Fed is Cautiously Optimistic re U.S. Systemic Risk

In this report, we assess the new Federal Reserve financial-stability report. Secretary Yellen is also testifying now about systemic risk and sure to get questions on the Fed’s conclusions. We will shortly send you an in-depth report on this hearing, but key to the Fed’s report is a more cautious, but still sanguine outlook. For example, banks are found to be resilient and well-capitalized despite growing Fed concern about indirect risk channels such as asset-market volatility, sanctions-related disruptions to payment, settlements, and clearing, and inter-connections with large European banks. Life-insurance companies and hedge-fund leverage remains a significant concern, although the Fed finds that at broker-dealers and P&C insurers is well within reasonable range. As detailed below, the FRB is still concerned with MMF-liquidity risk, favoring the swing-pricing reforms if “properly calibrated” in the pending SEC proposal (see FSM Report MMF19) along with urging continued attention to bond and open-end funds. The report also includes a synopsis of the Fed’s CBDC discussion draft (see FSM Report CBDC10), suggesting it might reduce systemic risk without reaching any conclusions ahead of ongoing Board review.