Financial Sector Stability

My first professional turn as an economist came when I worked in consulting. And I do mean worked: Late nights and weekend deadlines were routine. In contrast, the work-life balance of bank employment has been a tremendous relief. With rare exceptions, weekend time is our own.

One memorable exception came last March, as the failure of Silicon Valley Bank (SVB) carried the risk of contagion to the entire financial sector—as I learned while on an emergency Sunday conference call. High stress endured through the closure of First Republic Bank on May 1, 2023.

A year later, we can see that weekends across the financial sector are more relaxed. Last week, the Federal Reserve published its semiannual Financial Stability Report. The report was broadly encouraging, noting that banks maintain capital ratios well above statutory minimums, with ample liquidity. Bank profits have been stable in spite of a volatile rate environment, as interest income has nearly kept pace with rising interest expense. Deposit outflows were a point of great concern in the wake of SVB, but they stabilized and returned to net inflows in the fourth quarter of 2023.

Still, the report noted a bevy of risks: Banks carry unrealized market value losses on their fixed-income portfolios. Office commercial real estate is an albatross for many lenders. Subprime consumer credit delinquencies are on the rise, as are some small business loans. Financial sector participants reported inflation and its corresponding impact on monetary policy as the top risk.

federal reserve