In this report, we assess the details of the Fed’s most recent financial-stability report, focusing on policy and regulatory ramifications with near-term strategic impact. As always, the Fed’s language is muted lest any clear expressions of alarm spook financial markets. This report nonetheless signals a change in which the U.S. central bank publicly recognizes that strong banks do not necessarily ensure a strong financial system. In her statement accompanying the report, Gov. Brainard emphasized the benefits of counter-cyclical capital buffers in response, but we believe the Board and FSOC will instead pursue NBFI reform through an array of channels rather than a bank-focused macroprudential strategy.
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