Financial Stability: Cloudy, With A Chance Of Showers

The Survey of Consumer Finances wasn’t the only significant report released by the Federal Reserve last week. The semiannual Financial Stability Report (FSR) was also noteworthy.

The last FSR was issued in May, amid the banking turmoil that marred the spring. Interestingly, we rarely talk about that episode much anymore, as threatening as it seemed at the time. Deposit levels at banks have stabilized, and we have seen no further distress.

But the bank failures of last spring led to a tightening of credit. The Fed’s own gauge of financial conditions, which places heavy weights on bank lending standards and long-term interest rates, has swung from easy to restrictive in a very short space of time. Further, the regulatory environment surrounding banks has become more limiting. As these changes take deeper root, it will produce economic headwinds and stress some portfolios.

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The latest FSR attempts to anticipate where this stress might surface. The report focused attention on the following candidates: