Financial institutions remained resilient through the first six months of 2021, although some vulnerabilities – such as households and businesses under strain – have increased since February, the Federal Reserve said Friday in its semiannual Monetary Policy Report to Congress.
The Fed report also noted that asset valuations have generally risen across risky asset classes, with “improving fundamentals” as well as increased investor risk appetite, including in both equity and corporate bond markets.
The Fed report looks at a broad range of developments for the economy in the first half of the year. In addition to financial stability at financial institutions, the report also looks at monetary policy, the labor market, inflation, economic activity, financial conditions, and international developments.
Regarding financial stability, the report stated that vulnerabilities from both business and household debt have continued to decline in the first quarter of 2021, reflecting a slower pace of business borrowing, an improvement in business earnings, and government programs that have supported business and household incomes. “Even so, business-sector debt outstanding remains high relative to income, and some businesses and households are still under considerable strain,” the report asserts.
The report states that leverage at banks and broker-dealers remains low – however, at hedge funds, “available measures of leverage” are high, increasing in the early part of the year.
Issuances of collateralized loan obligations and asset-backed securities recovered strongly in the first three months of the year, the report states. However, issuances of non-agency commercial mortgage-backed securities were weak in the same period.
“Funding risks at domestic banks continued to be low in the first quarter, but structural vulnerabilities persist at some types of money market funds and bank-loan and bond mutual funds,” the report states.