Financial Stability Report October 2023
Central bank: fed | Document type: financial_stability_report | Date: 2023-10-20

October 2023
Financial Stability Report
bank of the United States. It performs five key
functions to promote the effective operation
of the U.S. economy and, more generally, the
public interest.
The Federal Reserve
conducts the nation’s monetary policy to promote maximum employment
and stable prices in the U.S. economy;
promotes the stability of the financial system and seeks to minimize
and contain systemic risks through active monitoring and engagement in
the U.S. and abroad;
promotes the safety and soundness of individual financial institutions
and monitors their impact on the financial system as a whole;
fosters payment and settlement system safety and efficiency through
services to the banking industry and the U.S. government that facilitate
U.S.-dollar transactions and payments; and
promotes consumer protection and community development through
consumer-focused supervision and examination, research and analysis of
emerging consumer issues and trends, community economic development
activities, and administration of consumer laws and regulations.
To learn more about us, visit www.federalreserve.gov/aboutthefed.htm.
Note: This report generally reflects information that was available as of October 4, 2023.
Purpose and Framework ................................................. iii
Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1 Asset Valuations ..................................................... 5
2 Borrowing by Businesses and Households .............................. 15
3 Leverage in the Financial Sector ....................................... 25
4 Funding Risks ....................................................... 37
5 Near-Term Risks to the Financial System ............................... 45
Box 5.1. Survey of Salient Risks to Financial Stability ............................ 47
Box 5.2. An Approach to Assessing Climate-Related Financial Risks  ................. 49
Appendix: Figure Notes ................................................ 51
Purpose and Framework
This report presents the Federal Reserve Board’s current assessment of the stability of the U.S.
financial system. By publishing this report, the Board intends to promote public understand -
ing by increasing transparency around, and creating accountability for, the Federal Reserve’s
views on this topic. Financial stability supports the objectives assigned to the Federal Reserve,
including full employment and stable prices, a safe and sound banking system, and an efficient
payments system.
A financial system is considered stable when
banks, other lenders, and financial markets
are able to provide households, communities,
and businesses with the financing they need
to invest, grow, and participate in a well-
functioning economy—and can do so even
when hit by adverse events, or “shocks.”
Consistent with this view of financial stabil-
ity, the Federal Reserve Board’s monitoring
framework distinguishes between shocks to,
and vulnerabilities of, the financial system.
Shocks are inherently difficult to predict,
while vulnerabilities, which are the aspects
of the financial system that would exacerbate
stress, can be monitored as they build up or
recede over time. As a result, the framework
focuses primarily on assessing vulnerabilities,
with an emphasis on four broad categories
and how those categories might interact to
amplify stress in the financial system.1
1 For a review of the research literature in this area, see Tobias Adrian, Daniel Covitz, and Nellie Liang (2015), “Finan -
cial Stability Monitoring,” Annual Review of Financial Economics , vol. 7 (December), pp. 357–95.
1. Valuation pressures arise when asset prices are high relative to economic fundamentals or
historical norms. These developments are often driven by an increased willingness of investors
to take on risk. As such, elevated valuation pressures may increase the possibility of outsized
drops in asset prices (see Section 1, Asset Valuations).
More on the Federal
Reserve’s Monitoring Efforts
See the Financial Stability section  of the
Federal Reserve Board’s website for more
information on how the Federal Reserve
monitors the stability of the U.S. and world
financial systems.
The website includes:
• a more detailed look at our monitoring
framework for assessing risk in each
• more data and research on related topics;
• information on how we coordinate, cooper -
ate, and otherwise take action on financial
system issues; and
• public education resources  describing the
importance of our efforts.
iv Financial Stability Report
2. Excessive borrowing by businesses and households  exposes the borrowers to distress if
their incomes decline or the assets they own fall in value. In these cases, businesses and
households with high debt burdens may need to cut back spending, affecting economic activity
and causing losses for investors (see Section 2, Borrowing by Businesses and Households).
3. Excessive leverage within the financial sector increases the risk that financial institutions will
not have the ability to absorb losses without disruptions to their normal business operations
when hit by adverse shocks. In those situations, institutions will be forced to cut back lending,
sell their assets, or even shut down. Such responses can impair credit access for households
and businesses, further weakening economic activity (see Section 3, Leverage in the
Financial Sector).
4. Funding risks expose the financial system to the possibility that investors will rapidly
withdraw their funds from a particular institution or sector, creating strains across markets
or institutions. Many financial institutions raise funds from the public with a commitment
to return their investors’ money on short notice, but those institutions then invest much of
those funds in assets that are hard to sell quickly or have a long maturity. This liquidity and
maturity transformation can create an incentive for investors to withdraw funds quickly in
adverse situations. Facing such withdrawals, financial institutions may need to sell assets
quickly at “fire sale” prices, thereby incurring losses and potentially becoming insolvent, as
well as causing additional price declines that can create stress across markets and at other
institutions (see Section 4, Funding Risks).
The Federal Reserve’s monitoring framework also tracks domestic and international develop -
ments to identify near-term risks—that is, plausible adverse developments or shocks that could
stress the U.S. financial system. The analysis of these risks focuses on assessing how such
potential shocks may spread through the U.S. financial system, given our current assessment of
vulnerabilities.
While this framework provides a systematic way to assess financial stability, some potential
risks may be novel or difficult to quantify and therefore are not captured by the current approach.
Given these complications, we rely on ongoing research by the Federal Reserve staff, academ -
ics, and other experts to improve our measurement of existing vulnerabilities and to keep pace
with changes in the financial system that could create new forms of vulnerabilities or add to
existing ones.
Purpose and Framework  v
Federal Reserve actions to promote the resilience of the
financial system
The assessment of financial vulnerabilities informs Federal Reserve actions to promote the resil -
ience of the financial system. The Federal Reserve works with other domestic agencies directly
and through the Financial Stability Oversight Council to monitor risks to financial stability and to
undertake supervisory and regulatory efforts to mitigate the risks and consequences of financial
instability.
Actions taken by the Federal Reserve to promote the resilience of the financial system include
its supervision and regulation of financial institutions. In the aftermath of the 2007–09 financial
crisis, these actions have included requirements for more and higher-quality capital, an innova -
tive stress-testing regime, and new liquidity regulations applied to the largest banks in the United
States. In addition, the Federal Reserve’s assessment of financial vulnerabilities informs deci -
sions regarding the countercyclical capital buffer (CCyB). The CCyB is designed to increase the
resilience of large banking organizations when there is an elevated risk of above-normal losses
and to promote a more sustainable supply of credit over the economic cycle.
This report reviews conditions affecting the stability of the U.S. financial system by analyzing
vulnerabilities related to valuation pressures, borrowing by businesses and households,
financial-sector leverage, and funding risks. It also highlights several near-term risks that, if
realized, could interact with these vulnerabilities.
A summary of the developments in the four broad categories of vulnerabilities since the
May 2023 Financial Stability Report is as follows:
Overview of financial system vulnerabilities
Leverage in the
ﬁnancial sector Funding risks
Borrowing by businesses
and householdsAsset valuations
• Equi ty price-to-earnings
ratios reached elevated
• Risk  premiums in
corporate bond markets
remained near the
middle of their historical
distri butions.
• Pr ices of resident ial and
commercial proper ties
remained high relative to
fundamentals.
• The ratio of total
private debt to gross
domestic product (GDP)
continued to edge down
and remained close to
its historical average.
• The business
debt-to-GDP ratio
remained high, but debt
issuance by the riskiest
companies continued
to be subdued. Firms’
ability to service their
debt remained solid
despite declining
interest coverage ratios.
• Household debt was at
modest levels relative to
GDP and concentrated
among prime-rated
borrowers.
• The banking system
remained sound and
resilient, as risk-based
capital ratios remained
close to average levels
over the past decade.
• Nonetheless, high
interes t rates
continued to depress
the fair value of
longer-maturity,
ﬁxed-rate assets that,
for some banks, were
• Leverage remained
high at the largest
hedge funds.
• Broker-dealer leverage
remained near
historically low levels .
• Mo st domestic banks
maintained high levels
of liquid assets and
stable funding.
• However, a subset of
banks continued to
face funding pressures,
reﬂecting concerns over
uninsured deposits and
other factors.
• Stru ctural
vulnerabilities persisted
at money market funds,
some other mutual
funds, and stablecoins.
• Li quidity risks for life
insurers remained
elevated as the share of
illiquid and risky assets
continued to edge up.
2 Financial Stability Report
1. Asset valuations. Equity prices grew faster than expected earnings, pushing the forward
price-to-earnings ratio into the upper ranges of its historical distribution. Risk premiums
in corporate bond markets narrowed somewhat and remained near the middle of their
historical distributions. Prices of residential and commercial properties remained high
relative to fundamentals (see Section 1, Asset Valuations).
2. Borrowing by businesses and households. Balance sheets of many nonfinancial
businesses and households remained solid. Growth of business debt continued to
decline through the first half of the year, although business debt remained high when
measured relative to gross domestic product (GDP) or business assets. Measures of
the ability of firms to service their debt remained strong. Household debt remained at
modest levels relative to GDP, with most of that debt owed by households with strong
credit histories or considerable home equity (see Section 2, Borrowing by Businesses and
Households).
3. Leverage in the financial sector. The banking sector remains sound and resilient overall,
and most banks continued to report capital levels well above regulatory requirements.
That said, the increase in interest rates over the past two years has contributed to
declines in the fair value of longer-maturity, fixed-rate assets that, for some banks, were
sizable. Outside the banking sector, available data suggest that hedge fund leverage
remained somewhat elevated, especially for the largest hedge funds. Leverage at life
insurance companies remained near the middle of its historical range, while broker-dealer
leverage remained historically low (see Section 3, Leverage in the Financial Sector).
4. Funding risks. Most domestic banks have ample liquidity and limited reliance on short-
term wholesale funding; nevertheless, some banks continued to face funding strains,
likely owing to vulnerabilities associated with high levels of uninsured deposits and
declines in the fair value of assets. The Bank Term Funding Program (BTFP) helped
mitigate these strains. Structural vulnerabilities remained in other short-term funding
markets. Prime and tax-exempt money market funds (MMFs), as well as other cash-
investment vehicles and stablecoins, remained vulnerable to runs. Bond and loan funds
that hold assets that can become illiquid during periods of stress remained susceptible
to large redemptions. Life insurers continued to rely on a higher-than-average share of
runnable liabilities (see Section 4, Funding Risks).
This report also discusses potential near-term risks based in part on the most frequently cited
risks to U.S. financial stability as gathered from outreach to a wide range of researchers,
academics, and market contacts conducted from August through early October (discussed in the
box “Survey of Salient Risks to Financial Stability ”). The two most frequently cited topics in this
survey—the risk of persistent inflationary pressures leading to a more restrictive monetary policy
stance and the potential for large losses on commercial real estate (CRE) and residential real
Overview  3
estate—were mentioned by three-fourths of all survey participants, up from one-half of all partici -
pants in the previous survey. Risks associated with the reemergence of banking-sector stress and
risks associated with market liquidity strains and volatility continued to feature prominently. Addi -
tionally, in the most recent survey, respondents were increasingly attentive to risks posed from
economic weakness in China as well as from fiscal debt sustainability in advanced economies.
Note that data and survey results for this report closed on October 4, 2023 and do not reflect the
escalation of geopolitical tensions following the attack on Israel.
In addition, the Federal Reserve is working to understand the risks that climate change may pose
to individual banking organizations and the financial system. The box “An Approach to Assessing
Climate-Related Financial Risks” contains information on some steps the Federal Reserve has
taken to collect data to better understand climate-related risks to financial institutions and
financial markets.
Survey of salient risks to the financial system
Survey respondents cited several emerging and existing events or conditions as presenting risks to the U.S. financial
system and the broader global economy. For more information, see the box “Survey of Salient Risks to Financial
Stability.”
of contacts
of contacts
Persistent inﬂation/uni003B
monetary tightening
of contacts
Weakness in Chinese
economy/ﬁnancial sector
of contacts
of contacts
of contacts
Market liquidity strains
and volatility
of contacts
of contacts
Commercial and
residential real estate
of contacts
Banking-sector
of contacts
1 Asset Valuations
Asset valuation pressures rose to a notable level
Since the May 2023 report, valuations in equity markets increased modestly from an already
high level even as yields on Treasury securities increased substantially. Corporate credit spreads
edged down and were somewhat below their historical averages. Liquidity in Treasury markets
remained challenged. While trading conditions largely recovered from the notable strains seen
following Silicon Valley Bank’s failure, they could again deteriorate in the face of further negative
Property prices remain elevated relative to fundamentals. In the market for residential real estate,
house prices started increasing again in recent months and prices relative to rents remained near
all-time highs. In the market for CRE, rental income relative to property prices remained low from
a historical perspective, despite recent declines in property values. Fundamentals in the market
for office properties were especially weak, as vacancy rates have risen and rent growth slowed.
Farmland prices were historically elevated relative to rents, reflecting higher crop prices and lim -
ited inventories of land.
Table 1.1 shows the sizes of the asset markets discussed in this section. The largest asset mar -
kets are those for residential real estate, equities, Treasury securities, and CRE.
Treasury yields increased substantially and now stand at the highest
levels in the past 15 years
Yields on Treasury securities moved notably higher since the May report and now stand close to
their highest levels over the past decade and a half (figure 1.1). A model-based estimate of the
nominal Treasury term premium—a measure of the compensation that investors require to hold
longer-term Treasury securities rather than shorter-term ones—increased but remained low rela -
tive to its long-run history (figure 1.2). Interest rate volatility implied by options remained elevated
by historical norms, reflecting, in part, uncertainty about the economic outlook and the path of
monetary policy (figure 1.3).
Equity market valuation pressures remained notable
Valuations in equity markets increased modestly from an already high level since the May report.
The pace of equity price increases exceeded that of expected earnings, and the forward price-to-
earnings ratio rose to a level further above its historical median ( figure 1.4).
6 Financial Stability Report
Figure 1.1. Nominal Treasury yields rose substantially in the third quarter of 2023
1998 2003 2008 2013 2018 2023
Percent, annual rate
Source: Federal Reserve Board, Statistical Release H.15, “Selected Interest Rates.”
Table 1.1. Size of selected asset markets
Item Outstanding
(billions of dollars)
2022:Q2–2023:Q2
Average annual growth,
1997–2023:Q2
Residential r eal estate 56,301 −1.2 6.4
Equities 53,457 15.0 8.2
Tr ea sur y securities 24,772 6.5 8.4
Commer cial r eal estate 24,003 2.5 6.4
In v estment-g rade corporate bonds 7,369 5.3 8.0
Fa rm land 3,288 8.1 5.7
High-yield and unrated corporate bonds 1,667 −6.0 6.4
Le v erag ed loan s 1 1,394 −1.5 13.0
Price g ro wth (r eal)
Commer cial r eal estate 2 −3.9 3.3
Residential r eal estate 3 −1.3 2.7
Note: The data extend thr ough 2023:Q2. Gr o wth rates ar e mea sur ed fr om Q2 of the y ear immediatel y pr eceding the period thr ough Q2 of the
ﬁnal y ear of the period. Equities, r eal estate, and far mland ar e at nominal mar k et va lue/uni003B bonds and loan s ar e at nominal book v alue.
1 The amount outstanding sho ws in stitutional leverag ed loan s and g enerall y excludes loan commitments held by  banks. For example, lines of
cr edit ar e g enerall y excluded fr om this mea sur e. Av erag e annual g ro wth of leverag ed loan s is fro m 2001 to 2023:Q2, as  this mark et wa s
fair l y small befor e then.
2 One-y ear g ro wth of commer cial r eal estate prices is fr om June 2022 to June 2023, and a v erag e annual g ro wth is fr om June 1999 to
June 2023. Both g ro wth rates ar e calculated fr om equal-w eighted nominal prices deﬂated using the con sumer price index (CPI).
3 One-y ear g ro wth of r esidential r eal estate prices is fr om June 2022 to June 2023, and a v erag e annual g ro wth is fro m June 1998 to
June 2023. Nominal prices ar e deﬂated using the CPI.
Sour ce: For leverag ed loan s, PitchBook D ata, Le v erag ed Commentar y & D ata/uni003B for corporate bonds, Merg ent, Inc., Fi xed Income Securities D ata-
ba se/uni003B for far mland, Depar tment of Ag ricultur e/uni003B for r esidential r eal estate price gr o wth, Cor eLogic, I nc./uni003B for commerc ial r eal estate price g ro wth,
CoStar Gr oup , Inc., CoStar Commer cial Repeat Sale Indices/uni003B for all other item s, Federal Reser ve  Boar d, Statistical Relea se Z.1, “ Fi nancial
A ccounts of the United States. ”
Asset Valuations 7
The difference between the forward earnings-to-price ratio and the real 10-year Treasury yield—
a measure of the additional return that investors require for holding stocks relative to risk-free
bonds (the equity premium)—declined since the May report to levels well below historical norms
(figure 1.5).2 Equity market volatility continued to decline from the elevated levels reached earlier
this year and currently stands slightly above its historical median ( figure 1.6).
2 This estimate is constructed based on expected corporate earnings for 12 months ahead. Alternative measures of the
equity premium that incorporate longer-term earnings forecasts suggest more elevated equity valuation pressures.
Figure 1.2. An estimate of the nominal
Treasury term premium increased but
remained relatively low
1998 2003 2008 2013 2018 2023
Percentage points
Source: Department of the Treasury; Wolters Kluwer,
Blue Chip Financial Forecasts; Federal Reserve Bank
of New York; Federal Reserve Board staff estimates.
Figure 1.3. Interest rate volatility remained
elevated by historical norms
2005 2008 2011 2014 2017 2020 2023
Basis points
Median = 79.37
Source: For data through July 13, 2022, Barclays and
S&P Global; for data from July 14, 2022, onward, ICAP,
Swaptions and Interest Rate Caps and Floors Data.
Figure 1.5. An estimate of the equity premium
fell further below its historical median
1991 1999 2007 2015 2023
Percentage points
Median = 4.73
Source: Federal Reserve Board staff calculations
using Refinitiv, Institutional Brokers’ Estimate
System estimates; Department of the Treasury;
Federal Reserve Bank of Philadelphia, Survey of
Professional Forecasters.
Figure 1.4. The price-to-earnings ratio of
S&P 500 firms increased to levels further
above its historical median
1991 1999 2007 2015 2023
Median = 15.55
Source: Federal Reserve Board staff calculations
using Refinitiv, Institutional Brokers’ Estimate
System estimates.
8 Financial Stability Report
Spreads in corporate debt markets narrowed modestly
Yields on corporate bonds rose since the May report and remain above the median of their histor -
ical distributions, as yields on comparable-maturity Treasury securities also increased ( figure 1.7).
Corporate bond spreads, measured as the difference in yields between corporate bonds and
comparable-maturity Treasury securities, narrowed modestly and currently stand a bit below their
historical median (figure 1.8). However, the excess bond premium—a risk premium measure that
captures the gap between corporate bond spreads and expected credit losses—remained near
its historical mean (figure 1.9). The trailing 12-month default rate for all corporate bonds edged
up over the past year but stands well below its historical median. For speculative-grade corporate
bonds in particular, the trailing 12-month default rate moved up more over the same time period
and stands at about its historical median.
Valuations in leveraged loan markets were little changed from the previous report. The average
spread on leveraged loans above their benchmark rates in the secondary market fell modestly
Figure 1.6. Volatility in equity markets stood slightly above its historical median
Option-implie d volatility
Realized volatility
1998 2003 2008 2013 2018 2023
Source: Refinitiv, DataScope Tick History; Federal Reserve Board staff estimates.
Figure 1.7. Corporate bond yields rose above their historical medians
High-yield
1998 2003 2008 2013 2018 2023
Source: ICE Data Indices, LLC, used with permission.
Asset Valuations 9
and remained near its average over the past decade ( figure 1.10). The trailing 12-month loan
default rate increased further since the last report and stands well above its historical median
since the Great Recession, but the year-ahead expected default rate declined moderately.
Market liquidity stayed near the lower end of its historical range
Market liquidity refers to the ease and cost of buying and selling an asset. Low liquidity can
amplify the volatility of asset prices and result in larger price moves in response to shocks. In
extreme cases, low liquidity can threaten market functioning, leading to a situation in which par -
ticipants are unable to trade without incurring a significant cost.
Figure 1.8. Corporate bond spreads narrowed modestly
Triple-B (left scale)
High-yield (right scale)
1998 2003 2008 2013 2018 2023
Percentage pointsPercentage points
Source: ICE Data Indices, LLC, used with permission.
Figure 1.9. The excess bond premium stayed
near its historical mean
1998 2003 2008 2013 2018 2023
Percentage points
Source: Federal Reserve Board staff calculations
based on Lehman Brothers Fixed Income Database
(Warga); Intercontinental Exchange, Inc., ICE Data
Services; Center for Research in Security Prices,
CRSP/Compustat Merged Database, Wharton
Research Data Services; S&P Global, Compustat.
Figure 1.10. Spreads on leveraged loans fell
1998 2003 2008 2013 2018 2023
Percentage points
Monthly to weekly
Source: PitchBook Data, Leveraged Commentary
10 Financial Stability Report
Treasury market liquidity is important because of the key role these securities play in the financial
system. Various measures of market liquidity, such as market depth, suggest that while Treasury
market liquidity was largely in line with expectations given interest rate volatility, it remained
below historical norms (figures 1.11 and 1.12). This low level of market depth could indicate that
liquidity providers are being particularly cautious, and liquidity may be less resilient than usual.
In other markets, liquidity conditions were little changed since the previous report and present a
more mixed picture. In corporate bond markets, bid-ask spreads remained well below pandemic
levels, suggesting ample liquidity, while in equity markets, depth in the S&P 500 futures markets
stayed at below-average levels (figure 1.13).
Figure 1.11. Treasury market depth remained below historical norms
5-year (right scale)
10-year (right scale)
30-year (left scale)
Jan. Apr. JulyO ct.J an.A pr. JulyO ct.J an.A pr. JulyO ct.J an.A pr. JulyO ct.J an.A pr. JulyO ct.
5-day moving average
Millions of dollarsMillions of dollars
2019 2020 2021 2022 2023
Source: Inter Dealer Broker Community.
Figure 1.12. On-the-run market depth improved in recent months but remained below historical norms
2-year OTR market depth (right scale)
10-year OTR market depth (left scale)
Oct. Jan. Apr. JulyO ct.J an.A pr. JulyO ct.J an.A pr. JulyO ct.J an.A pr. JulyO ct.
5-day moving average
Millions of dollarsMillions of dollars
2019 2020 2021 2022 2023
Source: BrokerTec; Federal Reserve Board staff calculations.
Asset Valuations 11
Commercial real estate valuations remained elevated, even as prices
continued to decline
Aggregate CRE prices measured in inflation-adjusted terms continued declining through August
(figure 1.14). Capitalization rates at the time of property purchase, which measure the annual
income of commercial properties relative to their prices, have increased modestly from recent his -
torically low levels but have not increased as much as real Treasury yields, suggesting that prices
remain high relative to rental income (figure 1.15). CRE valuations are particularly elevated for the
Figure 1.13. A measure of liquidity in equity markets remained below average
Oct. Jan. Apr. JulyO ct.J an.A pr. JulyO ct.J an.A pr. JulyO ct.J an.A pr. JulyO ct.
5-day moving average
Market depth (number of contracts)
2019 2020 2021 2022 2023
Source: Refinitiv, DataScope Tick History; Federal Reserve Board staff calculations.
Figure 1.14. Commercial real estate prices,
adjusted for inflation, continued to decline
2003 2008 2013 2018 2023
Jan. 2001 = 100
Source: Real Capital Analytics; consumer price index,
Bureau of Labor Statistics via Haver Analytics.
Figure 1.15. Income of commercial properties
relative to prices continued to grow but
remained well below historical norms
2003 2007 2011 2015 2019 2023
Source: Real Capital Analytics; Andrew C. Florance,
Norm G. Miller, Ruijue Peng, and Jay Spivey (2010),
“Slicing, Dicing, and Scoping the Size of the U.S.
Commercial Real Estate Market,” Journal of Real
Estate Portfolio Management,  vol. 16 (May–August),
pp. 101–18.
12 Financial Stability Report
office sector, where fundamentals are especially weak for offices in central business districts,
with vacancy rates increasing further and rent growth declining since the May report. In the April
and July 2023 Senior Loan Officer Opinion Survey (SLOOS), banks reported weaker demand and
tighter standards for all CRE loan categories over the first half of 2023 ( figure 1.16).
House prices started increasing again in recent months, and
valuations remained high
Since the last report, valuations in residential real estate markets increased from already ele -
vated levels. House prices, after holding steady earlier this year, started rising again in recent
months (figure 1.17). A model of house price valuation based on prices relative to owners’
Figure 1.16. Banks reported tightening lending standards in commercial real estate loans
1998 2003 2008 2013 2018 2023
Net percentage of banks reporting
Easing Tightening
Source: Federal Reserve Board, Senior Loan Officer Opinion Survey on Bank Lending Practices; Federal Reserve
Board staff calculations.
Figure 1.17. House prices started increasing again in recent months
Case-S hiller
2003 2008 2013 2018 2023
12-month percent change
Source: Zillow, Inc., Real Estate Data; CoreLogic, Inc., Real Estate Data; S&P Case-Shiller Home Price Indices.
Asset Valuations 13
equivalent rent and the real 10-year Treasury yield suggests that valuations in housing markets
were increasingly stretched (figure 1.18). Moreover, the median price-to-rent ratio measured
across a wide distribution of geographical areas remained close to its previous peak in the mid-
2000s (figure 1.19). That said, credit conditions for borrowers remained considerably tighter than
in the early 2000s.
Farmland valuations remained elevated
Farmland prices increased since the May report, reaching values near the peak of their historical
distribution (figure 1.20). Similarly, the ratios of farmland prices to rents remained historically
high (figure 1.21). These high valuations were driven by strong agricultural commodity prices,
limited inventory of farmland, and significant increases in cropland revenues that had more than
offset higher operating costs.
Figure 1.19. House price-to-rent ratios remained elevated across geographic areas
Middle 80 percent of markets
1998 2003 2008 2013 2018 2023
Jan. 2010 = 100
Source: For house prices, Zillow, Inc., Real Estate Data; for rent data, Bureau of Labor Statistics.
Figure 1.18. Model-based measures of house price valuations remained historically high
Owners’ equivalent rent
Market-based rents
1983 1988 1993 1998 2003 2008 2013 2018 2023
Source: For house prices, Zillow, Inc., Real Estate Data; for rent data, Bureau of Labor Statistics.
14 Financial Stability Report
Figure 1.21. Farmland prices grew faster than rents
Midwest index
1968 1973 1978 1983 1988 1993 1998 2003 2008 2013 2018 2023
Median = 18.18
Source: Department of Agriculture; Federal Reserve Bank of Minneapolis staff calculations.
Figure 1.20. Farmland prices stayed near historical highs
Midwest index
1968 1973 1978 1983 1988 1993 1998 2003 2008 2013 2018 2023
8000Annual
2022 dollars per acre
Median = $3,433.33
Source: Department of Agriculture; Federal Reserve Bank of Minneapolis staff calculations.
2 Borrowing by Businesses and
Households
Vulnerabilities from business and household debt remained moderate
Balance sheets of many nonfinancial businesses and households remained solid, with vulner -
abilities at moderate levels. That said, there are increasing signs that higher interest rates are
beginning to strain some borrowers.
For businesses, both the business debt-to-GDP ratio and gross leverage remained at high levels,
although they were significantly lower than the record highs reached at the onset of the pan -
demic. Interest coverage ratios (ICRs)—defined as the ratio of earnings before interest and tax to
interest expense—moved down  in the most recent data but remain solid, suggesting that firms,
overall, have sufficient cash flows to cover rising borrowing costs. Indicators of household vul -
nerabilities, including the household debt-to-GDP ratio and the aggregate household debt service
ratio, remained at modest levels. An economic downturn resulting in lower business earnings and
household incomes could weaken the debt service capacities of smaller, at-risk businesses with
already low ICRs as well as particularly indebted households.
Table 2.1 shows the amounts outstanding and recent historical growth rates of forms of debt
owed by nonfinancial businesses and households as of the second quarter of 2023. The com -
bined total debt of nonfinancial businesses and households grew more slowly than nominal GDP
in recent quarters, leading to a decline in the debt-to-GDP ratio, which is now at the level that pre -
vailed over most of the past decade (figure 2.1). The drop in the overall ratio was driven in equal
parts by declines in both the household and business debt-to-GDP ratios ( figure 2.2).
Business debt vulnerabilities remain moderate relative to
historical levels
Overall vulnerabilities from nonfinancial business debt increased slightly since the May report but
remained moderate overall. While measures of leverage remained high, debt growth continued to
decline. Firms’ ability to service their debt, as measured by ICRs, edged down a bit in the most
recent data but remained solid owing to resilient earnings. However, risky borrowers’ ability to
service their debt burdens has started to show signs of weakness, as would be expected in a
rising interest rate environment, and could become further strained if corporate earnings fall due
to a sharper-than-expected slowdown in economic activity.
16 Financial Stability Report
Table 2.1. Outstanding amounts of nonﬁnancial business and household credit
Item Outstanding
(billions of dollars)
2022:Q2–2023:Q2
Average annual growth,
1997–2023:Q2
T otal pri v ate nonﬁnancial cr edit 39,915 3.7 5.5
T otal nonﬁnancial busines s cr edit 20,335 3.6 5.9
Corporate busines s cr edit 13,003 3.2 5.4
Bonds and commer cial paper 7,720 2.3 5.5
Bank lending 2,101 8.7 4.5
Le v erag ed loan s 1 1,358 3.2 13.1
Noncorporate busines s cr edit 7,332 4.2 6.9
Commer cial r eal estate cr edit 2,971 5.4 6.2
T otal household cr edit 19,580 3.8 5.1
Mort ga g es 12,850 4.1 5.1
Con sumer cr edit 4,943 5.3 5.4
Student loan s 1,765 1.2 8.0
A uto loan s 1,533 6.1 5.4
Cr edit car ds 1,225 11.5 3.5
Nominal GD P 26,799 6.1 4.6
Note: The data extend thr ough 2023:Q2. Outstanding amounts ar e in nominal ter ms . Gr o wth rates ar e mea sur ed fr om Q2 of the y ear immedi-
atel y pr eceding the period thr ough Q2 of the ﬁnal y ear of the period. The table r epor ts the main components of corporate business  cr edit, total
household cr edit, and con sumer cr edit. Other , smaller components ar e not r epor ted. The commer cial r eal estate (CR E) ro w sho ws CRE  debt
ow ed b y both nonﬁnancial corporate and noncorporate busines ses a s deﬁned in T able L.220: Commerc ial Mor tg ag es in the “F inancial
A ccounts of the United States. ” T otal household-sector cr edit includes debt o w ed b y other entities, such as  nonpr oﬁt org anization s. G D P is
gr os s domestic pr oduct.
1 Le v erag ed loan s included in this table ar e an estimate of the leverag ed loan s that ar e made to nonﬁnancial busines ses onl y and do not
include the small amount of le v erag ed loan s outstanding for ﬁnancial busines ses. The amount outstanding sho ws in stitutional leverag ed
loan s and g enerall y excludes loan commitments held b y banks. For example, l ines of cr edit ar e g enerally  excluded fr om this mea sur e.
Av erag e annual g ro wth of le v erag ed loan s is fro m 2001 to 2023:Q2, as  this mar k et wa s fair ly  small befor e then.
Sour ce: For leverag ed loan s, PitchBook D ata, Le v erag ed Commentar y & D ata/uni003B for GD P,  B ur eau of Economic Anal ysis, national income and
pr oduct accounts/uni003B for all other item s, Federal Reser v e Boar d, Statistical Relea se Z.1, “ Fi nancial A ccounts of the United States.”
Figure 2.1. The total debt of businesses and households relative to GDP declined further
1981 1987 1993 1999 2005 2011 2017 2023
Quar terly
Source: Federal Reserve Board staff calculations based on Bureau of Economic Analysis, national income and
product accounts, and Federal Reserve Board, Statistical Release Z.1, “Financial Accounts of the United States.”
Borrowing by Businesses and Households  17
The growth of nonfinancial business debt
adjusted for inflation declined over the past
year (figure 2.3), and net issuance of risky
debt—defined as the difference between
issuance of high-yield bonds, unrated bonds,
and leveraged loans minus retirements and
repayments—remained subdued as firms
repaid existing leveraged loans at a faster
pace than new loans were issued (figure 2.4).
The net issuance of high-yield and unrated
bonds was also subdued through the third
quarter of 2023.
Figure 2.2. Both business and household debt-to-GDP ratios edged down
Nonﬁnancia l business
(right scale)
Househol d (left scale)
1981 1987 1993 1999 2005 2011 2017 2023
RatioRatio
Source: Federal Reserve Board staff calculations based on Bureau of Economic Analysis, national income and
product accounts, and Federal Reserve Board, Statistical Release Z.1, “Financial Accounts of the United States.”
Figure 2.3. Business debt adjusted for
inflation continued to decline
1998 2003 2008 2013 2018 2023
Percent change, annual rate
Source: Federal Reserve Board, Statistical Release Z.1,
“Financial Accounts of the United States.”
Figure 2.4. Net issuance of risky debt remained subdued
Institut ional leveraged loans
High-yield and unrated bonds
2005 2008 2011 2014 2017 2020 2023
Billions of dollar s
Source: Mergent, Inc., Fixed Income Securities Database; PitchBook Data, Leveraged Commentary & Data.
18 Financial Stability Report
Gross leverage—the ratio of debt to assets—of all publicly traded nonfinancial firms remained
high by historical standards (figure 2.5). Net leverage—the ratio of debt less cash to total
assets—continued to edge up among all large publicly traded businesses and remained high
relative to its history. Meanwhile, firms’ ability to service their debt remained solid overall, despite
some emerging signs of weakness among riskier firms. The median ICR has been steadily declin -
ing from its peak reached during the post-pandemic earnings boom and inched down further in
Q2 (figure 2.6). The decline partially reflects modest pass-through of higher interest rates to
firms’ borrowing costs, because most of the debt issued by large firms carries fixed rates .3
Corporate earnings remained solid for the first half of 2023. However, signs of stress in debt
servicing and deterioration in credit quality are emerging for the most vulnerable and lowest-rated
firms as elevated borrowing costs begin to weigh on interest expenses .4
The credit performance of outstanding corporate bonds remained solid, but signs of deterioration
have emerged since the May report. The volume of downgrades and defaults remained low, but
realized defaults and market expectations of defaults over the next year have been trending up
in recent months as pressures from rising interest rates and economic uncertainty mount. More
than half of investment-grade bonds outstanding continued to be rated in the lowest category of
the investment-grade range (triple-B). If a large share of these bonds were downgraded, debt cost
would increase when the bonds need to roll over, putting pressure on firms’ balance sheets.
3 Only about 5 percent of outstanding bonds rated triple-B and 1 percent of outstanding high-yield bonds are due within
4 While these firms represent a large share of the number of publicly traded firms (85 percent), their debt constitutes
only 35 percent of the total debt in the sector.
Figure 2.5. Gross leverage of large businesses
remained at high levels by historical standards
75th percentile
2002 2005 2008 2011 2014 2017 2020 2023
Source: Federal Reserve Board staff calculations
based on S&P Global, Compustat.
Figure 2.6. Firms’ ability to service their debt,
as measured by the interest coverage ratio,
continued to decline from post-pandemic highs
Median for all ﬁrms
Median for all non-inve stment-grade ﬁrms
2002 2005 2008 2011 2014 2017 2020 2023
Source: Federal Reserve Board staff calculations
based on S&P Global, Compustat.
Borrowing by Businesses and Households  19
Small and middle-market firms that are privately held—which have less access to capital markets
and primarily borrow from banks, private credit and equity funds, and sophisticated investors—
account for roughly 60 percent of outstanding U.S. debt. Available data for these firms indicate
that vulnerabilities inched up as higher interest rates started to reduce earnings and raise debt
service costs.5 Since the last report, leverage for these firms increased slightly following several
quarters of post-pandemic declines and is currently roughly in line with leverage levels among
publicly traded firms. The ICR for the median firm in this category declined notably but remained
at a high level, above that of publicly traded firms.
The credit quality of outstanding and newly issued leveraged loans remained solid through the
first half of 2023 but continued to show some signs of deterioration. The volume of credit rating
downgrades exceeded the volume of upgrades
over this period, and default rates have
continued to inch up from their historic lows
reached in 2021 (figure 2.7). The share of
newly issued loans to large corporations with
debt multiples—defined as the ratio of debt to
earnings before interest, taxes, depreciation,
and amortization—greater than 4 has fallen to
its lowest level in the past decade, suggest-
ing limited investor tolerance for riskier loans
(figure 2.8). As noted, a potential slowdown
in earnings growth posed by the less favor -
able economic outlook combined with rising
5 An important caveat is that the data on smaller middle-market firms are not as comprehensive as those on
large firms.
Figure 2.7. Default rates on leveraged loans
inched up from historically low levels
1999 2003 2007 2011 2015 2019 2023
Source: PitchBook Data, Leveraged Commentary
Figure 2.8. New leveraged loans with debt multiples less than 4 continued to rise
Debt multiples ≥ 6x
Debt multiples 5x–5.99x
Debt multiples 4x–4.99x
Debt multiples < 4x
20 02 20 05 20 08 20 11 20 14 20 17 20 20 20 23
Source: Mergent, Inc., Fixed Income Securities Database; PitchBook Data, Leveraged Commentary & Data.
20 Financial Stability Report
interest rates could put pressure on the credit quality of outstanding leveraged loans, as their
floating debt service costs would increase.
Delinquencies at small businesses edged up, but credit quality
remained solid
Credit quality for small businesses remained relatively solid, though delinquency rates continued
to edge up in recent months from relatively low levels. Borrowing costs increased in the first half
of 2023 to levels not seen since prior to the Great Recession. In addition, the share of small busi -
nesses that borrow regularly declined since the beginning of the year, according to the National
Federation of Independent Business Small Business Economic Trends Survey, and was somewhat
low relative to historical levels. The share of firms reporting unmet financing needs remained
quite low. Loan originations for small businesses remained in line with pre-pandemic levels.
Vulnerabilities from household debt remained moderate
Household balance sheets remained strong overall. Many households that purchased homes or
refinanced when interest rates were low continued to benefit from lower interest rate payments,
strengthening their current financial position. That said, some borrowers, especially those with
newly originated debt as interest rates have increased over the past year and a half, remained
financially stretched and more vulnerable to future shocks.
Outstanding household debt adjusted for
inflation ticked down in the second quarter,
with the decline in the most recent data
broad based across the credit score distri -
bution (figure 2.9). The ratio of total required
household debt payments to total disposable
income (the household debt service ratio)
increased slightly since the May report. None -
theless, the ratio remained at modest levels
after reaching a historical low in the first
quarter of 2021 amid credit card paydowns
with low interest rates at the time. Higher
interest rates over the past year have only
partially passed through to household interest
expenses because, except for credit card debt, only a small share of household debt is subject
to floating rates. For most other types of household debt, rising interest rates increase borrowing
costs only for new loan originations.
Figure 2.9. Real household debt edged down
Near prime
1999 2003 2007 2011 2015 2019 2023
Trillions of dollar s (real)
Source: Federal Reserve Bank of New York Consumer
Credit Panel/Equifax; consumer price index, Bureau
of Labor Statistics via Haver Analytics.
Borrowing by Businesses and Households  21
Mortgage credit risk remained generally low
Mortgage debt, which accounts for roughly
two-thirds of total household debt, grew a
bit more slowly than GDP over the past four
quarters. Estimates of housing leverage when
measuring home values as a function of rents
and other market fundamentals remained flat
and significantly lower than their peak levels
before 2008 (figure 2.10, black line). The over-
all mortgage delinquency rate was essentially
unchanged in the most recent data after edg -
ing up from the historically low levels reached
in 2021, and the share of mortgage balances
in loss-mitigation programs remained low
(figure 2.11). A very low share of borrowers
had negative home equity in the most recent
data through June 2023 (figure 2.12).
New mortgage extensions, which have been skewed heavily toward prime borrowers over the past
decade, continued to decline sharply in 2023 as mortgage rates remained elevated ( figure 2.13).
The early payment delinquency rate—the share of balances becoming delinquent within one year
of mortgage origination—continued to rise from its 2020 low, likely reflecting increasing strains
associated with higher interest expenses on newly originated mortgages.
Figure 2.10. A model-based estimate of
housing leverage was flat
Relative to model-implie d values
Relative to market value
1999 2003 2007 2011 2015 2019 2023
1999:Q1 = 100
Source: Federal Reserve Bank of New York Consumer
Credit Panel/Equifax; Zillow, Inc., Real Estate Data;
Bureau of Labor Statistics via Haver Analytics.
Figure 2.11. Mortgage delinquency rates
remained near historically low levels
Delinquen t
Delinquen t/loss mitigation
2002 2005 2008 2011 2014 2017 2020 2023
Percent of mortgages
Source: Federal Reserve Bank of New York Consumer
Credit Panel/Equifax.
Figure 2.12. Very few homeowners had
negative equity in their homes
2011 2013 2015 2017 2019 2021 2023
Percent of mortgages
Source: CoreLogic, Inc., Real Estate Data.
22 Financial Stability Report
Credit risk of outstanding household debt remained generally low,
but borrowers with low credit scores continued showing signs
Consumer debt—which accounts for the
remaining one-third of household debt and
consists primarily of student, auto, and credit
card loans—edged down in real terms since
the last report (figure 2.14) and, in nominal
terms, increased at a slightly slower pace
than nominal GDP. However, delinquency
rates on newly issued consumer loans rose,
particularly among borrowers with low credit
scores, as interest rates continued to rise.
Real auto loan balances ticked up for prime
borrowers but declined modestly for near-
prime and subprime borrowers (figure 2.15).
Smoothing through the quarter-to-quarter
variation over the first half of 2023, the share of auto loan balances in loss mitigation moved
sideways and remained roughly in line with its historical median. Those in delinquent status also
remained essentially flat, although at a level above the historical median ( figure 2.16). That said,
the aggregate delinquency rates mask a much sharper rise in auto loan delinquency rates for
subprime borrowers in the second quarter of 2023, which increased to a level that was elevated
relative to where it stood pre-pandemic.
Figure 2.13. New mortgage extensions to nonprime borrowers were subdued
Near prime
2002 2005 2008 2011 2014 2017 2020 2023
1600Annual
Billions of dollar s (real)
Source: Federal Reserve Bank of New York Consumer Credit Panel/Equifax; consumer price index, Bureau of Labor
Statistics via Haver Analytics.
Figure 2.14. Real consumer credit edged
down in the first half of 2023
Student loans
Auto loans
Credit cards
1999 2003 2007 2011 2015 2019 2023
Billions of dollar s (real)
Source: Federal Reserve Bank of New York Consumer
Credit Panel/Equifax; consumer price index, Bureau
of Labor Statistics via Haver Analytics.
Borrowing by Businesses and Households  23
Aggregate real credit card balances continued to increase over the first half of the year, and the
increases were broad based across the credit score distribution ( figure 2.17). Rates paid on
these balances increased in line with short-term interest rates over the past year. However, delin -
quency rates have continued to increase over the same period ( figure 2.18).
After rising rapidly for more than a decade, student loan debt, after adjusting for inflation, began
to decline with the onset of the pandemic. Student loan repayments, which had been on hold
since March 2020, are set to resume in October.
Figure 2.16. Auto loan delinquencies remained
at levels above their historical median
Delinquen t
Delinquen t/loss mitigation
2002 2005 2008 2011 2014 2017 2020 2023
Source: Federal Reserve Bank of New York Consumer
Credit Panel/Equifax.
Figure 2.17. Real credit card balances rose in
the first half of 2023
Near prime
1999 2003 2007 2011 2015 2019 2023
Billions of dollar s (real)
Source: Federal Reserve Bank of New York Consumer
Credit Panel/Equifax; consumer price index, Bureau
of Labor Statistics via Haver Analytics.
Figure 2.18. Credit card delinquencies
increased further in the first half of 2023
2002 2005 2008 2011 2014 2017 2020 2023
Source: Federal Reserve Bank of New York Consumer
Credit Panel/Equifax.
Figure 2.15. Real auto loans outstanding
ticked up for prime borrowers
Near prime
1999 2003 2007 2011 2015 2019 2023
Billions of dollar s (real)
Source: Federal Reserve Bank of New York Consumer
Credit Panel/Equifax; consumer price index, Bureau
of Labor Statistics via Haver Analytics.
Leverage in the Financial Sector3
While the overall banking system remains sound, declines in the
fair value of assets at some banks remained sizable and leverage at
some nonbanks continued to be somewhat elevated
Measures of regulatory capital for banks increased over the first half of the year and remained
solid. Nevertheless, declines in the fair value of fixed-rate assets have been sizable relative to
the regulatory capital at some banks, especially for a subset of large (but non–global systemi -
cally important) banks and regional banks. Outside the banking sector, leverage at broker-dealers
stayed near historically low levels, but limited capacity or willingness of broker-dealers to interme -
diate in Treasury markets during periods of stress remained a concern for liquidity in these mar -
kets. Hedge funds continued to operate with somewhat elevated leverage, and their exposures
are difficult to monitor due to lags in existing data.
Table 3.1 shows the sizes and growth rates of the types of financial institutions discussed in this
Table 3.1. Size of selected sectors of the ﬁnancial system, by types of institutions and vehicles
Item Total assets
(billions of dollars)
2022:Q2–2023:Q2
Average annual growth,
1997–2023:Q2
Banks and cr edit union s 25,865 1.4 6.0
Mutual funds 18,850 6.1 8.2
In surance companies 12,447 5.4 5.4
Life 9,269 4.7 5.4
Pr oper ty and ca sualty 3,178 7.5 5.5
Hedg e funds 1 9,094 −6.0 8.2
Br ok er-dealer s 2 5,471 8.0 4.7
Outstanding
(billions of dollars)
Securitization 13,441 6.4 5.6
Ag ency 11,954 7.0 6.0
Non-ag ency 3 1,486 2.2 3.6
Note: The data extend thr ough 2023:Q2 unles s otherwise noted. Outstanding amounts ar e in nominal ter ms . Gr o wth rates ar e mea sur ed fro m
Q2 of the y ear immediatel y pr eceding the period thr ough Q2 of the ﬁnal y ear of the period. L ife in surance companies’ as sets include both g en-
eral and separate account a s sets.
1 Hedg e fund data star t in 2012:Q4 and ar e updated thr ough 2022:Q4. G ro wth rates for the hedg e fund data ar e mea sur ed fro m Q4 of the
y ear immediatel y pr eceding the period thr ough Q4 of the ﬁnal y ear of the period.
2 Br ok er-dealer a s sets ar e calculated a s unnetted v alues.
3 Non-ag ency securitization excludes securitized cr edit held on balance sheets of banks and ﬁnance companies.
Sour ce: Federal Reser v e Boar d, Statistical Relea se Z.1, “F inancial A ccounts of the United States”/uni003B Federal Reser ve  Boar d, “Enhanced Fi nancial
A ccounts of the United States. ”
26 Financial Stability Report
Bank profitability remained robust amid further declines in the fair
value of some assets held on banks’ balance sheets
Amid the considerable increase in interest rates over the past year and a half, the overall
banking sector remained profitable. Net interest margins, which measure banks’ yield on their
interest-earning assets after netting out interest expenses, remained relatively constant in the
aggregate, reflecting higher interest income on floating-rate loans coupled with interest expense
on many deposits that remained well below market rates (figure 3.1). However, pressures to raise
deposit rates to compete with higher-yielding alternatives to bank deposits as well as banks
shifting to more expensive alternative sources of funding may continue to affect profit margins for
some banks.
Higher interest rates also substantially affected the fair value of banks’ existing holdings of fixed-
rate assets over this period. At the onset of the coronavirus pandemic, when longer-term interest
rates were low relative to current levels and banks experienced sizable inflows of deposits, banks
invested heavily in fixed-rate long-duration securities—primarily U.S. Treasury securities and
agency-guaranteed mortgage-backed securities. As interest rates rose over the past year and
a half, the fair value of these securities declined. As of the end of the second quarter of 2023,
banks had declines in fair value of $248 billion in available-for-sale (AFS) portfolios and $310 bil -
lion in held-to-maturity portfolios ( figure 3.2).
Policy interventions by the U.S. Department of the Treasury, the Federal Reserve, and the Federal
Deposit Insurance Corporation played a key role in mitigating the stresses in the banking sys -
tem that emerged in March. Since then, a number of banks continued to reduce their holdings
of securities, but declines in the fair value of bank securities holdings remained large relative to
historical norms.
Figure 3.1. Banks’ average interest rate on interest-earning assets remained significantly above the
average expense rate on liabilities
Average interes t rate on interest -earning assets
Average interes t expense rate on liabilities
2015 2017 2019 2021 2023
Source: Federal Reserve Board, Form FR Y-9C, Consolidated Financial Statements for Holding Companies.
Leverage in the Financial Sector  27
Banks’ risk-based capital increased, but tangible common equity
remained below its average over the past decade
The common equity Tier 1 (CET1) ratio—a regulatory risk-based measure of bank capital
adequacy—increased during the second quarter of the year across all bank categories and stood
around the median of its range since the end of the Great Recession ( figure 3.3). Global system-
ically important banks (G-SIBs) increased their CET1 ratios in the first half of the year as they cut
back on stock repurchases.
An alternative measure of bank capital is the ratio of tangible common equity to total tangible
assets. The tangible common equity ratio has similarities to the CET1 ratio in that both exclude
intangible items such as goodwill from the measurement of capital, but there are also important
differences between the two. In contrast with CET1, the tangible common equity ratio does not
Figure 3.2. The fair values of banks’ securities portfolios declined in the second quarter of 2023 as
interest rates rose
Available-for-sale securities
Held-to-maturity securities
2017 2018 2019 2020 2021 2022 2023
Billions of dollar s
Source: Federal Financial Institutions Examination Council, Call Report Form FFIEC 031, Consolidated Reports of
Condition and Income (Call Report); Federal Reserve Board, Form FR Y-9C, Consolidated Financial Statements for
Holding Companies.
Figure 3.3. Banks’ risk-based capital ratio remained near the median level since the Great Recession
Large non–G-SIBs
Other BHCs
2002 2005 2008 2011 2014 2017 2020 2023
Percent of risk-weighted assets
Source: Federal Reserve Board, Form FR Y-9C, Consolidated Financial Statements for Holding Companies.
28 Financial Stability Report
account for the riskiness of assets, but it does include fair value declines on AFS securities for
all banks. The tangible common equity ratio edged up across all bank categories in the first half
of the year, especially at G-SIBs (figure 3.4). Nonetheless, it remained at a level well below its
average over the past decade, partly due to a substantial drop in tangible equity from declines in
fair value on Treasury and agency-guaranteed mortgage-backed securities in AFS portfolios.
On July 27, 2023, the Federal Reserve Board, the Office of the Comptroller of the Currency, and
the Federal Deposit Insurance Corporation requested comment on a proposal to increase the
strength and resilience of the banking system.6 The proposal would modify large bank capital
requirements to better reflect underlying risks and increase the consistency of how banks mea -
sure their risks. The changes would implement the final components of the regulatory reforms
introduced in response to the Great Recession. Additionally, following the banking turmoil in
March 2023, the proposal seeks to further strengthen the banking system by applying a more
stringent set of capital requirements to a broader set of banks, specifically those with more than
$100 billion in assets.
Banks’ vulnerability to future credit losses appeared to be moderate
Aggregate credit quality in the nonfinancial sector remained solid, and loan delinquency rates
remained low overall. However, the quality of outstanding loans worsened in some sectors,
as the delinquency rates for consumer and CRE loans—especially those backed by office
Comptroller of the Currency (2023), “Agencies Request Comment on Proposed Rules to Strengthen Capital Require -
ments for Large Banks,” joint press release, July 27, https://www.federalreserve.gov/newsevents/pressreleases/
bcreg20230727a.htm.
Figure 3.4. The ratio of tangible common equity to tangible assets increased for banks of all
categories
Large non–G-SIBs
Other BHCs
1987 1993 1999 2005 2011 2017 2023
Percent of tangible assets
Source: For data through 1996, Federal Financial Institutions Examination Council, Call Report Form FFIEC 031,
Consolidated Reports of Condition and Income (Call Report). For data from 1997 onward, Federal Reserve Board,
Form FR Y-9C, Consolidated Financial Statements for Holding Companies; and Federal Financial Institutions
Examination Council, Call Report Form FFIEC 031, Consolidated Reports of Condition and Income (Call Report).
Leverage in the Financial Sector  29
properties—increased in the first half of 2023. Additionally, borrower leverage for bank commer -
cial and industrial (C&I) loans increased over the same period (figure 3.5). Data from the April
and July 2023 SLOOS indicated that banks continued to tighten lending standards on C&I and
CRE loans in the first half of 2023 amid concerns about the economic outlook and loan perfor -
mance (figure 3.6; see also figure 1.16).7 In response to a set of special questions about the
level of lending standards, banks reported that, on balance, levels of lending standards were on
the tighter end of their historical ranges for all loan categories. Meanwhile, banks reported that
demand for most categories of loans continued to weaken.
7 The SLOOS is available on the Federal Reserve Board’s website at https://www.federalreserve.gov/data/sloos.htm .
Figure 3.5. Borrower leverage for bank commercial and industrial loans increased
Non-publicly-t raded ﬁrms
Publicly traded ﬁrms
2013 2015 2017 2019 2021 2023
Debt as percentage of assets
Source: Federal Reserve Board, Form FR Y-14Q (Schedule H.1), Capital Assessments and Stress Testing.
Figure 3.6. Banks reported tightening lending standards in commercial and industrial loans
1998 2003 2008 2013 2018 2023
Net percentage of banks reporting
Easing Tightening
Source: Federal Reserve Board, Senior Loan Officer Opinion Survey on Bank Lending Practices; Federal Reserve
Board staff calculations.
30 Financial Stability Report
Leverage at broker-dealers remained low
Broker-dealer leverage ratios remained largely flat over the first half of 2023 at near historically
low levels (figure 3.7). Dealers’ equity growth has generally kept up with the growth of their
assets, boosted in part by solid trading profits ( figures 3.8 and 3.9). Net secured borrowing of
primary dealers increased slightly since the May report, consistent with an increase in net securi -
ties positions. Primary dealer Treasury market activities, including market making and repurchase
agreements, increased during the first half of 2023.
Figure 3.7. Leverage at broker-dealers
remained historically low
1995 1999 2003 2007 2011 2015 2019 2023
Ratio of assets to equity
Source: Federal Reserve Board, Statistical
Release Z.1, “Financial Accounts of the United
Figure 3.8. Trading profits in June were near
their average levels since 2018
2018 2019 2020 2021 2022 2023
Monthly average
Millions of dollars
Source: Federal Reserve Board, Reporting,
Recordkeeping, and Disclosure Requirements
Associated with Regulation VV (Proprietary Trading
and Certain Interests in and Relationships with
Covered Funds, 12 C.F.R. pt. 248).
Figure 3.9. Equities dropped slightly as a share of trading profits in the most recent data
Fixed income, rates, and credit
2018 2019 2020 2021 2022 2023
Monthly average
Source: Federal Reserve Board, Reporting, Recordkeeping, and Disclosure Requirements Associated with
Regulation VV (Proprietary Trading and Certain Interests in and Relationships with Covered Funds, 12 C.F.R. pt. 248).
Leverage in the Financial Sector  31
In the September 2023 Senior Credit Officer Opinion Survey on Dealer Financing Terms (SCOOS),
which covered the period between mid-May 2023 and mid-August 2023, dealers reported that
terms under which they facilitated securities and derivatives transactions were largely unchanged
for most types of clients.8 Additionally, some dealers continued to report that they had increased
the resources and attention they devoted to managing their concentrated credit exposure to other
dealers and other financial intermediaries over the past three months.
Leverage at life insurers edged up but remained near the middle of
its historical range
While leverage at property and casualty insurers stayed low relative to historical norms, leverage
at life insurers remained near the middle of its historical range and well below its pandemic peak
despite increasing slightly, on net, since the
previous report (figure 3.10). Life insurers con-
tinued to allocate a high percentage of assets
to risky instruments, such as leveraged loans,
high-yield corporate bonds, privately placed
corporate bonds, and alternative investments.
Moreover, insurance companies are large
holders of commercial mortgage-backed
securities (CMBS), and they also have mate-
rial exposures to commercial mortgages. A
significant correction in commercial property
values could lead to credit losses by insur-
ance companies, putting pressure on their
capital positions.
Leverage at hedge funds continued to be somewhat elevated
Comprehensive data collected by the Securities and Exchange Commission (SEC) indicate that
measures of leverage averaged across all hedge funds remained above their historical norms
in the first quarter of 2023. These somewhat elevated levels hold true for both average on-bal -
ance-sheet leverage (blue line in figure 3.11)—which captures financial leverage from secured
financing transactions, such as repurchase agreements and margin loans, but does not capture
leverage embedded through derivatives—as well as for average gross leverage of hedge funds
8 The SCOOS is available on the Federal Reserve Board’s website at https://www.federalreserve.gov/data/scoos.htm .
Figure 3.10. Leverage at life insurance
companies remained near the middle of its
historical range
Property and casualt y
2002 2005 2008 2011 2014 2017 2020 2023
Ratio of assets to equity
Source: Generally accepted accounting principles
data from 10-Q and 10-K filings accessed via S&P
Global, Capital IQ Pro.
32 Financial Stability Report
(black line in figure 3.11)—a broader measure that incorporates off-balance-sheet derivatives
exposures. Leverage at the largest funds was significantly higher, with the average on-bal -
ance-sheet leverage of the top 15 hedge funds by gross asset value rising in the first quarter
of 2023 to about 17-to-1 (figure 3.12). These high levels of leverage were facilitated, in part,
by low haircuts on Treasury collateral in some markets where many hedge funds obtain short-
term financing.9 More recent data from the September 2023 SCOOS suggested that the use
of financial leverage by hedge funds remained largely unchanged between mid-May 2023 and
mid-August 2023 (figure 3.13).
9 Ayelen Banegas and Phillip Monin (2023), “Hedge Fund Treasury Exposures, Repo, and Margining,” FEDS Notes
2380-7172.3377.
Figure 3.11. Leverage at hedge funds
remained somewhat elevated
Mean gross leverage
Mean balance sheet leverage
2013 2015 2017 2019 2021 2023
Source: Securities and Exchange Commission,
Form PF, Reporting Form for Investment Advisers to
Private Funds and Certain Commodity Pool Operators
and Commodity Trading Advisors.
Figure 3.12. Leverage at the largest hedge
funds increased
Top 15, by GAV
16–50, by GAV
51+, by GAV
2013 2015 2017 2019 2021 2023
Source: Securities and Exchange Commission,
Form PF, Reporting Form for Investment Advisers to
Private Funds and Certain Commodity Pool Operators
and Commodity Trading Advisors.
Figure 3.13. Dealers indicated that the use of leverage by hedge funds remained largely unchanged
Hedge funds
Trading REITs
Insurance companies
Mutual funds
2013 2015 2017 2019 2021 2023
Net percentage
Source: Federal Reserve Board, Senior Credit Officer Opinion Survey on Dealer Financing Terms.
Leverage in the Financial Sector  33
Data from the Commodity Futures Trading Commission (CFTC) Traders in Financial Futures
report showed that leveraged funds’ short Treasury futures positions increased notably since
the beginning of the year. In the past, high levels of short positions in Treasury futures held by
leveraged funds coincided with hedge fund activities in Treasury cash-futures basis trades—
trades that involve the sale of a Treasury future and the purchase of a Treasury security, funded
by repurchase agreement, deliverable into the futures contract—and several indicators suggest
that the trade likely gained in popularity recently as well. The data from the CFTC Traders in
Financial Futures report suggest that the recent growth of the trade could be, in part, attributed
to increased demand from asset managers—including mutual funds, pension funds, and other
investor types—for exposure to interest rates in the futures market. Because the basis trade is
often highly leveraged, a funding shock or heightened volatility in Treasury markets could force
leveraged funds to abruptly unwind their positions at potentially distressed prices. This delever -
aging could amplify initial disruptions in Treasury markets, possibly impairing market liquidity and
market functioning. However, recent SCOOS surveys suggest that these risks are likely mitigated
by tighter financing terms applied to hedge funds by dealer counterparties over the past several
Issuance of non-agency securities by securitization vehicles
remained subdued
Non-agency securitization issuance—which increases the amount of leverage in the financial
system—was relatively subdued after a notable slowdown since 2022 amid weak demand for
loans that are used as collateral in securitization deals (figure 3.14).10 Credit spreads on major
10 Securitization allows financial institutions to bundle loans or other financial assets and sell claims on the cash flows
generated by these assets as tradable securities, much like bonds. By funding assets with debt issued by invest -
ment funds known as special purpose entities (SPEs), securitization can add leverage to the financial system, in part
because SPEs are generally subject to regulatory regimes, such as risk retention rules, that are less stringent than
Figure 3.14. Issuance of non-agency securitized products has slowed significantly since 2022
Private- label RMBS
Non-agenc y CMBS
Auto loan/lease ABS
CDOs (including CLOs and ABS CDOs)
2002 2005 2008 2011 2014 2017 2020 2023
3200Annual
Billions of dollar s (real)
Source: Green Street, Commercial Mortgage Alert’s CMBS Database and Asset-Backed Alert’s ABS Database;
consumer price index, Bureau of Labor Statistics via Haver Analytics.
34 Financial Stability Report
securitized products generally narrowed since the last report but remained relatively wide com -
pared with historical norms. Measures of credit performance across securitized products backed
by riskier loan collateral indicated signs of credit deterioration. Specifically, loan delinquency
rates in below-prime consumer asset-backed securities deals and leveraged loan downgrades
in collateralized loan obligations increased. Loan delinquency rates in non-agency CMBS deals
remained relatively low, on average, but rose for deals backed by office properties.
Bank lending to nonbank financial institutions remained high
Bank lending to nonbank financial institutions (NBFIs), which can be informative about the
amount of leverage used by NBFIs and shed light on their interconnectedness with the rest of
the financial system, resumed growing in the second quarter of 2023 ( figure 3.15). The year-
over-year growth rate in committed amounts was largely due to loans to special purpose entities
and securitization vehicles, which grew about 25 percent at the end of the second quarter of
2023 (figure 3.16). Utilization rates on credit lines to NBFIs remained steady and averaged about
50 percent of total committed amounts. Delinquency rates on banks’ lending to NBFIs have been
lower than delinquency rates for the nonfinancial business sector since the data became avail -
able in 2013. Because NBFIs rely primarily on their bank credit lines to meet their liquidity needs,
loan commitments can experience sudden, correlated drawdowns. These drawdowns could be
material relative to banks’ available buffers of high-quality liquid assets (HQLA) and thus could
generate liquidity pressures at large banks during times of financial stress. More generally, infor -
mation on NBFIs’ alternative funding sources, and the extent to which those sources may be frag -
ile, is limited, and this lack of data could mask additional vulnerabilities in the financial sector.
banks’ regulatory capital requirements. Examples of the resulting securities include collateralized loan obligations
(predominantly backed by leveraged loans), asset-backed securities (often backed by credit card and auto debt),
CMBS, and residential mortgage-backed securities.
Figure 3.15. Bank credit commitments to nonbank financial institutions remained high
1. Financial transactions processing
2. Private equity, BDCs, and credit funds
3. Broker-dealer s
4. Insurance companies
6. Open-end investment funds
7. Special purpose entities , CLOs, and ABS
8. Other ﬁnancial vehicles
9. Real estate lenders and lessors
2018 2019 2020 2021 2022 2023
2250Q2Quarterly
Billions of dolla rs
10. Consumer lenders, other lenders, and lessors
Source: Federal Reserve Board, Form FR Y-14Q (Schedule H.1), Capital Assessments and Stress Testing.
Leverage in the Financial Sector  35
Figure 3.16. Aggregate credit commitments to nonbank financial institutions increased over the past
year but varied across sectors
Committed amounts
Utilized amounts
REITs Total
transactions
processing
investment
Source: Federal Reserve Board, Form FR Y-14Q (Schedule H.1), Capital Assessments and Stress Testing.
4 Funding Risks
The banking industry maintained a high level of liquidity overall,
but some banks continued to face funding pressures; meanwhile,
structural vulnerabilities persisted in other sectors engaged in
liquidity transformation
The banking industry overall maintained a high level of liquidity since the May report. Funding
risks for most banks remained low, and large banks that are subject to the liquidity coverage ratio
(LCR) continued to maintain ample levels of HQLA given the risk of their funding structures. That
said, banks that came under stress and experienced large deposit outflows in March continued
to face funding pressure. Since March, volatility has abated and deposit outflows have largely
stabilized—owing, in part, to actions by the Department of the Treasury, the Federal Reserve,
and the Federal Deposit Insurance Corporation—but these banks nonetheless continued to face
challenges navigating changes in depositor behavior, higher funding costs, and reduced market
values for investment securities.
Prime MMFs and other cash-investment vehicles remained vulnerable to runs and, hence, contrib -
uted to the fragility of short-term funding markets. In addition, some cash-management vehicles,
including retail prime MMFs, government MMFs, and short-term investment funds, maintained
stable net asset values (NAVs) that make them susceptible to sharp increases in interest rates.
The market capitalization of the stablecoin sector continued to decline, but the sector remained
vulnerable to liquidity risks like those present in other vehicles that attempt to substitute for
cash. Some open-end bond mutual funds continued to be susceptible to large redemptions
because they must allow shareholders to redeem every day even though the funds hold assets
that can face losses and become illiquid amid stress. Life insurers continued to face liquidity risk
owing to heavy reliance on nontraditional liabilities in combination with an increasing share of
illiquid and risky assets on their balance sheets.
Overall, estimated runnable money-like financial liabilities increased 3.4 percent to $20.3 trillion
(75 percent of nominal GDP) over the past year. As a share of GDP, runnable liabilities continued
their post-pandemic decline but remained above their historical median ( table 4.1 and figure 4.1).
Most banks maintained high levels of liquid assets and stable
Aggregate liquidity in the banking system appeared ample even as HQLA measured relative to
total assets decreased among most banks over the past year ( figure 4.2). These declines in
HQLA were driven by reductions in holdings of central bank reserve balances and by declines
38 Financial Stability Report
Table 4.1. Size of selected instruments and institutions
Item Outstanding/total assets
(billions of dollars)
2022:Q2–2023:Q2
Average annual growth,
1997–2023:Q2
T otal r unnable mone y-lik e liabilities 1 20,384 3.4 4.6
Unin sur ed depo sits 6,659 −15.6 11.5
Domestic mone y mar k et funds 2 5,372 18.7 5.6
Go ve rn ment 4,463 11.4 15.1
Prime 798 88.9 1.1
T ax exempt 112 13.5 −1.7
Repur cha se ag r eements 4,344 22.7 5.2
Commer cial paper 1,418 18.0 3.0
Securities lending 3 805 .6 7.0
Bond mutual funds 4,403 −3.2 8.1
Note: The data extend thr ough 2023:Q2 unles s otherwise noted. Outstanding amounts ar e in nominal ter ms . Gr o wth rates ar e mea sur ed fro m
Q2 of the y ear immediatel y pr eceding the period thr ough Q2 of the ﬁnal y ear of the period. T otal r unnable mone y-lik e liabilities exceed the
sum of listed components. Unlisted components of r unnable mone y-lik e liabilities include v ariable-rate demand oblig ation s, f ederal funds,
funding-ag r eement-back ed securities, pri v ate liquidity funds, offshor e money  mar k et funds, shor t-ter m in v estment funds, l ocal g over nment
in v estment pools, and stablecoin s.
1 Av erag e annual g ro wth is fr om 2003:Q1 to 2023:Q2.
2 Av erag e annual g ro wth is fr om 2001:Q1 to 2023:Q2.
3 Av erag e annual g ro wth is fr om 2000:Q1 to 2023:Q1. Securities lending includes onl y lending collateralized by  ca sh.
Sour ce: Securities and Exchang e Commis sion, Pri v ate Funds Statistics/uni003B iMone y Net, I nc., O ffshor e Mone y Fund Anal yzer /uni003B Bloomberg Fi nance L.P. /uni003B
Securities Industr y and F inancial Mar k ets As sociation: U .S . Municipal Va riable-Rate Demand Oblig ation Update/uni003B Risk Manag ement A s sociation,
Securities Lending Repor t/uni003B DTCC Solution s LLC, an afﬁliate of the Depo sitor y Tr ust & Clearing Corporation: commer cial paper data/uni003B Federal
Reser v e Boar d staff calculation s ba sed on In v estment Compan y In stitute data/uni003B Federal Reser ve  Boar d, Statistical Relea se Z.1, “ F inancial
A ccounts of the United States”/uni003B Federal F inancial In stitution s Examination Council, Con solidated Repor ts of Condition and Income (Call
Repor t)/uni003B Mor ningstar , Inc., Mor ningstar Dir ect/uni003B DeF iLlama.
Figure 4.1. Ratios of runnable money-like liabilities to GDP edged down but remained above their
historical medians
2. Securities lending
3. Commercial paper
4. Domestic money market funds
5. Repurchase agreements
6. Uninsured deposit s
2002 2005 2008 2011 2014 2017 2020 2023
Percent of GDP
Source: Securities and Exchange Commission, Private Funds Statistics; iMoneyNet, Inc., Offshore Money Fund
Analyzer; Bloomberg Finance L.P.; Securities Industry and Financial Markets Association: U.S. Municipal Variable-
Rate Demand Obligation Update; Risk Management Association, Securities Lending Report; DTCC Solutions LLC,
an affiliate of the Depository Trust & Clearing Corporation: commercial paper data; Federal Reserve Board staff
calculations based on Investment Company Institute data; Federal Reserve Board, Statistical Release Z.1,
“Financial Accounts of the United States”; Federal Financial Institutions Examination Council, Consolidated Reports
of Condition and Income (Call Report); gross domestic product, Bureau of Economic Analysis via Haver Analytics;
DeFiLlama.
Funding Risks 39
in the market values of securities as interest rates increased. Aggregate central bank reserve
balances held by banks remained above $3 trillion, significantly higher than pre-pandemic levels.
And despite the recent declines, U.S. G-SIBs continued to hold more HQLA than required by their
LCR—the requirement that ensures banks hold sufficient HQLA to fund estimated cash outflows
for 30 days during a hypothetical stress event. Moreover, banks’ reliance on short-term wholesale
funding remained low (figure 4.3).
As interest rates increased throughout 2022, higher-paying alternatives to bank deposits became
more attractive to businesses and households and, as a result, core deposits began flowing
out of the banking sector. The pace of outflows accelerated temporarily in the wake of the
March 2023 stresses in the banking system and, within the banking sector, deposits at some
midsize banks were moved to the largest banks. Deposit flows have since stabilized across all
bank groups and market sentiment has improved, but many of the vulnerabilities that came to
light because of the bank stresses persist for a subset of large banks (outside of the G-SIBs) and
regional banks. At the same time, some banks also increased their reliance on wholesale funding
Figure 4.2. The amount of high-quality liquid assets held by most banks continued to decrease in the
first half of 2023
Large non–G-SIBs
Other BHCs
2002 2005 2008 2011 2014 2017 2020 2023
Percent of assets
Source: Federal Reserve Board, Form FR Y-9C, Consolidated Financial Statements for Holding Companies.
Figure 4.3. Banks’ reliance on short-term wholesale funding remained low
2002 2005 2008 2011 2014 2017 2020 2023
Percent of assets
Source: Federal Reserve Board, Form FR Y-9C, Consolidated Financial Statements for Holding Companies.
40 Financial Stability Report
sources, which are typically more expensive and less stable than retail deposits. As competition
for deposits intensified, financial markets continued to signal concerns over banks with high lev -
els of uninsured deposits, high reliance on wholesale funding, and significant declines in the fair
value of securities.
The BTFP was created during the acute
phase of the banking stresses and offers
loans of up to one year to eligible depository
institutions against high-quality securities
at par value, thereby eliminating an institu-
tion’s need to quickly sell those securities
should depositors suddenly withdraw their
funding. The facility helped reassure depos -
itors that banks can meet their customers’
needs and contributed to the stabilization of
deposit flows. Since its inception, the amount
of credit extended by the BTFP increased
steadily and has stabilized at around
$110 billion (figure 4.4).
Structural vulnerabilities remained at some money market funds and
other cash-management vehicles
In the immediate aftermath of the failures of Silicon Valley Bank and Signature Bank, prime MMFs
experienced a jump in redemptions. Although outflows from prime MMFs eased after a few days,
the episode illustrated again that these funds remain a prominent vulnerability due to their sus -
ceptibility to large redemptions during episodes of financial stress and the significant role they
play in short-term funding markets. Since the May report, assets under management (AUM) in
prime MMFs offered to the public increased $100 billion, driven mostly by inflows into retail prime
funds (figure 4.5).
On July 12, 2023, the SEC voted to adopt amendments to rules that govern MMFs.11 The key
elements of the reforms make dynamic liquidity fees mandatory for institutional prime and tax-
exempt funds, eliminate temporary gates and redemption fees linked to liquid asset levels with
the intent of removing incentives for investors to run preemptively, and increase a fund’s daily
liquid asset and weekly liquid asset requirements. On net, the reforms represent significant
11 See Securities and Exchange Commission (2023), “SEC Adopts Money Market Fund Reforms and Amendments to
Form PF Reporting Requirements for Large Liquidity Fund Advisers,” press release, July 12, https://www.sec.gov/
news/press-release/2023-129 .
Figure 4.4. Credit extended by the Bank
Term Funding Program stabilized at around
$110 billion
Primary credit
Bank Term Funding Program
Feb. Mar. Apr. May June JulyA ug.S ept. Oct.
Billions of dolla rs
22 22 19 17 14 12 96 4
Source: Federal Reserve Board, Statistical
Release H.4.1, “Factors Affecting Reserve Balances.”
Funding Risks 41
progress in making prime and tax-exempt MMFs more resilient, although these funds remain vul -
nerable to runs in periods of significant stress.
Other cash-management vehicles, including dollar-denominated offshore MMFs and short-term
investment funds, also invest in money market instruments, engage in liquidity transformation,
and are vulnerable to runs. Since the May report, estimated aggregate AUM of these cash-
management vehicles remained around $1.8 trillion. Currently, between $0.6 trillion and $1.5 tril-
lion of these vehicles’ AUM are in portfolios like those of U.S. prime MMFs, and large redemp -
tions from these vehicles also have the potential to destabilize short-term funding markets. 12
Many cash-management vehicles—including retail and government MMFs, offshore MMFs, and
short-term investment funds—seek to maintain stable NAVs that are typically rounded to $1.00.
When short-term interest rates rise sharply or portfolio assets lose value for other reasons, the
market values of these funds may fall below their rounded share prices, which can put the funds
under strain, particularly if they also have large redemptions.
The market value of many stablecoins declined, and they remain
vulnerable to runs
The total market capitalization of stablecoins, which are digital assets designed to maintain
a stable value relative to a national currency or another reference asset, fell 21 percent since
the beginning of 2022 to $130 billion. While not widely used as a cash-management vehicle
by institutional and retail investors or for transactions for real economic activity, stablecoins
are important for digital asset investors. They remain structurally vulnerable to runs and lack a
12 Cash-management vehicles included in this total are dollar-denominated offshore MMFs, short-term investment funds,
private liquidity funds, ultrashort bond mutual funds, and local government investment pools.
Figure 4.5. Growth in money market funds was concentrated in retail prime funds
1. Government
2. Tax exempt
3. Retail prime
4. Instituti onal prime
2002 2005 2008 2011 2014 2017 2020 2023
6000JulyMonthly
Billions of dollar s (real)
Source: Federal Reserve Board staff calculations based on Investment Company Institute data; consumer price
index, Bureau of Labor Statistics via Haver Analytics.
42 Financial Stability Report
comprehensive prudential regulatory framework. Moreover, stablecoins could scale quickly, partic -
ularly if the stablecoin is supported by access to an existing customer base.
Bond mutual fund asset holdings stabilized, but they remained
exposed to liquidity risks
Mutual funds that invest substantially in corporate bonds, municipal bonds, and bank loans may
be particularly exposed to liquidity transformation risks, given the relative illiquidity of their assets
and the requirement that these funds offer redemptions daily. The total outstanding value of
U.S. corporate bonds held by mutual funds remained flat during the first half of 2023 following
consecutive years of sharp declines, primarily
reflecting a fall in bond values associated
with higher interest rates (figure 4.6). Mutual
fund holdings through the second quarter
of 2023 were approximately 13 percent of
all U.S. corporate bonds outstanding. Total
AUM at high-yield bond and bank loan mutual
funds, which primarily hold riskier and less
liquid assets, continued declining in recent
quarters following sharp decreases in real
terms during 2022 (figure 4.7). Bond and loan
mutual funds experienced negative returns
and notable outflows during most of 2022,
but outflows have stabilized in the first half of
2023 (figure 4.8).
Figure 4.6. Corporate bonds held by bond
mutual funds stabilized in the first half
2003 2007 2011 2015 2019 2023
Billions of dollar s (real)
Source: Federal Reserve Board staff estimates
based on Federal Reserve Board, Statistical
Release Z.1, “Financial Accounts of the United
States”; consumer price index, Bureau of Labor
Statistics via Haver Analytics.
Figure 4.7. Assets held by bank loan and high-yield mutual funds continued to decrease in 2023
Bank loan mutual funds
High-yield bond mutual funds
2002 2005 2008 2011 2014 2017 2020 2023
Billions of dollar s (real)
Source: Investment Company Institute; consumer price index, Bureau of Labor Statistics via Haver Analytics.
Funding Risks 43
Central counterparties’ initial margin levels and prefunded resources
remained high, but liquidity risks remain amid elevated volatility
Interest rate volatility rose to elevated levels late last year and stressed some central counterpar -
ties (CCPs) that focus on clearing interest rate products. As volatility in rates and other markets
retreated from recent highs, CCPs’ margin and prefunded resources fell more slowly. 13 Taken
together, higher initial margins and elevated levels of prefunded resources relative to anticipated
volatility likely lowered credit risk at CCPs because the amount of resources readily available in
case of default by one or more clearing members is likely to be generally higher relative to the
market risk of cleared portfolios. However, CCPs continue to face potentially substantial liquidity
needs in the event of a default during highly volatile stressed markets. Further, additional liquidity
risk remains around the concentration of clients at the largest clearing members, which could
make transferring client positions to other clearing members challenging if it were ever necessary.
Life insurers’ reliance on nontraditional liabilities remained high
Over the past decade, the liquidity of life insurers’ assets steadily declined, and the liquidity
of their liabilities slowly increased, potentially making it more difficult for life insurers to meet
a sudden rise in withdrawals and other claims. As of 2022, the share of illiquid assets held on
life insurers’ balance sheets—including CRE loans, less liquid corporate debt, and alternative
investments—stood at a historic high (figure 4.9). In addition, they have continued to rely on
13 Prefunded resources represent financial assets, including cash and securities, transferred by the clearing members
to the CCP to cover that CCP’s potential credit exposure in case of default by one or more clearing members. These
prefunded resources are held as initial margin and prefunded mutualized resources, which builds the resilience of
CCPs to the possible default of a clearing member or market participant.
Figure 4.8. The outflows that bond and bank loan mutual funds experienced in 2022 have stabilized
Investment-grade bond mutual funds
Bank loan mutual funds
High-yield bond mutual funds
Apr. Aug. Dec. Apr. Aug. Dec. Apr. Aug. Dec. Apr. Aug. Dec. Apr. Aug. Dec. Apr. Aug. Dec. Apr. Aug.
150Monthly
Billions of dolla rs
2017 2018 2019 2020 2021 2022 2023
Source: Investment Company Institute.
44 Financial Stability Report
nontraditional liabilities—including funding-agreement-backed securities, Federal Home Loan
Bank advances, and cash received through repurchase agreements and securities lending
transactions—which offer some investors the opportunity to withdraw funds on short notice
(figure 4.10).
Figure 4.10. Life insurers continued to rely on nontraditional liabilities
Repurchase agreements
Securities lending cash collateral
FHLB advances
Funding-ag reement-backed securities
2007 2009 2011 20132 0152 0172 0192 021 2023
Billions of dollar s (real)
Source: Consumer price index, Bureau of Labor Statistics via Haver Analytics; Moody’s Analytics, Inc., CreditView,
Asset-Backed Commercial Paper Program Index; Securities and Exchange Commission, Forms 10-Q and 10-K;
National Association of Insurance Commissioners, quarterly and annual statutory filings accessed via S&P Global,
Capital IQ Pro; Bloomberg Finance L.P.
Figure 4.9. Life insurers held more risky, illiquid assets on their balance sheets
1. Other ABS
2. CRE loans
3. CRE loans, securitize d
4. Alternative investments
5. Illiquid corporate debt
6. Illiquid corporate debt,
Share of life insurer assets (left scale)
Share of P&C insurer assets (left scale)
2006 2008 2010 2012 2014 2016 2018 2020 2022
3000Billions of dolla rsPercent share
securitized
Source: Consumer price index, Bureau of Labor Statistics via Haver Analytics; staff estimates based on data from
Bloomberg Finance L.P. and National Association of Insurance Commissioners Annual Statutory Filings.
5 Near-Term Risks to the Financial
The Federal Reserve routinely engages in discussions with domestic and international policymak -
ers, academics, community groups, and others to gauge the set of risks of greatest concern to
these groups. As noted in the box “Survey of Salient Risks to Financial Stability,” in recent out-
reach, contacts were particularly focused on the risk of persistent inflationary pressures leading
to a more restrictive monetary policy stance, the potential for large losses on CRE and residential
real estate, the reemergence of banking-sector stress, and risks associated with market liquid -
ity strains and volatility. Respondents were increasingly attentive to risks posed from economic
weakness in China and high levels of public debt in the U.S. and other advanced economies.
Heightened geopolitical tensions continue to pose important risks to global economic activity.
The following discussion considers possible interactions of existing domestic vulnerabilities with
several potential near-term risks, including international risks. The box “Transmission of Stress
Abroad to the U.S. Financial System,” featured in the May 2023 Financial Stability Report, dis-
cusses some transmission channels through which shocks originating abroad can transmit back
to the U.S. financial system.14
A significant slowdown in economic growth could pose risks to the
financial system and precipitate strains in commercial real estate
If the economy were to slow unexpectedly, profits of nonfinancial businesses would decrease,
and, given the generally high level of leverage in that sector, such decreases would likely lead to
financial stress and defaults at some firms. Such dynamics may lead to job losses and strains on
households, potentially leading to a mild recession. Investor risk appetite and asset prices might
decline, and valuations in the office building sector appear particularly vulnerable given the ongo -
ing uncertainty surrounding post-pandemic norms regarding return to work. A correction in office
property valuations accompanied by even a mild recession could result in significant losses for
a range of financial institutions with sizable exposures, including some regional and community
banks and insurance companies. Lenders that experience large losses may reduce their willing -
ness to supply credit to the broader economy, which would further weigh on economic activity.
While stress tests suggest the largest banks are well positioned to withstand a severe recession
and contraction in CRE markets, other financial institutions with concentrated exposures could be
forced to retrench.
federalreserve.gov/publications/files/financial-stability-report-20230508.pdf .
46 Financial Stability Report
Persistent inflation in the U.S. and other advanced economies could
pose risks to the global financial system
Energy prices have increased notably in recent months, leading to renewed cost pressures that
businesses might pass on to their customers. Unexpected persistence in inflation from any
source could prompt upward revisions to the path of policy rates. A sharp increase in rates could
lead to heightened volatility in financial markets, stresses to market liquidity, and an adjustment
in asset prices. In the U.S., higher rates and lower real incomes would strain the balance sheets
of some households and businesses and, in conjunction with other adverse shocks, could lead
to a significant economic slowdown. Collectively, these factors could lead to pronounced losses
among financial intermediaries and a consequent reduction in the supply of credit. High interest
rates in foreign economies, particularly if they persist, could negatively affect the debt servicing
capacity of households, businesses, and governments abroad. This stress could spill over to the
U.S. through strains in dollar funding markets, rapid rebalancing of portfolios, and diminished
credit provisions by foreign lenders to U.S. entities.
A further slowdown in Chinese growth could worsen financial
stresses in China and strain markets worldwide
In China, a further slowdown in economic growth could increase distress among borrowers and
worsen financial stresses. Many Chinese firms are struggling to service very high debt burdens,
especially in the property sector, and local governments are also facing increasing fiscal strains.
Stresses originating from China could spill over to other emerging market economies (EMEs), par -
ticularly those that are dependent on trade with China or on credit provided by Chinese entities.
The spillovers could result in significant capital outflows from EMEs, where generally heightened
debt levels may make these economies more susceptible to external shocks. Given the size of its
economy and financial system, financial stresses in China also could strain global markets more
broadly through disruptions to economic activity, deterioration of risk sentiment, and possibly a
sharp appreciation of the dollar, potentially affecting the U.S.
A worsening of global geopolitical tensions could lead to broad
adverse spillovers to global markets
The attack on Israel, in conjunction with Russia’s ongoing war against Ukraine, has ratcheted up
geopolitical tensions. These tensions pose important risks to global economic activity, including
the possibility of sustained disruptions to regional trade in food, energy, and other commodities.
Escalation of these conflicts or a worsening in other geopolitical tensions could reduce economic
activity and boost inflation worldwide, particularly in the event of prolonged disruptions to supply
chains and interruptions in production. The global financial system could be affected by a pull -
back from risk-taking, declines in asset prices, and losses for exposed businesses and investors,
including those in the U.S.
Near-Term Risks to the Financial System  47 47
Box 5.1. Survey of Salient Risks to Financial Stability
As part of its market intelligence gathering, staff from the Federal Reserve Bank of New York solicited
views from a wide range of contacts on risks to U.S. fi  nancial stability. From August 10 to October 4,
the staff surveyed 25 contacts, including professionals at broker-dealers, investment funds, research
and advisory fi  rms, and academics (fi g u r e  A). Several risks that featured prominently in the survey
conducted in the spring remained top-of-mind, including the risk of persistent inﬂ  ationary pressures
leading to a more restrictive monetary policy stance, the potential for large losses on CRE and resi-
dential real estate, and the reemergence of banking-sector stress ( fi g u r e  B). Contacts continued to
express concern over potential market liquidity strains, with some highlighting risks stemming from
rising long-term interest rates. Respondents were increasingly attentive to risks posed from economic
weakness in China and high levels of public debt in advanced economies. Although geopolitical ten-
sions from both the Russia–Ukraine war and U.S.–China relations featured prominently in the May
2023 report, these risks had slipped out of the top fi  ve cited concerns for the current survey, which
closed before the attack on Israel. This discussion summarizes the most cited risks from this round
of outreach.
Persistent inflation and monetary tightening
Contacts continued to highlight the risk of persistent or reaccelerating inﬂ  ationary pressures, partic-
ularly in the U.S. amid a more resilient economic outlook, that could lead to further monetary policy
tightening and volatile market conditions. Some contacts worried that persistent elevated inﬂ  ation
might entrench expectations of higher inﬂ  ation, which could lead to higher realized inﬂ  ation and
require an even more restrictive monetary policy stance that could either induce or exacerbate a
recession.
Commercial real estate
Many contacts saw real estate as a potential trigger for systemic stress, most notably in the com-
mercial sector, where concerns over higher interest rates, declining property prices, and structural
shifts in demand for offi  ce space may prompt large realized losses. Survey respondents viewed small
and regional domestic banks as particularly vulnerable due to their higher concentration of CRE expo-
sures, which could lead to tighter bank lending conditions.
Reemergence of banking-sector stress
Although survey respondents noted the banking sector has stabilized since the period of acute stress
earlier this year, many highlighted risks of renewed deposit outﬂ  ows given that large portions of
deposits remain uninsured. Many respondents continued to link risks of reemerging banking-sector
stress to potential losses on CRE exposures, particularly among smaller and regional banks.
Market liquidity strains and volatility
Respondents expressed concern over strained liquidity conditions and intermediation capacity in
sovereign bond markets during periods of market stress, which could exacerbate volatile trading con-
ditions. Contacts noted these factors could weigh on investor sentiment and risky asset prices while
also exposing vulnerabilities among highly levered NBFIs, which could be forced to liquidate assets,
putting downward pressure on market prices, potentially tightening fi  nancial conditions.
Weakness in the Chinese economy and financial sector
Contacts frequently noted slowing growth in China and highlighted several risks that could emerge
from continued economic weakness, including capital ﬂ  ight, which could contribute to a stronger U.S.
dollar and put downward pressure on Chinese assets and other Asian fi  nancial markets. Respondents
also cited that weak growth in China, alongside weakness in Europe, increased the likelihood of a
global recession, despite economic resilience in the U.S. Increased foreign exchange market volatility
and the implementation of capital controls were also cited as risks.
(continued)
48 Financial Stability Report48
Fiscal debt sustainability
Respondents noted possible risks emanating from higher levels of public debt and wider fi  scal defi  -
cits in advanced economies, particularly in the U.S., which could drive Treasury market volatility and
strain Treasury market liquidity. Higher long-term interest rates and bond term premia were noted as
possible effects of expected increases in sovereign bond issuance.
Box 5.1—continued
Figure A. Fall 2023: Most cited potential risks over the next 12 to 18 months
Persistent inﬂation/uni003B monetary tightening
Commercial and residential real estate
Banking-sector stress
Market liquidity strains and volat ility
Fiscal debt sustainability
China economy/ﬁnancial sector
Under-regulated nonbanks
Foreign divestment from U.S. assets
Higher long-term rates
Leverage buildup
Russia–Ukraine war
01 02 03 04 05 06 07 08 0
Percentage of respondents
Source: Federal Reserve Bank of New York survey of 25 market contacts from August to October.
Figure B. Spring 2023: Most cited potential risks over the next 12 to 18 months
Persistent inﬂation/uni003B monetary tightening
Banking-sector stress
U.S.–China tensions
Commercial and residential real estate
Russia–Ukraine war
Debt limit
Market liquidity strains and volat ility
Under-regulated nonbanks
Fiscal debt sustainability
01 02 03 04 05 06 07 0
Percentage of respondents
Source: Federal Reserve Bank of New York survey of 25 market contacts from February to April.
N ear-Term Risks to the Financial System  4949
Box 5.2. An Approach to Assessing Climate-Related
Financial Risks
The Federal Reserve’s responsibilities with respect to climate change are narrow but important.
These responsibilities are tightly linked to its role in promoting the safety and soundness of individ-
ual fi  nancial institutions as well as the stability of the fi  nancial system. Hence, the Federal Reserve,
much like many fi  nancial market participants, is working to better understand the risks that climate
change may pose to individual banking organizations and the fi  nancial system.
A key area of focus is identifying the appropriate data and tools needed to assess climate-related
fi  nancial risks that could affect the goals mandated to the Federal Reserve by Congress. These
efforts focus on the translation of physical and transition risks associated with climate change into
fi  nancial risks. To do so, climate data need to be processed into a form that can be merged with
fi  nancial data. In addition, exposures of fi  nancial institutions to those risks need to be assessed,
which requires analyses of fi  nancial institution disclosures. To go beyond exposures of individual
institutions, models or scenarios are used to evaluate the transfer of climate-related risks within the
fi  nancial system and to assess the signifi  cance of climate-related risks to fi  nancial stability.
Because the effects of climate change are highly uncertain, geographically diffuse, and realized over
time, it is important to scrutinize underlying assumptions, consider alternative estimation methodolo-
gies, and utilize a wide range of data. Accordingly, a focus of this work is on coordinating with domes-
tic and international groups to develop models and to address data gaps in order to improve fi  nancial
stability risk assessments.
Measurement of climate-related fi  nancial risks to individual fi  nancial institutions and to fi  nancial mar-
kets requires data and methodologies that may be new to fi  nancial institutions, market participants,
and regulators. Because other regulators face similar challenges, the Federal Reserve is engaging
both with Financial Stability Oversight Council members and with international groups, such as the
Financial Stability Board, the Basel Committee on Banking Supervision, the Network of Central Banks
and Supervisors for Greening the Financial System, and the International Monetary Fund.
1 See, for example, Financial Stability Board (2021), FSB Roadmap for Addressing Climate-Related Financial Risks (Basel: FSB,
https://www.fsb.org/wp-content/uploads/P070721-2.pdf .
Figure Notes
Figure 1.1. Nominal Treasury yields rose substantially in the third quarter of 2023
The 2-year and 10-year Treasury rates are the monthly average of the constant-maturity yields
based on the most actively traded securities.
Figure 1.2. An estimate of the nominal Treasury term premium increased but remained
relatively low
Term premiums are estimated from a 3-factor term structure model using Treasury yields and
Blue Chip interest rate forecasts.
Figure 1.3. Interest rate volatility remained elevated by historical norms
The data begin in April 2005. Implied volatility on the 10-year swap rate, 1 month ahead, is
derived from swaptions.
Figure 1.4. The price-to-earnings ratio of S&P 500 firms increased to levels further above its
historical median
The figure shows the aggregate forward price-to-earnings ratio of S&P 500 firms, based on
expected earnings for 12 months ahead.
Figure 1.5. An estimate of the equity premium fell further below its historical median
The data begin in October 1991. The figure shows the difference between the aggregate for -
ward earnings-to-price ratio of S&P 500 firms and the expected real Treasury yields, based on
expected earnings for 12 months ahead. Expected real Treasury yields are calculated from the
10-year consumer price index inflation forecast, and the smoothed nominal yield curve is esti -
mated from off-the-run securities.
Figure 1.6. Volatility in equity markets stood slightly above its historical median
Realized volatility is computed from an exponentially weighted moving average of 5-minute daily
realized variances with 75 percent of the weight distributed over the past 20 business days.
Figure 1.7. Corporate bond yields rose above their historical medians
The triple-B series reflects the effective yield of the ICE Bank of America Merrill Lynch (BofAML)
triple-B U.S. Corporate Index (C0A4), and the high-yield series reflects the effective yield of the
ICE BofAML U.S. High Yield Index (H0A0).
Figure 1.8. Corporate bond spreads narrowed modestly
The triple-B series reflects the option-adjusted spread of the ICE Bank of America Merrill
Lynch (BofAML) triple-B U.S. Corporate Index (C0A4), and the high-yield series reflects the
option-adjusted spread of the ICE BofAML U.S. High Yield Index (H0A0).
52 Financial Stability Report
Figure 1.9. The excess bond premium stayed near its historical mean
The excess bond premium (EBP) is a measure of bond market investors’ risk sentiment. It is
derived as the residual of a regression that models corporate bond spreads after controlling for
expected default losses. By construction, its historical mean is zero. Positive (negative) EBP val -
ues indicate that investors’ risk appetite is below (above) its historical mean.
Figure 1.10. Spreads on leveraged loans fell modestly
The data show secondary-market discounted spreads to maturity. Spreads are the constant
spread used to equate discounted loan cash flows to the current market price. B-rated spreads
begin in July 1997. The black dashed line represents the data transitioning from monthly to
weekly in November 2013.
Figure 1.11. Treasury market depth remained below historical norms
Market depth is defined as the average top 3 bid and ask quote sizes for on-the-run Treasury
securities.
Figure 1.12. On-the-run market depth improved in recent months but remained below
historical norms
The data show the time-weighted average market depth at the best quoted prices to buy and sell,
for 2-year and 10-year Treasury notes. OTR is on-the-run.
Figure 1.13. A measure of liquidity in equity markets remained below average
The data show the depth at the best quoted prices to buy and sell, defined as the ask size plus
the bid size divided by 2, for E-mini S&P 500 futures.
Figure 1.14. Commercial real estate prices, adjusted for inflation, continued to decline
The data are deflated using the consumer price index.
Figure 1.15. Income of commercial properties relative to prices continued to grow but remained
well below historical norms
The data are a 12-month moving average of weighted capitalization rates in the industrial, retail,
office, and multifamily sectors, based on national square footage in 2009.
Figure 1.16. Banks reported tightening lending standards in commercial real estate loans
Banks’ responses are weighted by their commercial real estate loan market shares. The
shaded bars with top caps indicate periods of business recession as defined by the National
Bureau of Economic Research: March 2001–November 2001, December 2007–June 2009, and
February 2020–April 2020. Survey respondents to the Senior Loan Officer Opinion Survey on
Bank Lending Practices are asked about the changes over the quarter.
Figure 1.17. House prices started increasing again in recent months
The data extend through August 2023 for Zillow and CoreLogic and July 2023 for Case-Shiller.
Figure Notes 53
Figure 1.18. Model-based measures of house price valuations remained historically high
The values for 2023:Q3 are based on monthly data through July 2023. The data for the
market-based rents model begin in 2004:Q1. Valuation is measured as the deviation from the
long-run relationship between the price-to-rent ratio and the real 10-year Treasury yield.
Figure 1.19. House price-to-rent ratios remained elevated across geographic areas
The data are seasonally adjusted. Percentiles are based on 19 large metropolitan
statistical areas.
Figure 1.20. Farmland prices stayed near historical highs
The data for the U.S. begin in 1997. Midwest index is a weighted average of Corn Belt and Great
Plains states derived from staff calculations. Values are given in real terms. The value for 2023 is
based on monthly data through July 2023.
Figure 1.21. Farmland prices grew faster than rents
The data for the U.S. begin in 1998. Midwest index is a weighted average of Corn Belt and Great
Plains states derived from staff calculations. The value for 2023 is based on monthly data
through July 2023.
Figure 2.1. The total debt of businesses and households relative to GDP declined further
The shaded bars with top caps indicate periods of business recession as defined by the National
Bureau of Economic Research: January 1980–July 1980, July 1981–November 1982, July 1990–
March 1991, March 2001–November 2001, December 2007–June 2009, and February 2020–
April 2020. GDP is gross domestic product.
Figure 2.2. Both business and household debt-to-GDP ratios edged down
The shaded bars with top caps indicate periods of business recession as defined by the National
Bureau of Economic Research: January 1980–July 1980, July 1981–November 1982, July 1990–
March 1991, March 2001–November 2001, December 2007–June 2009, and February 2020–
April 2020. GDP is gross domestic product.
Figure 2.3. Business debt adjusted for inflation continued to decline
Nominal debt growth is seasonally adjusted and is translated into real terms after subtracting the
growth rate of the price deflator for the core personal consumption expenditures price index.
Figure 2.4. Net issuance of risky debt remained subdued
The data begin in 2004:Q2. Institutional leveraged loans generally exclude loan commitments
held by banks. The key identifies bars in order from top to bottom (except for some bars with at
least one negative value).
Figure 2.5. Gross leverage of large businesses remained at high levels by historical standards
Gross leverage is an asset-weighted average of the ratio of firms’ book value of total debt to book
value of total assets. The 75th percentile is calculated from a sample of the 2,500 largest firms
by assets. The dashed sections of the lines in the first quarter of 2019 reflect the structural
54 Financial Stability Report
break in the series due to the 2019 compliance deadline for Financial Accounting Standards
Board rule Accounting Standards Update 2016-02. The accounting standard requires operating
leases, previously considered off-balance-sheet activities, to be included in measures of debt
and assets.
Figure 2.6. Firms’ ability to service their debt, as measured by the interest coverage ratio,
continued to decline from post-pandemic highs
The interest coverage ratio is earnings before interest and taxes divided by interest payments.
Firms with leverage less than 5 percent and interest payments less than $500,000 are excluded.
Figure 2.7. Default rates on leveraged loans inched up from historically low levels
The data begin in December 1998. The default rate is calculated as the amount in default over
the past 12 months divided by the total outstanding volume at the beginning of the 12-month
period. The shaded bars with top caps indicate periods of business recession as defined by
the National Bureau of Economic Research: March 2001–November 2001, December 2007–
June 2009, and February 2020–April 2020.
Figure 2.8. New leveraged loans with debt multiples less than 4 continued to rise
Volumes are for large corporations with earnings before interest, taxes, depreciation, and amor -
tization greater than $50 million and exclude existing tranches of add-ons and amendments as
well as restatements with no new money. The key identifies bars in order from top to bottom.
Figure 2.9. Real household debt edged down
Subprime are those with an Equifax Risk Score less than 620; near prime are from 620 to 719;
prime are greater than 719. Scores are measured contemporaneously. Student loan balances
before 2004 are estimated using average growth from 2004 to 2007, by risk score. The data are
converted to constant 2023 dollars using the consumer price index.
Figure 2.10. A model-based estimate of housing leverage was flat
Housing leverage is estimated as the ratio of the average outstanding mortgage loan balance
for owner-occupied homes with a mortgage to (1) current home values using the Zillow national
house price index and (2) model-implied house prices estimated by a staff model based on rents,
interest rates, and a time trend.
Figure 2.11. Mortgage delinquency rates remained near historically low levels
Loss mitigation includes tradelines that have a narrative code of forbearance, natural disaster,
payment deferral (including partial), loan modification (including federal government plans), or
loans with no scheduled payment and a nonzero balance. Delinquent includes loans reported to
the credit bureau as at least 30 days past due.
Figure 2.13. New mortgage extensions to nonprime borrowers were subdued
Year-over-year change in balances for the second quarter of each year among those households
whose balance increased over this window. Subprime are those with an Equifax Risk Score less
than 620; near prime are from 620 to 719; prime are greater than 719. Scores were measured
Figure Notes 55
1 year ago. The data are converted to constant 2023 dollars using the consumer price index. The
key identifies bars in order from left to right.
Figure 2.14. Real consumer credit edged down in the first half of 2023
The data are converted to constant 2023 dollars using the consumer price index. Student loan
data begin in 2005.
Figure 2.15. Real auto loans outstanding ticked up for prime borrowers
Subprime are those with an Equifax Risk Score less than 620; near prime are from 620 to 719;
prime are greater than 719. Scores are measured contemporaneously. The data are converted to
constant 2023 dollars using the consumer price index.
Figure 2.16. Auto loan delinquencies remained at levels above their historical median
Loss mitigation includes tradelines that have a narrative code of forbearance, natural disaster,
payment deferral (including partial), loan modification (including federal government plans), or
loans with no scheduled payment and a nonzero balance. Delinquent includes loans reported to
the credit bureau as at least 30 days past due. The data for auto loans are reported semiannually
by the Risk Assessment, Data Analysis, and Research Data Warehouse until 2017, after which
they are reported quarterly. The data for delinquent/loss mitigation begin in the first quarter
Figure 2.17. Real credit card balances rose in the first half of 2023
Subprime are those with an Equifax Risk Score less than 620; near prime are from 620 to 719;
prime are greater than 719. Scores are measured contemporaneously. The data are converted to
constant 2023 dollars using the consumer price index.
Figure 2.18. Credit card delinquencies increased further in the first half of 2023
Delinquency measures the fraction of balances that are at least 30 days past due, excluding
severe derogatory loans. The data are seasonally adjusted.
Figure 3.1. Banks’ average interest rate on interest-earning assets remained significantly above
the average expense rate on liabilities
Average interest rate on interest-earning assets is total interest income divided by total
interest-earning assets. Average interest expense rate on liabilities is total interest expense
divided by total liabilities. The shaded bar with a top cap indicates a period of business recession
as defined by the National Bureau of Economic Research: February 2020–April 2020.
Figure 3.2. The fair values of banks’ securities portfolios declined in the second quarter of 2023
as interest rates rose
The figure plots the difference between the fair and amortized cost values of the securities. The
sample consists of all bank holding companies and commercial banks.
56 Financial Stability Report
Figure 3.3. Banks’ risk-based capital ratio remained near the median level since the Great
The data are seasonally adjusted by Federal Reserve Board staff. The sample consists of domes -
tic bank holding companies (BHCs) and intermediate holding companies (IHCs) with a substan -
tial U.S. commercial banking presence. G-SIBs are global systemically important banks. Large
non–G-SIBs are BHCs and IHCs with greater than $100 billion in total assets that are not G-SIBs.
Before 2014:Q1 (advanced-approaches BHCs) or before 2015:Q1 (non-advanced-approaches
BHCs), the numerator of the common equity Tier 1 ratio is Tier 1 common capital. Afterward,
the numerator is common equity Tier 1 capital. The denominator is risk-weighted assets. The
shaded bars with top caps indicate periods of business recession as defined by the National
Bureau of Economic Research: March 2001–November 2001, December 2007–June 2009, and
February 2020–April 2020.
Figure 3.4. The ratio of tangible common equity to tangible assets increased for banks of all
categories
The data are seasonally adjusted by Federal Reserve Board staff. The sample consists of
domestic bank holding companies (BHCs), intermediate holding companies (IHCs) with a sub -
stantial U.S. commercial banking presence, and commercial banks. G-SIBs are global system -
ically important banks. Large non–G-SIBs are BHCs and IHCs with greater than $100 billion in
total assets that are not G-SIBs. Bank equity is total equity capital net of preferred equity and
intangible assets. Bank assets are total assets net of intangible assets. The shaded bars with
top caps indicate periods of business recession as defined by the National Bureau of Economic
Research: July 1990–March 1991, March 2001–November 2001, December 2007–June 2009,
and February 2020–April 2020.
Figure 3.5. Borrower leverage for bank commercial and industrial loans increased
The figure shows the weighted median leverage of nonfinancial firms that borrow using commer -
cial and industrial loans from the 24 banks that have filed in every quarter since 2013:Q1. Lever -
age is measured as the ratio of the book value of total debt to the book value of total assets of
the borrower, as reported by the lender, and the median is weighted by committed amounts.
Figure 3.6. Banks reported tightening lending standards in commercial and industrial loans
Banks’ responses are weighted by their commercial and industrial loan market shares. Survey
respondents to the Senior Loan Officer Opinion Survey on Bank Lending Practices are asked
about the changes over the quarter. Results are shown for loans to large and medium-sized firms.
The shaded bars with top caps indicate periods of business recession as defined by the National
Bureau of Economic Research: March 2001–November 2001, December 2007–June 2009, and
February 2020–April 2020.
Figure 3.7. Leverage at broker-dealers remained historically low
Leverage is calculated by dividing total assets by equity.
Figure Notes 57
Figure 3.8. Trading profits in June were near their average levels since 2018
The sample includes all trading desks of bank holding companies subject to the Volcker rule
reporting requirement.
Figure 3.9. Equities dropped slightly as a share of trading profits in the most recent data
The sample includes all trading desks of bank holding companies subject to the Volcker rule
reporting requirement. The “other” category comprises desks trading in municipal securities,
foreign exchange, and commodities, as well as any unclassified desks. The key identifies series
in order from top to bottom.
Figure 3.10. Leverage at life insurance companies remained near the middle of its historical range
Ratio is calculated as (total assets – separate account assets)/(total capital – accumulated other
comprehensive income) using generally accepted accounting principles. The largest 10 publicly
traded life and property and casualty insurers are represented.
Figure 3.11. Leverage at hedge funds remained somewhat elevated
Means are weighted by net asset value (NAV). On-balance-sheet leverage is the ratio of gross
asset value to NAV. Gross leverage is the ratio of gross notional exposure to NAV. Gross notional
exposure includes both on-balance-sheet exposures and off-balance-sheet derivative notional
exposures. Options are delta adjusted, and interest rate derivatives are reported at 10-year bond
equivalent values. The data are reported on a 2-quarter lag beginning in the first quarter of 2013.
Figure 3.12. Leverage at the largest hedge funds increased
Leverage is measured by gross asset value (GAV) divided by net asset value (NAV). Funds are
sorted into cohorts based on GAV. Average leverage is computed as the NAV-weighted mean.
Figure 3.13. Dealers indicated that the use of leverage by hedge funds remained largely
Net percentage equals the percentage of institutions that reported increased use of financial
leverage over the past 3 months minus the percentage of institutions that reported decreased
use of financial leverage over the past 3 months. REIT is real estate investment trust.
Figure 3.14. Issuance of non-agency securitized products has slowed significantly since 2022
The data from the first and second quarters of 2023 are annualized to create the 2023 bar.
RMBS is residential mortgage-backed securities; CMBS is commercial mortgage-backed secu -
rities; CDO is collateralized debt obligation; CLO is collateralized loan obligation. The “other”
category consists of other asset-backed securities (ABS) backed by credit card debt, student
loans, equipment, floor plans, and miscellaneous receivables; resecuritized real estate mortgage
investment conduit (Re-REMIC) RMBS; and Re-REMIC CMBS. The data are converted to constant
2023 dollars using the consumer price index. The key identifies bars in order from top to bottom.
Figure 3.15. Bank credit commitments to nonbank financial institutions remained high
Committed amounts on credit lines and term loans extended to nonbank financial institutions by
a balanced panel of 24 bank holding companies that have filed Form FR Y-14Q in every quarter
58 Financial Stability Report
since 2018:Q1. Nonbank financial institutions are identified based on reported North American
Industry Classification System (NAICS) codes. In addition to NAICS codes, a name-matching
algorithm is applied to identify specific entities such as real estate investment trusts (REITs), spe -
cial purpose entities, collateralized loan obligations (CLOs), and asset-backed securities (ABS).
BDC is business development company. REITs incorporate both mortgage (trading) REITs and
equity REITs. Broker-dealers also include commodity contracts dealers and brokerages and other
securities and commodity exchanges. Other financial vehicles include closed-end investment and
mutual funds.
Figure 3.16. Aggregate credit commitments to nonbank financial institutions increased over the
past year but varied across sectors
2023:Q2-over-2022:Q2 growth rates as of the end of the second quarter of 2023. REIT is real
estate investment trust; PE is private equity; BDC is business development company; SPE is spe -
cial purpose entity; CLO is collateralized loan obligation; ABS is asset-backed securities. The key
identifies bars in order from left to right.
Figure 4.1. Ratios of runnable money-like liabilities to GDP edged down but remained above their
historical medians
The black striped area denotes the period from 2008:Q4 to 2012:Q4, when insured deposits
increased because of the Transaction Account Guarantee program. The “other” category consists
of variable-rate demand obligations (VRDOs), federal funds, funding-agreement-backed securities,
private liquidity funds, offshore money market funds, short-term investment funds, local govern -
ment investment pools, and stablecoins. Securities lending includes only lending collateralized
by cash. GDP is gross domestic product. Values for VRDOs come from Bloomberg beginning
in 2019:Q1. See Jack Bao, Josh David, and Song Han (2015), “The Runnables,” FEDS Notes
federalreserve.gov/econresdata/notes/feds-notes/2015/the-runnables-20150903.html.
Figure 4.2. The amount of high-quality liquid assets held by most banks continued to decrease in
the first half of 2023
The sample consists of domestic bank holding companies (BHCs), intermediate holding compa -
nies (IHCs) with a substantial U.S. commercial banking presence, and commercial banks. G-SIBs
are global systemically important banks. Large non–G-SIBs are BHCs and IHCs with greater than
$100 billion in total assets that are not G-SIBs. Liquid assets are cash plus estimates of securi -
ties that qualify as high-quality liquid assets as defined by the Liquidity Coverage Ratio require -
ment. Accordingly, Level 1 assets and discounts and restrictions on Level 2 assets are incorpo -
rated into the estimate.
Figure 4.3. Banks’ reliance on short-term wholesale funding remained low
Short-term wholesale funding is defined as the sum of large time deposits with maturity less
than 1 year, federal funds purchased and securities sold under agreements to repurchase,
deposits in foreign offices with maturity less than 1 year, trading liabilities (excluding revaluation
Figure Notes 59
losses on derivatives), and other borrowed money with maturity less than 1 year. The shaded
bars with top caps indicate periods of business recession as defined by the National Bureau
of Economic Research: March 2001–November 2001, December 2007–June 2009, and
February 2020–April 2020.
Figure 4.4. Credit extended by the Bank Term Funding Program stabilized at around $110 billion
The key identifies series in order from top to bottom.
Figure 4.5. Growth in money market funds was concentrated in retail prime funds
The data are converted to constant 2023 dollars using the consumer price index.
Figure 4.6. Corporate bonds held by bond mutual funds stabilized in the first half of 2023
The data show holdings of all U.S. corporate bonds by all U.S.-domiciled mutual funds (holdings of
foreign bonds are excluded). The data are converted to constant 2023 dollars using the consumer
price index.
Figure 4.7. Assets held by bank loan and high-yield mutual funds continued to decrease in 2023
The data are converted to constant 2023 dollars using the consumer price index. The key identi -
fies series in order from top to bottom.
Figure 4.8. The outflows that bond and bank loan mutual funds experienced in 2022 have stabilized
Mutual fund assets under management as of August 2023 included $2,211 billion in
investment-grade bond mutual funds, $313 billion in high-yield bond mutual funds, and $78 billion
in bank loan mutual funds. Bank loan mutual funds, also known as floating-rate bond funds, are
excluded from high-yield bond mutual funds.
Figure 4.9. Life insurers held more risky, illiquid assets on their balance sheets
The data are converted to constant 2022 dollars using the consumer price index. Securitized
products include collateralized loan obligations for corporate debt, private-label commercial
mortgage-backed securities for commercial real estate (CRE), and private-label residential
mortgage-backed securities and asset-backed securities (ABS) backed by autos, credit cards,
consumer loans, and student loans for other ABS. Illiquid corporate debt includes private place -
ments, bank and syndicated loans, and high-yield bonds. Alternative investments include assets
filed under Schedule BA. P&C is property and casualty. The key identifies bars in order from top
to bottom.
Figure 4.10. Life insurers continued to rely on nontraditional liabilities
The data are converted to constant 2023 dollars using the consumer price index. FHLB is Federal
Home Loan Bank. The data are annual from 2006 to 2010 and quarterly thereafter. The key iden -
tifies bars in order from top to bottom.
60 Financial Stability Report
Box 5.1. Survey of Salient Risks to Financial Stability
Figure A. Fall 2023: Most cited potential risks over the next 12 to 18 months
Responses are to the following question: “Over the next 12–18 months, which shocks, if real -
ized, do you think would have the greatest negative effect on the functioning of the U.S. financial
Figure B. Spring 2023: Most cited potential risks over the next 12 to 18 months
Responses are to the following question: “Over the next 12–18 months, which shocks, if real -
ized, do you think would have the greatest negative effect on the functioning of the U.S. financial
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