios of mortgages backed by office and downtown retail properties were in the range of 50 to 60 percent, on average, for available loan-level data (Category I–IV banks, insurance companies, and CMBS pools). - Nonfarm nonresidential CRE mortgages tend to be a small share of total assets held by banks overall, but about one-fifth of total assets of banks other than Category I–IV banks. - The Federal Reserve has increased monitoring of the performance of CRE loans and expanded examination procedures for banks with significant CRE concentration risk. *Source: Box 1.1, Financial Stability Report (excerpt).* ### Box 1.2—continued ### Box 1.2—continued ### Commercial real estate holdings (2022:Q4) - Total nonfarm nonresidential CRE holdings: 3.57 (trillions of dollars) - Holders and reported figures: - Banks: 2.176 (trillions of dollars); Percent of total CRE loans outstanding: 61.7228.5 (as presented) - Category I banks (U.S. G-SIBs): .28 (trillions of dollars); Percent of total CRE loans outstanding: 8.1014.3 (as presented) - Category II–IV banks: .34 (trillions of dollars); Percent of total CRE loans outstanding: 9.11 6.8 (as presented) - Other: 1.554 (trillions of dollars); Percent of total CRE loans outstanding: 3.51 7.4 (as presented) - Life insurers: .471 (trillions of dollars); Percent of total CRE loans outstanding: 3.17 5.4 (as presented) - Holders of non-agency CMBS: .531 (trillions of dollars); Percent of total CRE loans outstanding: 5.17 (as presented) - Other nonbank: .401 (trillions of dollars); Percent of total CRE loans outstanding: 1.1 (as presented) - Notes on construction and definitions: - Total nonfarm nonresidential CRE equals all commercial mortgage assets as reported in Table L.220: Commercial Mortgages in the “Financial Accounts of the United States.” - For banks: private depository institutions’ CRE loans; banks’ totals constructed as sum of loans secured by nonfarm nonresidential properties and 0.847 fraction of non–one- to four-family construction lending. - For life insurers: life insurers’ CRE loans; life insurer total assets do not consider reinsurance. - For holders of non-agency CMBS: data include REIT holdings of CMBS. - Other nonbank holders = total commercial mortgages less banks, life insurers, and holders of CMBS (includes REITs, government, and nonfinancial businesses). - Office and downtown retail loan holdings for groups adjusted by staff estimates for the office loan share of nonfarm nonresidential CRE loans in the group. - Total assets for banks calculated using FR Y-9C and Call Reports. - Source data used by staff calculations: Form FR Y-14Q (Schedule H.2); Morningstar CMBS data; National Association of Insurance Commissioners, Schedule B; CBRE Econometric Advisors; Statistical Release Z.1; FR Y-9C; S&P Global, Capital IQ Pro; and Call Report Forms FFIEC 031, 041, and 051. ### House prices and residential valuation indicators - Recent dynamics: - Year-over-year house price increases have decelerated; some data suggested small declines in recent months. - Valuation pressures remain elevated despite declines in early quarter. - Model-based valuation measures: - Model using prices relative to owners’ equivalent rent and the real 10-year Treasury yield remained near historically high levels. - Market-rent–based measure also indicated stretched valuations, though to a lesser extent. - Price-to-rent ratios: - Price-to-rent ratios declined across a wide distribution of geographic areas since the November report, but the median price-to-rent ratio remained above its previous peak in the mid-2000s. - Mortgage market and fundamentals: - Foreclosures and distressed sales remained limited. - Mortgage underwriting standards did not loosen substantially. - Homeowner equity cushions remained considerable. - Share of second-home buyers remained near historical lows. - Data sources for figures cited: Zillow, Inc.; Bureau of Labor Statistics; CoreLogic, Inc.; S&P Case-Shiller Home Price Indices. ### Outstanding amounts of nonfinancial business and household credit (2022:Q4) - Total private nonfinancial credit: 38,832 (billions of dollars); Growth, 2021:Q4–2022:Q4: 6.0 (percent); Average annual growth, 1997–2022:Q4: 5.6 (percent) - Total nonfinancial business credit: 19,877 (billions of dollars); Growth, 2021:Q4–2022:Q4: 5.9 (percent); Average annual growth, 1997–2022:Q4: 5.9 (percent) - Corporate business credit: 12,765 (billions of dollars); Growth: 5.5 (percent); Average annual growth: 5.3 (percent) - Bonds and commercial paper: 7,545.7 (billions of dollars); Growth: 5.5 (percent) - Bank lending: 2,171.20 (billions of dollars); Growth: 20.9 (percent) - Leveraged loans*: 1,388 (billions of dollars); Growth: 11.3 (percent); Average annual growth (2000–2022:Q4): 14.1 (percent) - Noncorporate business credit: 7,111 (billions of dollars); Growth: 6.6 (percent); Average annual growth: 7.0 (percent) - Commercial real estate credit: 3,069 (billions of dollars); Growth: 8.1 (percent); Average annual growth: 6.3 (percent) - Total household credit: 18,955 (billions of dollars); Growth, 2021:Q4–2022:Q4: 6.2 (percent); Average annual growth, 1997–2022:Q4: 5.4 (percent) - Mortgages: 12,515 (billions of dollars); Growth: 7.2 (percent); Average annual growth: 5.6 (percent) - Consumer credit: 4,781 (billions of dollars); Growth: 7.9 (percent); Average annual growth: 5.2 (percent) - Student loans: 1,757 (billions of dollars); Growth: 1.4 (percent); Average annual growth: 8.0 (percent) - Auto loans: 1,412 (billions of dollars); Growth: 7.5 (percent); Average annual growth: 5.1 (percent) - Credit cards: 1,203 (billions of dollars); Growth: 15.5 (percent); Average annual growth: 3.5 (percent) - Nominal GDP: 26,145 (billions of dollars); Growth: 7.2 (percent); Average annual growth: 4.5 (percent) - Notes: - Data extend through 2022:Q4; outstanding amounts are nominal. - Leveraged loans in table are estimates for nonfinancial businesses; average annual growth for leveraged loans computed from 2000 to 2022:Q4. ### Business debt vulnerabilities and indicators - Overall assessment: vulnerabilities from nonfinancial business debt remained moderate since the November report. - Leverage and issuance: - Business debt-to-GDP ratio and gross leverage remained at high levels but were lower than pandemic-onset peaks. - Gross leverage of publicly traded nonfinancial firms remained high by historical standards and roughly unchanged from 2021. - Net leverage (debt less cash to total assets) continued to edge up among large publicly traded businesses and remained high relative to history. - Earnings and interest coverage: - Median interest coverage ratios remained high, supported by strong earnings growth, though earnings growth has started to slow for the largest firms. - Median interest coverage ratio for all publicly traded firms retreated from recent high but remained in the upper range of its historical distribution. - For non-investment-grade firms, interest coverage ratios remained below historical median levels. - Note: Only about 5 percent of outstanding bonds rated triple-B and 1 percent of outstanding high-yield bonds are due within a year. - Market issuance and credit quality: - Net issuance of risky debt dropped sharply; institutional leveraged loan issuance turned negative for the first time since 2020. - Net issuance of high-yield and unrated bonds remained negative. - Credit performance of outstanding corporate bonds remained strong; downgrades and defaults volumes remained low but market expectations of defaults over the next year rose. - More than half of investment-grade bonds outstanding rated in lowest investment-grade category (triple-B). - Leveraged loans: - Credit quality remained solid through second half of 2022 but showed signs of deterioration: downgrades exceeded upgrades; defaults inched up for four consecutive quarters from historically low levels. - Share of newly issued loans with debt multiples > 5 remained historically high in 2022. - Rising interest rates and weakening earnings could pressure leveraged loan credit quality due to floating-rate exposures. - Small and middle-market firms: - Leverage declined over second half of 2022; median interest coverage ratio for median middle-market firm remained high and above level at publicly traded firms. - Delinquency rates for small businesses edged up from relatively low levels, but overall credit quality remained solid. - Borrowing costs for small businesses increased in 2022 and stand a touch higher than prevailing pre-pandemic rates. - Share of small businesses that borrow regularly increased but remained low relative to historical levels; share with unmet financing needs remained quite low. ### Household debt vulnerabilities and credit performance - Overall assessment: vulnerabilities from household debt remained moderate. - Aggregate and components: - Total outstanding household debt: 18,955 (billions of dollars) (see table above). - Household debt adjusted for inflation edged up in second half of 2022; most growth driven by prime borrowers who accounted for more than half of total number of borrowers. - Mortgage debt accounts for roughly two-thirds of total household debt. - Debt service and interest-rate pass-through: - Household debt service ratio (total required household debt payments to total disposable income) increased slightly since the November report but remained at modest levels after reaching a historical low in 2021:Q1. - With only a small share of household debt subject to floating rates (except credit cards), pass-through of higher interest rates to household interest expenses has been partial; most types of household debt see higher borrowing costs mainly on new originations. - Mortgage indicators: - Mortgage delinquency rate ticked up from historically low level; share of mortgage balances in loss-mitigation remained low. - Very low share of borrowers had negative home equity in 2022:Q4. - New mortgage extensions skewed toward prime borrowers and declined in 2022:Q4 amid higher mortgage rates and slower housing activity. - About half of newly originated purchase loans in 2022 had low down payments; such high-leverage originations tended to have lower average credit scores and are vulnerable to house price declines. - Share of adjustable-rate mortgages in new home purchases at 10 percent in recent months. - Early payment delinquency rate (balances becoming delinquent within one year of origination) continued to rise. - Consumer credit: - Remaining one-third of household debt is consumer credit: student loans, auto loans, credit card debt. - Real consumer credit edged up in second half of 2022 at a slightly higher pace than GDP. - Real auto loan balances ticked up, mostly driven by prime borrowers; near-prime and subprime balances also increased to lesser extent. - Share of auto loan balances in loss mitigation continued to decline and stood at a low level at end-2022; delinquent auto loan balances increased over past several quarters to levels in line with the previous decade. - Aggregate real credit card balances continued to increase in second half of 2022; rates on these balances increased in line with short-term rates; delinquency rates increased but remained at low levels. - Real student loan debt declined with onset of pandemic and has recently ticked up. - Data sources cited: Federal Reserve Bank of New York Consumer Credit Panel/Equifax; consumer price index, Bureau of Labor Statistics; CoreLogic, Inc.; Zillow, Inc. ### Leverage in the financial sector and bank stresses - Sector-size snapshot (2022:Q4 unless otherwise noted): - Banks and credit unions: 25,594 (billions of dollars); Growth, 2021:Q4–2022:Q4: -0.1 (percent); Average annual growth, 1997–2022:Q4: 6.1 (percent) - Mutual funds: 17,333 (billions of dollars); Growth: -22.0 (percent); Average annual growth: 8.9 (percent) - Insurance companies: 11,867 (billions of dollars); Growth: -8.5 (percent); Average annual growth: 5.5 (percent) - Life: 8,844 (billions of dollars); Growth: -10.3 (percent); Average annual growth: 5.6 (percent) - Property and casualty: 3,023 (billions of dollars); Growth: -2.5 (percent); Average annual growth: 5.5 (percent) - Hedge funds*: 9,067 (billions of dollars); Growth: -5.7 (percent); Average annual growth: 7.9 (percent) (data start 2012:Q4 through 2022:Q3) - Broker-dealers**: 4,927 (billions of dollars); Growth: -0.7 (percent); Average annual growth: 4.8 (percent) - Securitization outstanding: 13,161 (billions of dollars); Growth: 9.1 (percent); Average annual growth: 5.6 (percent) - Agency: 11,698 (billions of dollars); Growth: 9.5 (percent); Average annual growth: 6.1 (percent) - Non-agency***: 1,464 (billions of dollars); Growth: 5.8 (percent); Average annual growth: 3.6 (percent) - Aggregate banking sector resilience and vulnerabilities: - More than 45 percent of bank assets reprice or mature within a year, reducing exposure to legacy fixed-rate assets. - Banks added nearly $2.3 (trillion) in securities to balance sheets in 2020–2021, primarily fixed-rate U.S. Treasury securities and agency-guaranteed MBS, largely in AFS and HTM portfolios. - By end-2022, declines in fair value: $277 (billion) in AFS portfolios and $341 (billion) in HTM portfolios; additional decline of $28 (billion) related to securities transferred from AFS to HTM. - Net interest margins for most banks typically increased in the rising-rate environment as asset yields outpaced funding costs; banks’ average interest rate on interest-earning assets and average expense rate on liabilities both increased. - Bank stresses since March 2023 (summary of events and supervisory response): - Poor interest rate and liquidity risk management contributed to runs on SVB and Signature Bank in March 2023 and stresses at additional banks; First Republic Bank failed on May 1. - Official sector actions (U.S. Department of the Treasury, Federal Reserve, FDIC) on March 12 reassured depositors and supported deposit outflows slowing thereafter. - Aggregate bank capital levels remained ample; examiners increased frequency and depth of monitoring at potentially vulnerable banks focusing on investment securities valuation, deposit trends, funding diversity, and contingency funding plans. - The Federal Reserve stands prepared to use all its tools for institutions of any size to support the safety and soundness of the U.S. banking system. - Broker-dealers and nonbank leverage: - Broker-dealer leverage remained low in the aggregate, but vulnerabilities persisted regarding their willingness and ability to intermediate in fixed-income markets during stress. - Some types of nonbank financial firms continued to operate with high leverage. - Data sources: Federal Reserve Board staff calculations; Form FR Y-9C; Call Reports; Statistical Release Z.1; Enhanced Financial Accounts of the United States. *Source: Federal Reserve Board staff calculations and text from Box 1.2—continued, Financial Stability Report (content unit provided).* ### Box 3.1. The Bank Stresses since March 2023 ### Box 3.1. The Bank Stresses since March 2023 ### Timeline of major events - March 8, 2023: Silvergate Bank, an institution supervised by the Federal Reserve with $11 billion in assets at the end of 2022, announced its intention to voluntarily wind down its operations and to fully repay all deposits. - March 8, 2023: SVB, an institution supervised by the Federal Reserve with $209 billion in assets at the end of 2022, announced it had sold $21 billion from its AFS securities portfolio at an after-tax loss of $1.8 billion, was planning to increase nondeposit borrowing from $15 billion to $30 billion, and was commencing a public offering to raise capital by $2.25 billion. - March 9, 2023: SVB experienced unprecedented deposit withdrawals totaling $42 billion in a single business day. - March 10, 2023: SVB informed regulators that $100 billion in deposit withdrawals were scheduled or expected for that day; the bank was unable to pay those obligations and was declared insolvent by the Department of Financial Protection and Innovation of the State of California; the FDIC was appointed receiver. - March 10, 2023: Signature Bank, an institution supervised by the FDIC with $110 billion in assets at the end of 2022, experienced depositors withdrawing 20 percent of deposit balances that day; Signature was closed on March 12, and the FDIC was named receiver. - March 13–19, 2023: Credit Suisse published its annual report; on March 16 it announced intention to access emergency liquidity support from the Swiss National Bank for up to CHF 50 billion; on March 19, UBS agreed to merge with Credit Suisse with Swiss government liquidity support and loss sharing. - March 10–16, 2023: First Republic Bank, an institution supervised by the FDIC with $213 billion in assets at the end of 2022, experienced notable deposit outflows; the California Department of Financial Protection and Innovation took possession of First Republic Bank before markets opened on Monday, May 1, appointing the FDIC as receiver. - May 1, 2023: The FDIC entered into a purchase and assumption agreement with JPMorgan Chase Bank to assume all deposits and most assets of First Republic Bank, with a loss-sharing agreement. ### Market effects and contagion dynamics - Loss of confidence following SVB announcements manifested as a sharp decline in SVB’s stock market price and unprecedented deposit withdrawals. - The prospect of uninsured depositors being unable to access funds raised concerns about destabilizing runs at other U.S. commercial banks; these concerns led to sizable declines in bank stocks, reflected in declines in the KBW bank indexes. - The runs on SVB and Signature Bank amplified initial stresses and contributed to broader deterioration of confidence in banks; other banks saw notable deposit outflows, while the largest banks saw significant deposit inflows. - The unprecedented speed of the runs was likely facilitated by widespread adoption among SVB’s tightly networked depositor base of technologies enabling electronic withdrawal requests and rapid communication via messaging apps and social media. - The spillovers of stresses related to Credit Suisse to the U.S. were described as so far muted. ### Deposit-run speed and historical comparisons - Washington Mutual (2008): depositors withdrew about $17 billion over eight business days; the largest deposit withdrawal in one day reached just over 2 percent of pre-run deposits. - SVB and Signature Bank (March 2023): highest one-day withdrawal rate was more than 20 percent for each bank, making them at the time the second- and third-largest depository institutions by inflation-adjusted total assets to fail due to a bank run. - Continental Illinois (May 1984): sustained sizable withdrawals of uninsured deposits for six consecutive days with a peak one-day withdrawal rate of 7.8 percent of deposits before a public assistance package. - The comparison highlights: - Washington Mutual: peak one-day withdrawal ~ just over 2 percent (Sept. 18, 2008). - Silicon Valley Bank: effective outflow Mar. 9, 2023; scheduled or expected outflow Mar. 10, 2023. - Signature Bank: effective outflow Mar. 10, 2023. - Continental Illinois: effective outflow May 17, 1984; peak one-day withdrawal rate 7.8 percent. ### Policy responses and official actions - On Sunday, March 12, the Federal Reserve, together with the FDIC and the U.S. Department of the Treasury, announced actions to protect households and businesses (referenced in the source as “The Federal Reserve’s Actions to Protect Bank Depositors and Support the Flow of Credit to Households and Businesses”). - On March 19, the Federal Reserve, together with other central banks, announced measures to enhance the provision of liquidity in global funding markets (referenced in the source). - Credit Suisse accessed emergency liquidity support from the Swiss National Bank for up to CHF 50 billion. - First Republic resolution: California Department of Financial Protection and Innovation took possession and appointed the FDIC as receiver; FDIC and JPMorgan Chase Bank entered a purchase and assumption agreement with loss-sharing. ### Key statistics and figures (preserved exactly) - Silvergate Bank assets at end of 2022: $11 billion. - SVB assets at end of 2022: $209 billion. - SVB sold from AFS securities portfolio: $21 billion. - SVB after-tax loss on sale: $1.8 billion. - SVB planned increase in nondeposit borrowing: from $15 billion to $30 billion. - SVB planned capital raise via public offering: $2.25 billion. - SVB deposit withdrawals on March 9, 2023: $42 billion in a single business day. - SVB scheduled or expected deposit withdrawals for March 10, 2023: $100 billion. - Signature Bank assets at end of 2022: $110 billion. - Signature Bank depositors withdrew: 20 percent of deposit balances (on March 10, 2023). - Washington Mutual one-day largest withdrawal in 2008: just over 2 percent of pre-run deposits. - Continental Illinois peak one-day withdrawal rate: 7.8 percent of deposits. - Credit Suisse emergency liquidity support announced up to: CHF 50 billion. - First Republic assets at end of 2022: $213 billion. *Source: Box 3.1. The Bank Stresses since March 2023, Financial Stability Report* ### Box 3.1—continued ### Box 3.1—continued ### Banks’ capital and leverage - As of the fourth quarter of 2022, banks in the aggregate were well capitalized, especially U.S. global systemically important banks (G-SIBs). - The common equity Tier 1 (CET1) ratio remained close to the median of its range since the end of the 2007–09 financial crisis. - In the second half of 2022, G-SIBs increased their CET1 ratios by cutting back on stock repurchases and reducing risk-weighted assets to meet higher capital requirements resulting from an increase in their 2023 G-SIB surcharges. - CET1 ratios decreased at large non-G-SIB and other banks that continued to grow their risk-weighted assets, though their CET1 ratios remained well above requirements. - The ratio of tangible common equity to total tangible assets: - Edged up at G-SIBs in the fourth quarter of 2022. - Continued to decline at large non-G-SIB and other banks. - The decreases in tangible common equity ratios of non–G-SIBs were partly due to a substantial drop in tangible equity from declines in fair value on Treasury and agency-guaranteed mortgage-backed securities in AFS portfolios. ### Aggregate credit quality and loan demand - Aggregate credit quality in the nonfinancial sector remained strong. - Delinquency rates increased in certain loan segments, including auto loans, credit cards, and CRE loans backed by office and retail buildings. - Borrower leverage for bank commercial and industrial (C&I) loans continued to trend downward in the fourth quarter of 2022 relative to the start of the year. - According to January 2023 SLOOS data, banks continued to tighten lending standards on C&I loans and CRE loans in the second half of 2022. - Most banks reported weaker loan demand, especially in interest-rate-sensitive segments such as residential real estate and CRE. - A material decrease in commercial property prices could lead to credit losses for banks with sizable CRE exposures. - Overall, bank profitability was below its 2021 level but close to its pre-pandemic average. ### Broker-dealers - Broker-dealer leverage ratios decreased slightly in 2022:Q4 and remained near historically low levels. - Dealers’ equity growth generally kept up with growth of their assets, aided in part by trading profits that remained strong despite seasonal declines in 2022:Q4. - Net secured borrowing of primary dealers has increased since the November report but remained near its historical average; gross financing and borrowing have increased. - Primary dealer Treasury market activities, including market making and repo, increased since the November report but did not keep pace with the amount of Treasury securities available to investors. - During the volatile period in mid-March, dealers faced elevated client flows that resulted in inventories of Treasury securities increasing somewhat, suggesting dealers continued to intermediate in Treasury markets. - In the March 2023 Senior Credit Officer Opinion Survey on Dealer Financing Terms (SCOOS) covering December 2022–February 2023: - Dealers reported that, on net, they had tightened terms associated with securities financing and over-the-counter derivatives transactions offered to REITs and nonfinancial corporations. - Respondents reported that liquidity and market functioning for non-agency residential mortgage-backed securities and consumer asset-backed securities (ABS) had improved. - Respondents reported increased client interest in trading volatility products since January 2021, driven by increased demand for hedging volatility, and improved market liquidity and functioning for FX and credit spread volatility products. ### Life and property & casualty insurers - Leverage at life insurers increased slightly since the previous report but remained near the middle of its historical range and well below its pandemic peak. - Leverage at property and casualty insurers stayed low relative to historical levels. - Life insurers continued to allocate a high percentage of assets to instruments with higher credit or liquidity risk, such as high-yield corporate bonds, privately placed corporate bonds, and alternative investments. - Rising interest rates have likely had a positive effect on the profitability of life insurers, as their liabilities generally had longer effective durations than their assets. - An unexpected and sharp surge in interest rates may induce policy holders to surrender contracts at a higher-than-expected rate, potentially causing some funding strains. ### Hedge funds and private credit funds - According to SEC data, average on-balance-sheet leverage and average gross leverage of hedge funds remained above their historical averages in the third quarter of 2022. - Leverage at the largest hedge funds was substantially higher than average: - The average on-balance-sheet leverage of the top 15 hedge funds by gross asset value decreased in 2022:Q3 to about 14-to-1 (it has at times exceeded 20-to-1). - High leverage at large hedge funds is consistent with low haircuts on Treasury collateral in the noncentrally cleared bilateral repo market. - March 2023 SCOOS data suggested that the use of financial leverage by hedge funds had not changed, on net, between December 2022 and February 2023 amid unchanged price and nonprice borrowing terms. - Data from the Commodity Futures Trading Commission Traders in Financial Futures report showed that, before the bank stresses of March 2023, leveraged funds’ short Treasury futures positions had increased notably since the November report. - Amid increased interest rate volatility following the SVB failure, some hedge funds that were short Treasury futures or engaged in bets that U.S. short-term rates would continue to rise faced margin calls and partially unwound those positions; the unwinds may have contributed to large movements and increased volatility in short-term Treasury markets and in interest rate markets. - Private credit funds are private pooled investment vehicles about which relatively little is known; vulnerabilities posed by private credit funds are assessed in the box “Financial Stability Risks from Private Credit Funds Appear Limited.” ### Securitization and non-agency issuance - Non-agency securitization issuance slowed significantly in 2022 and in the first quarter of 2023. - Non-agency CMBS issuance volumes were well below their five-year averages. - Credit spreads of non-agency securitized products have narrowed since the November report. - Spreads between senior and junior tranches were higher, particularly for deal types experiencing weakness in underlying credit, such as subprime consumer ABS deals and CMBS. - Most securitization sectors exhibited relatively stable credit performance, indicated by low loan delinquency or default rates compared with historical long-term averages. - Delinquencies in non-agency CMBS backed by CRE remained relatively high. ### Bank lending to nonbank financial institutions (NBFIs) - Banks’ credit commitments to NBFIs reached about $2 trillion in the fourth quarter of 2022. - The year-over-year growth rate in committed amounts to special purpose entities and securitization vehicles was about 40 percent at the end of last year, more than double its growth rate in 2021. - Growth in bank lending to NBFIs slowed significantly since the November report. - Banks are important creditors to nonbank mortgage companies; nonbank mortgage companies’ profitability has come under pressure as mortgage originations have declined. - Should mortgage delinquencies rise, some nonbank mortgage companies could become distressed and see a reduction in their access to credit. - Utilization rates on credit lines to NBFIs averaged about 50 percent of total committed amounts and remained steady. - Delinquency rates on banks’ lending to NBFIs have been lower than delinquency rates for the nonfinancial business sector since data availability began in 2013. - Limited information on NBFIs’ alternative funding sources and the extent to which those sources may be fragile could contribute to increased vulnerabilities in the financial sector. *Federal Reserve Financial Stability Report, Box 3.1—continued.* ### Box 3.2. Financial Stability Risks from Private Credit Funds ### Box 3.2. Financial Stability Risks from Private Credit Funds ### Overview - Private credit refers to direct lending to businesses by nonbank institutions and is distinct from bank loans, leveraged loans, or corporate bonds. - Private credit funds are pooled investment vehicles that originate or invest in loans to private (not publicly traded) businesses; only institutional investors or high-net-worth individuals are eligible to invest. - Available information about private credit funds’ activities and risks is limited; the analysis uses SEC Form PF data and suggests financial stability risks are likely limited, though opacity and difficulty in assessing default risk remain. ### Size, growth, and dry powder - As of 2021:Q4, private credit funds’ assets under management (AUM) stood at $1 trillion. - Estimated “dry powder” (committed but uncalled capital) amounted to $228 billion as of 2021:Q4. - Over the past decade, private credit fund assets grew at an annual rate of 13 percent; leveraged loans grew at an annual rate of 10 percent. - As of 2021:Q4, private credit fund AUM was similar in size to the volume of outstanding leveraged loans (approximately $1 .4 trillion) and U.S. high-yield bonds (approximately $1 .5 trillion). - Preqin estimates that the industry’s total AUM grew by 8.9 percent in 2022. - For comparison, business development companies managed about $180 billion in assets. ### Investment strategies, asset characteristics, and valuation - Direct lending funds are the largest category of private credit funds in terms of assets; they hold senior secured, unrated, floating-rate loans to middle-market companies. - Some funds invest in broadly categorized credit opportunities; distressed credit funds lend to businesses experiencing liquidity problems or invest in deeply discounted debt. - Loans held by private credit funds appear largely illiquid; valuations are not based on prices readily available in active markets and are often classified as Level 2 or 3 under generally accepted accounting principles. - Middle-market businesses are defined as businesses with annual revenues between $10 million and $1 billion. ### Investor composition and investor-facing liquidity risks - Based on Form PF, as of 2021:Q4: - Public and private pension funds held about 31 percent ($307 billion) of aggregate private credit fund assets. - Other private funds held 14 percent ($136 billion). - Insurance companies held about 9 percent ($92 billion). - Individual investors held about 9 percent ($92 billion). - Most private credit funds have a closed-end fund structure and typically lock up investor capital for 5 to 10 years; hedge-fund-structured private credit funds restrict redemptions through notice periods, lockups, and gates. - Private credit funds engage in limited liquidity and maturity transformation. - Funds can pose liquidity demands on investors via capital calls, for which investors generally have 10-day notice periods (though notice periods may differ across funds). - As of 2021:Q4, pensions had $69 billion in uncalled capital commitments to private credit funds, while insurance companies had $23 billion. - Uncalled capital (dry powder) is estimated as regulatory AUM (which includes uncalled capital commitments) minus total balance sheet assets. ### Leverage, derivative exposure, and risks to lenders - Most private credit funds are unlevered, with no borrowings or derivative exposures, though a minority use modest amounts of financial or synthetic leverage. - At the 95th percentile, borrowings-to-assets ratios were about 1.27 and derivatives-to-assets ratios were about 0.66. - In the aggregate, private credit funds borrowed about $200 billion in 2021:Q4, mainly from U.S. financial institutions, and held about $200 billion of derivative gross notional exposure. - Derivatives exposures (in the subset filing as qualifying hedge funds) are concentrated in credit default swaps, FX derivatives, and interest rate derivatives. - Risks to lenders of private credit funds, typically banks, appear moderate due to the relatively modest amount of borrowings and the secured nature of those borrowings. ### Financial stability assessment and remaining vulnerabilities - Overall vulnerabilities posed by private credit funds appear limited: most funds use little leverage and have low redemption risks, making it unlikely they would amplify market stress through asset sales. - However, a deterioration in credit quality and investor risk appetite could limit private credit funds’ capacity to provide new financing to firms that rely on private credit. - Visibility into the private credit space remains limited despite Form PF; comprehensive data are lacking on the forms and terms of financing extended, borrower characteristics, and default risk in private credit portfolios. *_Source: Box 3.2. Financial Stability Risks from Private Credit Funds, Financial Stability Report (content unit: financial-stability-report-20230508 - Box 3.2)._ ### 1. Government ### 1. Government ### Funding risks and market stresses - In March 2023, the domestic and global banking sector experienced acute stress following a loss of confidence in SVB and Signature Bank. - SVB and Signature Bank failed after experiencing bank runs of unprecedented speed; Credit Suisse came under renewed pressure, leading to its acquisition by UBS in a deal that involved liquidity support and loss sharing from the Swiss government as well as the write-off of a certain type of contingent capital instruments. - Social media and messaging apps facilitated the communication of perceived bank concerns among the network of uninsured depositors, and the availability of information technology facilitated the movement of deposits. - These developments reduced confidence and propagated stresses rapidly across the financial system. ### Federal Reserve, FDIC, and Treasury interventions to protect depositors and support credit - On Sunday, March 12, the Federal Reserve, together with the FDIC and the U .S . Department of the Treasury, announced two actions designed to support all bank depositors and the continued flow of credit to households and businesses. - The Treasury Secretary approved a systemic risk exception, enabling the FDIC to complete its resolution of SVB and Signature Bank in a manner that fully protects all depositors; depositors were given full access to their accounts on the Monday following the announcement. - Shareholders and certain unsecured debt holders were not protected, and senior management at these banks was removed. - The losses associated with these actions were later estimated by the FDIC to be $22 .5 billion; these losses will not be borne by taxpayers and instead will be borne by the Deposit Insurance Fund, which will be replenished by special assessments on banks, as required by law. - Current FDIC estimates about the cost to its Deposit Insurance Fund from the failure of SVB and Signature Bank are approximately $20 billion and $2 .5 billion, respectively. ### Bank Term Funding Program (BTFP) and discount window actions - On Sunday, March 12, with approval by the Treasury Secretary, the Federal Reserve Board announced the establishment of the BTFP, making available additional funding to eligible depository institutions. - BTFP key features: - Offers loans of up to one year in length to federally insured banks, savings associations, and credit unions, and to U .S . branches and agencies of foreign banks. - New loans can be requested under the BTFP until at least March 11, 2024. - Eligible institutions can pledge any collateral eligible for purchase by the Federal Reserve in open market operations, such as U .S . Treasury securities, U .S . agency securities, and U .S . agency mortgage-backed securities. - The BTFP extends loans against the par value of eligible collateral—that is, the face amount of the securities without giving effect to any declines in fair value. - With approval of the Treasury Secretary, the U .S . Department of the Treasury has committed to make available up to $25 billion from the Exchange Stabilization Fund as a backstop for the BTFP; the Federal Reserve does not anticipate that it will be necessary to draw on these backstop funds. - The discount window remained open and available; at the same time as the BTFP was established, it was announced that the discount window will apply the same margins used for the securities eligible for the BTFP. - Observed liquidity usage following announcements: - Primary credit extended through the discount window increased from less than $5 billion to more than $150 billion during the first week and quickly fell back to about $70 billion. - Credit extended through the BTFP increased steadily by smaller increments and stabilized in a range between $70 billion and $80 billion. ### International liquidity measures and swap lines - On Sunday, March 19, the Federal Reserve, together with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank, announced measures to mitigate strains on global funding markets via the standing U .S . dollar liquidity swap line arrangements. - To improve effectiveness, these central banks agreed to increase the frequency of seven-day maturity operations from weekly to daily and to continue at this frequency; these daily operations commenced on Monday, March 20. - Following the announcement on March 19, demand for these swap lines ticked up by slightly over $100 million and then fell back to levels below $500 million observed before the announcement. - These central banks announced on April 25 that the frequency of swap line operations will revert from daily back to once a week beginning on May 1. ### Cash-management vehicles, stablecoins, and mutual funds: exposures and vulnerabilities - Other cash-management vehicles, including dollar-denominated offshore MMFs and short-term investment funds, invest in money market instruments, engage in liquidity transformation, and are vulnerable to runs. - Since November, estimated aggregate AUM of these cash-management vehicles has edged up to about $1 .7 trillion. - Currently, between $600 billion and $1 .5 trillion of these vehicles’ AUM are in portfolios like those of U .S . prime MMFs; large redemptions from these vehicles have the potential to destabilize short-term funding markets. - Many cash-management vehicles—including retail and government MMFs, offshore MMFs, and short-term investment funds—seek to maintain stable NAVs typically rounded to $1 .00; sharp rises in short-term interest rates or portfolio asset value declines can push market values below rounded share prices and place funds under strain, particularly with large redemptions. - Stablecoins: - Total market capitalization of stablecoins fell 21 percent since the beginning of 2022 to $130 billion. - Circle’s USD Coin (USDC) had $3 .3 billion in dollar reserves held at SVB; Circle operates the $31 billion stablecoin USDC. - On March 10, 2023, the disclosure that Circle held $3 .3 billion at SVB triggered large redemptions of USDC and caused it to drop temporarily as low as 87 cents; after government interventions assuring depositors’ safety at SVB and Signature Bank, USDC’s price stabilized near $1. - Bond mutual funds: - Mutual funds that invest substantially in corporate bonds, municipal bonds, and bank loans are exposed to liquidity transformation risks because of relatively illiquid assets and daily redemption requirements. - The total outstanding amount of U .S . corporate bonds held by mutual funds fell to its lowest level since 2013 on an inflation-adjusted basis, primarily driven by a drop in valuations. - Mutual fund holdings at the end of 2022 were approximately 13 percent of all U .S . corporate bonds outstanding. - Total AUM at high-yield bond and bank-loan mutual funds decreased sharply in real terms in 2022; bond and loan mutual funds experienced negative returns and notable outflows during most of 2022. - Regulatory proposals: - On November 2, 2022, the SEC proposed reforms including making swing pricing mandatory for open-end mutual funds and enhancing the 2016 liquidity risk-management rule for mutual funds and certain ETFs. - Proposed enhancements include a requirement that funds hold at least 10 percent of their portfolios in “highly liquid assets” as well as tightened liquidity classifications. ### Liquidity and solvency risks at CCPs and insurers - Central counterparty (CCP) liquidity risks remained low: - CCPs maintained elevated initial margin levels in the third quarter of 2022, even as volatility decreased in most cleared markets, with the notable exception of interest rate markets. - Prefunded resources held by CCPs were stable. - CCPs that clear interest rate products faced difficulties adapting margin models to the higher rate and volatility environment; these CCPs experienced more frequent initial margin exceedances and large variation margin calls that were met by clearing members and clients. - Client clearing remained concentrated at the largest clearing members, which could make transferring client positions challenging if necessary. - Life insurers: - Over the past decade, life insurers increased the share of illiquid assets—including CRE loans, less liquid corporate debt, and alternative investments—on their balance sheets. - Life insurers continued to rely on nontraditional liabilities—funding-agreement-backed securities, Federal Home Loan Bank advances, and cash received through repos and securities lending transactions—that offer some investors the opportunity to withdraw funds on short notice. - These trends raise liquidity risk and could make it more difficult for life insurers to meet sudden rises in withdrawals and other claims. ### Near-term risks and potential transmission channels - Ongoing banking stresses could lead to a broader contraction in credit, resulting in a marked slowdown in economic activity: - Banks and other financial institutions might further contract the supply of credit, driving up funding costs for businesses and households and increasing defaults and financial stress among leveraged nonfinancial businesses. - A reduction in investor risk appetite could lead to significant declines in asset prices. - Households are less likely to transmit shocks due to moderate borrowing relative to income and concentration of household debt among those with higher credit scores. - Further rate increases in the U .S . and other advanced economies could pose risks: - Tighter-than-expected monetary policy could prompt sharp increases in longer-term interest rates and weaken economic growth worldwide, straining debt service capacity of governments, households, and businesses, particularly in EMEs that borrow externally. - Most business loans and, in some countries, many residential mortgages have floating interest rates, so higher policy rates can quickly increase debt service requirements. - Higher funding costs may pressure profitability of banks with large portfolios of fixed-rate assets acquired when rates were much lower. - A sharp rise in interest rates could increase volatility in global financial markets, stress market liquidity, and trigger corrections in asset prices; liquidity pressures could drive deposit outflows and stress NBFIs that provide maturity transformation. - Geopolitical tensions and stresses in China: - A worsening of global geopolitical tensions, including escalation of the war in Ukraine, could reduce economic activity and boost inflation worldwide, with resurgent food and energy prices intensifying stresses, especially in EMEs. - China continues to have very high levels of corporate debt, especially in the property sector, and local government debt has been increasing recently; stresses in China could spill over to EMEs that rely on trade with China or credit from Chinese entities and could amplify adverse spillovers to global asset markets and U .S . economic and financial conditions. *Source: Federal Reserve Board staff, Financial Stability Report (excerpt).* ### Box 5.1. Survey of Salient Risks to Financial Stability ### Box 5.1. Survey of Salient Risks to Financial Stability ### Survey overview - Outreach period: February to early April (spring 2023). - Number of contacts surveyed: 25, including professionals at broker-dealers, investment funds, research and advisory organizations, and universities. - Follow-up reference: Fall 2022 survey of 26 market contacts from August to October (figure B). - Contextual event: Closure of SVB on March 10; a large majority of respondents highlighted the risk of additional banks coming under renewed stress. ### Most-cited risks (survey responses and summary) - Persistent inflation; monetary tightening: - The potential for persistent inflationary pressures to result in more restrictive monetary policy remained a top-cited risk, as it has been since the fall 2021 survey. - Several contacts noted labor and economic activity data remained robust despite the rapid rise in policy rates, implying global central banks may need to tighten further, risking a sharper economic slowdown and financial market instability. - Some contacts flagged that central bank balance sheet reductions in the U.S. and abroad could strain market functioning, particularly in sovereign bond markets. - Banking-sector stress and nonbank financial institutions (NBFIs): - Respondents highlighted risk of stress in the banking sector driven by higher funding costs and depressed profitability, which may render some banks vulnerable to deposit runs. - Market scrutiny over deposit stability and declines in fair value of legacy long-duration fixed-rate assets could trigger further contagion and market volatility. - Some contacts noted risks stemming from NBFIs in an environment of tightening monetary policy, citing precedent such as the U.K. in September 2022. - Commercial real estate (CRE): - Many contacts identified real estate—particularly the commercial sector—as a potential trigger for systemic risk, citing concerns over higher interest rates, valuations, and shifts in end-user demand. - Some market participants linked CRE vulnerabilities to banking-sector stress, noting bank exposures to underperforming CRE assets could prompt instability. - Geopolitical risks: - Respondents emphasized geopolitical risks centered on U.S.–China tensions, noting deterioration in trade and financial flows could hurt global supply chains and investor sentiment. - Specific concerns included the risk of military or political conflict between China and Taiwan and potential U.S. intervention as a flash point. - Some respondents highlighted the risk of escalation of Russia’s war in Ukraine as weighing on Europe’s economic outlook, driving higher commodity prices, and increasing risks of cyberwarfare. - Debt limit: - Respondents warned of potential funding market disruptions and tighter financial conditions if the statutory debt limit is not raised in a timely manner. - Adverse ramifications of a technical or outright default cited: a sharp rise in Treasury yields, an increase in corporate financing costs, and a deterioration in risk sentiment. - Some contacts noted the risk of higher government financing costs if monetary policy remains restrictive for a protracted period. - Additional risks noted in figures and responses: - Market liquidity strains and volatility. - Under-regulated nonbanks. - Fiscal debt sustainability. - Figure A (Spring 2023) lists the most cited potential risks over the next 12 to 18 months; Figure B (Fall 2022) lists the most cited potential risks from the prior survey period. ### Cross-cutting observations from the survey text - The persistence of inflation and the prospect of further monetary tightening remained the dominant concern across contacts. - The March 10 SVB failure sharpened focus on banking-sector vulnerabilities and the potential for contagion to other banks through deposit runs and mark-to-market losses on long-duration assets. - Real estate vulnerabilities, especially in CRE, were frequently cited as a possible proximate trigger of banking stress. - Geopolitical developments, especially U.S.–China relations and the Russia–Ukraine war, were prominent nonfinancial sources of risk that could amplify financial-stability concerns. *Source: Federal Reserve Bank of New York survey of 25 market contacts from February to April, summarized in Box 5.1, Financial Stability Report.* ### Box 5.2—continued ### Box 5.2—continued ### Market indicators and asset valuations - Figure 1.1: The 2-year and 10-year Treasury rates are the monthly average of the constant-maturity yields based on the most actively traded securities. - Figure 1.2: Term premiums are estimated from a 3-factor term structure model using Treasury yields and Blue Chip interest rate forecasts; an estimate of the nominal Treasury term premium remained low. - Figure 1.3: Implied volatility on the 10-year swap rate, 1 month ahead, is derived from swaptions. The data begin in April 2005. The median value is 78.93 basis points. - Figure 1.4: The aggregate forward price-to-earnings ratio of S&P 500 firms is based on expected earnings for 12 months ahead. The median value is 15.5. - Figure 1.5: The equity premium is measured as the difference between the aggregate forward earnings-to-price ratio of S&P 500 firms and the expected real Treasury yields. Expected real Treasury yields are calculated from the 10-year consumer price index inflation forecast, and the smoothed nominal yield curve is estimated from off-the-run securities. The median value is 4.78 percentage points. - Figure 1.6: Realized equity volatility is computed from an exponentially weighted moving average of 5-minute daily realized variances with 75 percent of weight distributed over the past 20 business days. - Figure 1.7: Market depth for Treasury securities is defined as the average top 3 bid and ask quote sizes for on-the-run Treasury securities. - Figure 1.8: The time-weighted average market depth at the best quoted prices to buy and sell is shown for 2-year and 10-year Treasury notes (OTR is on-the-run). - Figure 1.9: Depth at the best quoted prices to buy and sell for E-mini S&P 500 futures is defined as (ask size + bid size)/2; a measure of equity market liquidity fell sharply in March. - Figure 1.10: The triple-B series reflects the effective yield of the ICE Bank of America Merrill Lynch (BofAML) triple-B U.S. Corporate Index (C0A4), and the high-yield series reflects the effective yield of the ICE BofAML U.S. High Yield Index (H0A0); corporate bond yields fell to near their historical averages. - Figure 1.11: The triple-B series reflects the option-adjusted spread of the ICE BofAML triple-B U.S. Corporate Index (C0A4), and the high-yield series reflects the option-adjusted spread of the ICE BofAML U.S. High Yield Index (H0A0); spreads to similar-maturity Treasury securities edged down. - Figure 1.12: The excess bond premium (EBP) is derived as the residual of a regression that models corporate bond spreads after controlling for expected default losses. Data begin in January 1997. By construction, its historical mean is zero; positive (negative) EBP values indicate investors’ risk appetite is below (above) its historical mean. The excess bond premium stayed near its historical average. ### Credit markets, real estate, and housing - Figure 1.13: Secondary-market discounted spreads to maturity for leveraged loans are shown; B-rated spreads begin in July 1997. The line break denotes transition from monthly to weekly data in November 2013. Spreads in the leveraged loan market fell modestly. - Figure 1.14: Commercial real estate prices are deflated using the consumer price index and seasonally adjusted by Federal Reserve Board staff; prices declined (inflation-adjusted). - Figure 1.15: A 12-month moving average of weighted capitalization rates in industrial, retail, office, and multifamily sectors (based on national square footage in 2009) shows income of commercial properties relative to prices turned up but remained near historically low levels. - Figure 1.16: Banks’ responses (weighted by commercial real estate loan market shares) to the Senior Loan Officer Opinion Survey on Bank Lending Practices show banks reported tightening lending standards in commercial real estate loans. Shaded recession bars correspond to March 2001–November 2001, December 2007–June 2009, and February 2020–April 2020. - Figure 1.17: Farmland price data for the U.S. begin in 1997. A Midwest index is a weighted average of Corn Belt and Great Plains states derived from staff calculations. Values are in real terms and annual as of July. The median value is $3,308.32; farmland prices reached near historical highs. - Figure 1.18: Farmland price data for the U.S. begin in 1998. Midwest index is a weighted average of Corn Belt and Great Plains states derived from staff calculations. Data are annual as of July. The median value is 18.1; farmland prices grew faster than rents. - Figure 1.19: Zillow and CoreLogic data extend through February 2023, and Case-Shiller data extend through January 2023; house price growth decelerated sharply. - Figure 1.20: Owners’ equivalent rent value for 2023:Q1 is based on monthly data through February 2023. Market-based rents model data begin in 2004:Q1 and extend through 2023:Q1; the value for 2023:Q1 is based on monthly data through January 2023. Valuation is measured as the deviation from the long-run relationship between the price-to-rent ratio and the real 10-year Treasury yield; model-based measures of house price valuations remained historically high. - Figure 1.21: House price-to-rent ratios are seasonally adjusted. Percentiles are based on 19 large metropolitan statistical areas; ratios remained elevated across geographic areas. ### Aggregate debt and credit conditions - Figure 2.1: Shaded recession bars reflect periods defined by the National Bureau of Economic Research: January 1980–July 1980, July 1981–November 1982, July 1990–March 1991, March 2001–November 2001, December 2007–June 2009, and February 2020–April 2020. The total debt of households and businesses relative to GDP declined further. - Figure 2.2: Both business and household debt-to-GDP ratios edged down (same recession shading as Figure 2.1). - Figure 2.3: Nominal business debt growth is seasonally adjusted and translated into real terms after subtracting the growth rate of the price deflator for the core personal consumption expenditures price index; business debt adjusted for inflation declined modestly. - Figure 2.4: Data begin in 2004:Q2. Institutional leveraged loans generally exclude loan commitments held by banks. Net issuance of risky debt remained subdued. - Figure 2.5: Gross leverage is an asset-weighted average of firms’ book value of total debt to book value of total assets. The 75th percentile is from a sample of the 2,500 largest firms by assets. A structural break occurs in 2019 due to Accounting Standards Update 2016-02. Gross leverage of large businesses remained at high levels. - Figure 2.6: Interest coverage ratio is earnings before interest and taxes divided by interest payments. Firms with leverage less than 5 percent and interest payments less than $500,000 are excluded. Firms’ ability to service their debt, as measured by the interest coverage ratio, was strong. - Figure 2.7: Default rate on leveraged loans is calculated as amount in default over the past 12 months divided by total outstanding volume at the beginning of the 12-month period. Data begin in December 1998. Shaded recession bars: March 2001–November 2001, December 2007–June 2009, and February 2020–April 2020. Default rates inched up from historically low levels. - Figure 2.8: Volumes are for large corporations with EBITDA greater than $50 million and exclude existing tranches of add-ons/amendments and restatements with no new money. The majority of new leveraged loans last year have debt multiples greater than 5. - Figure 2.9: Real household debt is converted to constant 2022 dollars using the consumer price index. Subprime: Equifax Risk Score < 620; near prime: 620–719; prime: > 719. Student loan balances before 2004 are estimated using average growth from 2004 to 2007, by risk score. Real household debt edged up. - Figure 2.10: Housing leverage is estimated as the ratio of the average outstanding mortgage loan balance for owner-occupied homes with a mortgage to (1) current home values using the Zillow national house price index and (2) model-implied house prices from a staff model based on rents, interest rates, and a time trend; model-based estimate of housing leverage was flat. - Figure 2.11: Loss mitigation includes tradelines with codes for forbearance, natural disaster, payment deferral (including partial), loan modification (including federal government plans), or loans with no scheduled payment and a nonzero balance. Delinquent includes loans reported at least 30 days past due. Mortgage delinquency rates remained at historically low levels. - Figure 2.13: Year-over-year change in balances for the second quarter among households whose balance increased over this window. Subprime: Equifax Risk Score < 620; near prime: 620–719; prime: > 719. Scores measured 1 year ago. Data converted to constant 2022 dollars using the consumer price index. New mortgage extensions to nonprime borrowers have been subdued. - Figure 2.14: Data converted to constant 2022 dollars using the consumer price index. Student loan data begin in 2005. Real consumer credit edged up in the second half of 2022. - Figure 2.15: Real auto loans outstanding converted to constant 2022 dollars; subprime/near-prime/prime definitions as above. Real auto loans outstanding ticked up. - Figure 2.16: Loss mitigation and delinquency definitions as in Figure 2.11. Auto loan delinquency data reporting frequency changed (semiannual until 2017, then quarterly). Auto loan delinquencies moved up in 2022 but remained at modest levels. - Figure 2.17: Real credit card balances converted to constant 2022 dollars. Subprime/near-prime/prime definitions as above. Real credit card balances increased in 2022, partially reversing earlier declines. - Figure 2.18: Credit card delinquency measures the fraction of balances at least 30 days past due, excluding severe derogatory loans. The data are seasonally adjusted. Credit card delinquencies increased but remained at low levels. ### Banking sector, nonbank financial institutions, and market intermediation - Figure 3.1: Average interest rate on interest-earning assets = total interest income / total interest-earning assets. Average interest expense rate on liabilities = total interest expense / total liabilities. Data for average interest expense rate begin in 2014:Q2. The average interest rate on assets and average expense rate on liabilities increased. - Figure 3.2: The figure plots the difference between fair and amortized cost values of securities. Sample: all bank holding companies and commercial banks. The fair values of banks’ securities portfolios declined in 2022 as interest rates rose. - Figure 3.3: Data are seasonally adjusted. Sample: domestic bank holding companies (BHCs) and intermediate holding companies (IHCs) with substantial U.S. commercial banking presence. G-SIBs are global systemically important banks; large non–G-SIBs are BHCs/IHCs with > $100 billion in total assets that are not G-SIBs. Prior to 2014:Q1/2015:Q1, numerator of CET1 ratio differs (Tier 1 common capital vs. common equity Tier 1 capital). The denominator is risk-weighted assets. Shaded recession bars: March 2001–November 2001, December 2007–June 2009, and February 2020–April 2020. Banks’ risk-based capital ratio remained near the median level since the 2007–09 financial crisis. - Figure 3.4: Data seasonally adjusted; sample includes BHCs, IHCs, and commercial banks. G-SIBs and large non–G-SIBs defined as in Figure 3.3. Bank equity = total equity capital net of preferred equity and intangible assets. Bank assets = total assets net of intangible assets. Shaded recession bars: July 1990–March 1991, March 2001–November 2001, December 2007–June 2009, and February 2020–April 2020. The ratio of tangible common equity to tangible assets increased for G-SIBs but decreased for other banks. - Figure 3.5: Weighted median leverage of nonfinancial firms borrowing via commercial and industrial loans from 24 banks that filed every quarter since 2013:Q1. Leverage = book value of total debt / book value of total assets (borrower), median weighted by committed amounts. Borrower leverage for bank commercial and industrial loans continued to decrease. - Figure 3.6: Banks’ responses weighted by commercial and industrial loan market shares from the Senior Loan Officer Opinion Survey on Bank Lending Practices. Results shown for loans to large and medium-sized firms. Lending standards for bank commercial and industrial loans have tightened. - Figure 3.7: Leverage at broker-dealers is calculated as total assets / equity and remained historically low. - Figure 3.8: Sample includes all trading desks of BHCs subject to the Volcker rule reporting requirement. Trading profits decreased in 2022:Q4, consistent with seasonal patterns. - Figure 3.9: Sample includes all trading desks of BHCs subject to the Volcker rule reporting requirement. The “other” category comprises desks trading municipal securities, foreign exchange, commodities, and unclassified desks. - Figure 3.10: Ratio for life insurers = (total assets – separate account assets) / (total capital – accumulated other comprehensive income) using GAAP. Largest 10 publicly traded life and property and casualty insurers are represented. Leverage at life insurance companies edged up but remained below its pandemic peak. - Figure 3.11: Hedge fund leverage = gross notional exposure / net asset value. Gross notional exposure includes nominal value of all long and short positions and on-/off-balance-sheet derivative notional exposures. Options are delta adjusted; interest rate derivatives reported at 10-year bond equivalents. Mean is NAV-weighted. Data reported on a 2-quarter lag beginning in 2013:Q1. Leverage at hedge funds remained elevated. - Figure 3.12: Leverage at the largest hedge funds measured by GAV/NAV; funds sorted into cohorts by GAV; average leverage is NAV-weighted. Leverage at the largest hedge funds decreased but remained high. - Figure 3.13: Net percentage = percent of institutions reporting increased use of financial leverage over past 3 months minus percent reporting decreased use. REIT = real estate investment trust. Dealers indicated that the use of leverage by hedge funds was unchanged recently. - Figure 3.14: Issuance of non-agency securitized products has slowed significantly since 2021. Data for 2023:Q1 are annualized to create the 2023 bar. CMBS = commercial mortgage-backed securities; CDO = collateralized debt obligation; RMBS = residential mortgage-backed securities; CLO = collateralized loan obligation. “Other” consists of ABS backed by credit card debt, student loans, equipment, floor plans, and miscellaneous receivables; Re-REMIC RMBS; and Re-REMIC CMBS. Data converted to constant 2023 dollars using the consumer price index. - Figure 3.15: Committed amounts on credit lines and term loans extended to nonbank financial institutions by a balanced panel of 24 BHCs that have filed Form FR Y-14Q in every quarter since 2018:Q1. Nonbank financial institutions identified via NAICS codes plus name-matching (REITs, SPEs, CLOs, ABS). BDC = business development company. REITs incorporate both mortgage (trading) REITs and equity REITs. Broker-dealers include commodity contracts dealers and brokerages and other securities and commodity exchanges. Other financial vehicles include closed-end investment and mutual funds. Bank credit commitments to nonbank financial institutions remained high. - Figure 3.16: 2022:Q4-over-2021:Q4 growth rates as of the end of the fourth quarter of 2022 shown; REIT = real estate investment trust; PE = private equity; BDC = business development company; SPE = special purpose entity; CLO = collateralized loan obligation; ABS = asset-backed securities. Aggregate loan commitments and utilization rates of nonbank financial institutions increased during 2022 but varied across sectors. *Federal Reserve Board — Financial Stability Report (Box 5.2—continued)* ### Box 3.1. The Bank Stresses since March 2023 ### Box 3.1. The Bank Stresses since March 2023 ### Bank stock prices and stock indexes - Figure A: "Bank stock prices and stock indexes" - Note: "Stock prices are not reported on or after the day of bank failure." ### Runs and peak withdrawal rates - Figure B: "Peak 1-day withdrawal rates for runs on the largest banks, by inflation-adjusted total assets" - Note: "Banks are sorted by inflation-adjusted total assets from left to right." *Source: financial-stability-report-20230508 - Box 3.1. The Bank Stresses since March 2023* --- _Source: https://www.federalreserve.gov/publications/files/financial-stability-report-20230508.pdf_