Fed: Banking sector strong in wake of failures

The banking sector remains resilient with a high capacity to absorb losses in the wake of the failures of Silicon Valley Bank, Signature Bank and First Republic Bank, according to the Federal Reserve’s Financial Stability Report

“Domestic banks have ample liquidity and limited reliance on short-term wholesale funding,” the Fed stated May 8 in the biannual report. “Structural vulnerabilities remained in short-term funding markets. Prime and tax-exempt money market funds, as well as other cash investment vehicles and stablecoins, remained vulnerable to runs. Certain types of bond and loan funds experienced outflows and remained susceptible to large redemptions, as they hold securities that can become illiquid during periods of stress.” 

The failures of the three banks were attributed to substantial deposit outflows caused by concerns over poor management of liquidity and interest rate risks along with high rates of uninsured depositors. In the wake of the failures, the Federal Reserve and FDIC protected uninsured depositors at both Silicon Valley Bank and Signature Bank.

 “Owing to these actions and the resilience of the banking and financial sector, financial markets normalized, and deposit flows have stabilized since March, although some banks that experienced large deposit outflows continued to experience stress,” the Fed stated. “These developments may weigh on credit conditions going forward.” 

Fifty-six percent of respondents listed persistent inflation, banking-sector stress and tensions between the United States and China as the top risks facing the financial sector. Fifty-two percent said the downturn in the commercial and residential real estate markets and the Russia-Ukraine War are top risks to financial stability.  

Other report findings included:

  • CRE valuations remained near record highs, even as price declines occurred across market segments.
  • Yields on Treasury securities fell amid market volatility. Equity prices relative to expected earnings were volatile but remained above the historical median. 
  • Vulnerabilities from borrowing by nonfinancial businesses and households were mainly unchanged from November and remained at moderate levels.  
  • Business debt compared to GDP and measures of leverage remained relatively high but showed signs of slowing toward the end of 2022.
  • Household debt remained at modest levels relative to GDP. Most of that debt is owed by households with solid credit histories or substantial home equity.