Banks remained profitable in the second quarter of this year even as higher interest rates and recession fears continued, according to the semiannual stability report released by the Federal Reserve on Nov. 4.
Funding risks for domestic banks remain low as they continue to hold extensive amounts of liquid assets and have minimal reliance on short-term wholesale funding, according to the Fed, but structural vulnerabilities persist at money market funds, other mutual funds and stablecoins.
Banks kept risk-based capital ratios near post-2010 averages, according to the Fed, and broker-dealer leverage was historically low. Bank lending to non-bank institutions reached a record high of nearly $2 trillion in the second quarter. “More generally, monitoring some parts of the nonbank financial sector, where hidden pockets of leverage could amplify adverse shocks, could be enhanced with more comprehensive and timely data,” the report stated.
According to the Fed, higher interest rates and recessionary predictions caused prices for financial assets to fall as real estate prices, including for commercial properties, remain high. Businesses continued to borrow at high levels relative to GDP in the first half of the year, but certain measures of their ability to service the debt improved as higher business earnings offset increased interest rates.
“Household debt remained at modest levels relative to GDP, and most of that debt is owed by households with strong credit histories or considerable home equity,” the report stated. “Nonetheless, borrowing costs continue to rise and inflation is reducing real incomes, a combination that may pose risks to the ability of some businesses and households to service their debts, especially in the event of further adverse shocks to income or inflation.”