Inflation, commercial real estate among top financial stability concerns
-Fed survey
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[October 21, 2023] By
Pete Schroeder
WASHINGTON (Reuters) -The chance for persistent inflation to keep
interest rates higher and potential losses in the commercial real estate
market are among the top concerns of respondents to a Federal Reserve
survey on financial stability, the U.S. central bank said on Friday.
The latest version of the central bank's semiannual report found that
three-quarters of survey respondents cited those two issues as prominent
near-term risks. Concerns over bank stability following the failure of
three large firms this spring were cited by roughly half, similar to
levels seen in the May version of the report.
Economic weakness in China had grown in the Fed's semiannual survey,
cited by 44% of those surveyed as a top risk, compared to just 12% in
May. But the war between Russia and Ukraine slipped to the 11th-most
cited concern by respondents, after it was cited as the top financial
stability concern one year ago.
The Fed noted that its survey of looming risks was closed in early
October, before war broke out between Israel and the Palestinian enclave
of Gaza.
Overall, the Fed identified several vulnerabilities within the financial
system, including historically high asset valuations, including in
equities and real estate. Specifically, the Fed found that commercial
real estate valuations remain elevated, even as prices have declined
amid high office vacancies.
The Fed cautioned that if the economy were to slow unexpectedly,
generally high leverage levels could strain or even sink some
businesses. It specifically noted a correction in office property
valuations alongside a mild recession could lead to "significant losses
for a range of financial institutions with sizable exposures, including
some regional and community banks and insurance companies."
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An eagle tops the U.S. Federal Reserve building's facade in
Washington, July 31, 2013. REUTERS/Jonathan Ernst/File Photo
While the overall banking system remained sound, the Fed said some
banks were still grappling with "sizable" declines in the fair value
of some assets as interest rates rapidly increased. Large levels of
unrealized losses were a major contributor to the stresses faced by
banks, including Silicon Valley Bank, that failed this spring.
The Fed said banks overall have large levels of liquidity, and
deposit outflows and volatility have abated since the spring.
However, some firms are still facing funding pressures, as some
depositors have left and banks have had to pay more to retain
depositors or acquire other funding.
The Fed also found home prices increased from already high levels
seen in May, although it noted that credit conditions for borrowers
is "considerably tighter" than what was seen leading up to the
subprime mortgage crisis of 2007-2009.
In fact, banks reported to the Fed that lending standards were now
on the tighter end of historical norms for all loan categories.
The report found that household and business debt burdens remained
moderate, despite the uptick in interest rates. It warned, however,
that borrowers with low credit scores were beginning to show some
signs of stress in various types of consumer debt, such as credit
cards and auto loans.
(Reporting by Pete Schroeder; Editing by Leslie Adler and Andrea
Ricci)
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