Board of Governors of the Federal Reserve System ("FRB") Vice Chair Stanley Fischer detailed significant improvements in the financial stability of the U.S. financial system, but cautioned that "financial stability cannot be taken for granted." He also found significant room for improvement.

At the International Monetary Fund Workshop on Financial Surveillance and Communication, Mr. Fischer discussed financial stability as it relates to the following areas:

  • Leverage: Mr. Fischer explained that the regulatory capital of banks is as high as ever, and highlighted the successful stress tests of banks in recent times as evidence that these institutions are equipped to maintain sufficient capital in times of market stress. He noted that earnings strength, as exemplified by the return on assets, appears to be high, but qualified that statement with a warning: "with interest rates being so low, the return on assets might be expected to have declined relative to their pre-crisis levels – and that fact is also a cause for concern."
  • Borrowing: Mr. Fischer noted that household borrowing decreased, which has kept debt in the nonfinancial sector below its long-term trend. He contended that even though corporate borrowing levels continue to grow, other trends might indicate that improvements in this sector are forthcoming. However, he said, increased balances and delinquency rates for student and auto loans are areas of concern. He explained that the trend of increased costs for student and auto loans leaves borrowers in the position of being susceptible to "adverse shocks."
  • Liquidity and Maturity Transformation: Mr. Fischer argued that amended money market mutual fund regulations helped to create less risk and more financial stability. At the same time, he said, the increased issuance of shorter-maturity liabilities by Federal Home Loan Banks ("FHLBs") is cause for concern, since this trend could leave the FHLB system vulnerable if subjected to liquidity pressures.
  • Asset Valuations: Mr. Fischer observed that the prices of risky and risk-free assets increased significantly. Although valuation trends may be indicative of a "brighter economic future," he cautioned, they are also signs that the "risk appetite" is increasing.

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