The US government's debt load is now seen as the biggest risk to financial stability, outweighing persistent inflation in a Federal Reserve survey. Concerns surrounding US fiscal debt sustainability were atop the list this survey, followed by escalating tensions in the Middle East and policy uncertainty, indicating that the central bank is considerably worried about the implications of governmental debt on the broader economy, more than inflationary pressures.
While the banking sector remained sound and resilient overall, the report said leverage across hedge funds was at or near the highest level observed since data became available in 2013. This suggests that, despite stability in the conventional banking environment, the hedge fund sector is displaying characteristics of heightened risk, which could have severe implications if left unchecked.
In addition to delinquency rates for credit cards and auto loans being above average, especially among those with lower credit scores, the Fed described overall vulnerabilities related to household and business debt as moderate. Notably, the report highlighted that high delinquency rates reportedly reflected increased borrowing during and after the pandemic, suggesting a temporary situation rather than a systemic crisis.
The central bank noted that funding risks have decreased but remain notable. The Fed flagged that stablecoin assets grew substantially since the prior report, reaching a total market capitalization of more than $170 billion. However, the central bank expressed concerns regarding the structural vulnerabilities of these digital assets to runs, exacerbated by the absence of a comprehensive federal regulatory framework.
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