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Financial Stability Report

May 2022
B O A R D O F G OV E R N O R S O F T H E F E D E R A L R E S E RV E S Y S T E M

The Federal Reserve System is the central
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.

Financial Stability Report

May 2022
B O A R D O F G OV E R N O R S O F T H E F E D E R A L R E S E RV E S Y S T E M

iii

Contents
Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v
Framework. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1 Asset Valuations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Box 1.1. Recent Liquidity Strains across U.S. Treasury, Equity Index Futures, and Oil
Futures Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Box 1.2. LIBOR Transition Update. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

2 Borrowing by Businesses and Households . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
3 Leverage in the Financial Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
4 Funding Risks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Box 4.1. Central Bank Digital Currency and Financial Stability. . . . . . . . . . . . . . . . . . . . . . . 43
Box 4.2. Commodity Market Stresses following Russia’s Invasion of Ukraine. . . . . . . . . . . . 48

5 Near-Term Risks to the Financial System. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Box 5.1. Stresses in China’s Real Estate Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Box 5.2. Survey of Salient Risks to Financial Stability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

Appendix: Figure Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

Note: This report generally reflects information that was available as of April 25, 2022.

Purpose
This report presents the Federal Reserve Board’s current assessment of the resilience of the U.S.
financial system. By publishing this report, the Board intends to promote public understanding and
increase transparency and accountability for the Federal Reserve’s views on this topic.
Promoting financial stability is a key element in meeting the Federal Reserve’s dual mandate for
monetary policy regarding full employment and stable prices. In an unstable financial system,
adverse events are more likely to result in severe financial stress and disrupt the flow of credit,
leading to high unemployment and great
financial hardship. Monitoring and assessing
financial stability also support the Federal
Reserve’s regulatory and supervisory activities, which promote the safety and soundness
of our nation’s banks and other important
financial institutions. Information gathered
while monitoring the stability of the financial
system helps the Federal Reserve develop its

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.

view of the salient risks to be included in the

The website includes

scenarios of the stress tests and its setting of
the countercyclical capital buffer (CCyB).

• a more detailed look at our monitoring
framework for assessing risk in each
category;

The Board’s Financial Stability Report is similar

• more data and research on related topics;

to those published by other central banks and

• information on how we coordinate, cooperate, and otherwise take action on financial
system issues; and

complements the annual report of the Financial Stability Oversight Council (FSOC), which
is chaired by the Secretary of the Treasury and

• public education resources describing the
importance of our efforts.

includes the Federal Reserve Board Chair and
other financial regulators.

More information on the Federal Reserve’s supervisory and regulatory activities is available on the Board’s website; see the
Supervision and Regulation Report (https://www.federalreserve.gov/publications/supervision-and-regulation-report.htm) as
well as the webpages for Supervision and Regulation (https://www.federalreserve.gov/supervisionreg.htm) and Payment
Systems (https://www.federalreserve.gov/paymentsystems.htm). Moreover, additional details about the conduct of monetary policy are also on the Board’s website; see the Monetary Policy Report (https://www.federalreserve.gov/monetarypolicy/
mpr_default.htm) and the webpage for Monetary Policy (https://www.federalreserve.gov/monetarypolicy.htm).

vii

Framework
A stable financial system, when hit by adverse events, or “shocks,” continues to meet the
demands of households and businesses for financial services, such as credit provision and payment services. By contrast, in an unstable system, these same shocks are likely to have much
larger effects, disrupting the flow of credit and leading to declines in employment and economic
activity.
Consistent with this view of financial stability, the Federal Reserve Board’s monitoring framework
distinguishes between shocks to and vulnerabilities of the financial system. Shocks, such as sudden changes to financial or economic conditions, are typically surprises and are inherently difficult
to predict. Vulnerabilities tend to build up over time and are the aspects of the financial system
that are most expected to cause widespread problems in times of stress. As a result, the framework focuses primarily on monitoring vulnerabilities and emphasizes four broad categories based
on research.2
1. Elevated valuation pressures are signaled by asset prices that are high relative to economic
fundamentals or historical norms and are often driven by an increased willingness of investors
to take on risk. As such, elevated valuation pressures imply a greater possibility of outsized
drops in asset prices (see Section 1, Asset Valuations).
2. Excessive borrowing by businesses and households leaves them vulnerable to distress if their
incomes decline or the assets they own fall in value. In the event of such shocks, businesses
and households with high debt burdens may need to cut back spending sharply, affecting the
overall level of economic activity. Moreover, when businesses and households cannot make
payments on their loans, financial institutions and investors incur losses (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 even modest losses when hit by adverse shocks. In those
situations, institutions will be forced to cut back lending, sell their assets, or, in extreme
cases, shut down. Such responses can substantially impair credit access for households and
businesses (see Section 3, Leverage in the Financial Sector).
4. Funding risks expose the financial system to the possibility that investors will “run” by
withdrawing their funds from a particular institution or sector. 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 the funds in illiquid assets that are hard to sell quickly
or in assets that have a long maturity. This liquidity and maturity transformation can create an

For a review of the research literature in this area and further discussion, see Tobias Adrian, Daniel Covitz, and Nellie
Liang (2015), “Financial Stability Monitoring,” Annual Review of Financial Economics, vol. 7 (December), pp. 357–95.

viii

Financial Stability Report

incentive for investors to withdraw funds quickly in adverse situations. Facing a run, financial
institutions may need to sell assets quickly at “fire sale” prices, thereby incurring substantial
losses and potentially even becoming insolvent. Historians and economists often refer to
widespread investor runs as “financial panics” (see Section 4, Funding Risks).
These vulnerabilities often interact with each other. For example, elevated valuation pressures
tend to be associated with excessive borrowing by businesses and households because both
borrowers and lenders are more willing to accept higher degrees of risk and leverage when asset
prices are appreciating rapidly. The associated debt and leverage, in turn, make the risk of outsized declines in asset prices more likely and more damaging. Similarly, the risk of a run on a
financial institution and the consequent fire sales of assets are greatly amplified when significant
leverage is involved.
It is important to note that liquidity and maturity transformation and lending to households, businesses, and financial firms are key aspects of how the financial system supports the economy.
For example, banks provide safe, liquid assets to depositors and long-term loans to households
and businesses; businesses rely on loans or bonds to fund investment projects; and households
benefit from a well-functioning mortgage market when buying a home.
The Federal Reserve’s monitoring framework also tracks domestic and international developments
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 play out through the U.S. financial system, given our current assessment of the four
areas of vulnerabilities.
While this framework provides a systematic way to assess financial stability, some potential risks
do not fit neatly into it because they are novel or difficult to quantify. In addition, some vulnerabilities are difficult to measure with currently available data, and the set of vulnerabilities may evolve
over time. Given these limitations, we continually rely on ongoing research by the Federal Reserve
staff, academics, 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.

Federal Reserve actions to promote the resilience of the
financial system
The assessment of financial vulnerabilities informs Federal Reserve actions to promote the resilience of the financial system. The Federal Reserve works with other domestic agencies directly
and through the FSOC 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 particular, large bank holding companies
(BHCs), the U.S. operations of certain foreign banking organizations, and financial market utilities.

Framework

Specifically, in the post-crisis period, for the largest, most systemically important BHCs, these
actions have included requirements for more and higher-quality capital, an innovative stresstesting regime, new liquidity regulation, and improvements in the resolvability of such BHCs.
In addition, the Federal Reserve’s assessment of financial vulnerabilities informs the design of
stress-test scenarios and decisions regarding the CCyB. The stress scenarios incorporate
some systematic elements to make the tests more stringent when financial imbalances are
rising, and the assessment of vulnerabilities also helps identify salient risks that can be included
in the scenarios. 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.

Overview
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
leverage, and funding risk. It also highlights several near-term risks that, if realized, could interact
with these vulnerabilities.
Since the November 2021 Financial Stability Report, uncertainty about the economic outlook has
increased. The Russian invasion of Ukraine has caused tremendous human and economic hardship, and the implications for the U.S. and global economies are highly uncertain. In the near
term, the invasion and related events are likely to create additional upward pressure on inflation
and weigh on economic activity. After deteriorating early in the period because of the emergence
and spread of the highly contagious Omicron variant, the pandemic outlook has improved but
remains uncertain. Finally, inflation has been higher and more persistent than expected, even
before the invasion of Ukraine, and uncertainty over the inflation outlook poses risks to financial
conditions and economic activity.

Financial system vulnerability assessment, May 2022

Asset valuations

Borrowing by businesses
and households

Leverage in the
financial sector

• Uncertainty about the
economic outlook led
to large fluctuations
in prices of financial
assets.

• The debt-to-GDP ratio
continued to decline,
although businesses
and households' debt
grew throughout 2021.

• Banks are well
capitalized, but
risk-based capital ratios
declined at the largest
banks due to heighted
market volatility.

• Despite markedly higher
Treasury yields, real and
financial asset prices
generally remained
high relative to their
corresponding expected
cash flows.

• Interest coverage ratios
for large businesses
exceeded the historical
average, but the
business debt-to-GDP
ratio remains high.

• House prices continued
to rise at a rapid
pace that outstripped
increases in rents.

• Increases in household
debt were concentrated
among borrowers with
strong credit histories.

• Leverage was high at life
insurers and somewhat
elevated at hedge funds.
• Issuance of non-agency
securitized products
reached post-2008
highs, and bank lending
to nonbank financial
institutions continued to
grow rapidly.

Funding risks

• Domestic banks
maintained high levels of
liquid assets and stable
funding.
• Structural vulnerabilities
persist at money market
funds and some other
mutual funds, and
the rapidly growing
stablecoin sector is
vulnerable to runs.
• Central counterparties
made larger margin calls
amid elevated market
volatility.

Financial Stability Report

Against this backdrop, financial markets experienced high volatility and some strains on market
liquidity. On net, over the period, Treasury yields increased markedly, broad equity prices declined
notably, and credit spreads widened considerably in corporate bond markets. While business and
household debt increased last year and likely has continued to do so this year, the ratio of credit
to gross domestic product (GDP) continued to fall and is approaching pre-pandemic levels. Credit
quality remained robust. Banks remained well capitalized, but some money market and bond funds
are still exposed to sizable liquidity risks. A few signs of funding pressures emerged amid the
escalation of geopolitical tensions. However, broad funding markets proved resilient, and spillovers
have been limited to date.
1. Asset valuations. Heightened uncertainty about the economic outlook led to notable
fluctuations in financial markets. Since the previous report, broad equity prices declined
notably, and spreads in corporate bond markets widened considerably. Prices of risky financial
assets remained generally high compared with corresponding expected cash flows. Since
November, house prices rose at a rapid rate and continued to outstrip increases in rents. Asset
prices remain vulnerable to declines in response to negative shocks (see Section 1, Asset
Valuations).
2. Borrowing by businesses and households. Key indicators of vulnerabilities arising from
business and household debt—including debt-to-GDP ratios, gross leverage, and interest
coverage ratios—continued to improve and have largely recovered from the economic stresses
of the COVID-19 recession. Nonetheless, rising inflation, supply chain disruptions, and ongoing
geopolitical events might pose risks to the ability of some businesses and households to
service their debts (see Section 2, Borrowing by Businesses and Households).
3. Leverage in the financial sector. Banks maintained risk-based capital ratios well above
regulatory minimums. Leverage at broker-dealers stayed low, while leverage at life insurance
companies and hedge funds remained high by historical standards. Issuance of non-agency
asset-backed securities recovered from the low levels of the pandemic (see Section 3,
Leverage in the Financial Sector).
4. Funding risks. Funding risks at domestic banks remained low as a result of large holdings of
liquid assets and a limited reliance on short-term wholesale funding. However, some types of
money market funds (MMFs) and stablecoins remain prone to runs, and many bond and bank
loan mutual funds continue to be vulnerable to redemption risks. Elevated market volatility
associated with the Russian invasion of Ukraine has led to increased margin calls by central
counterparties (CCPs), which in turn increased the demand for liquidity from a range of market
participants (see Section 4, Funding Risks).
This report also details how near-term risks have changed since the November 2021 report 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 (discussed in the box “Survey of
Salient Risks to Financial Stability”). Stresses in Europe related to the Russian invasion of Ukraine

Overview

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.”

Russian invasion
of Ukraine

May
2022

November
2021

77%

Persistent inflation;
monetary tightening

68%

of contacts
surveyed

Not cited

of contacts
surveyed

65%

Risk asset
valuations/correction

50%

of contacts
surveyed

23%

of contacts
surveyed

Foreign divestment
from U.S. assets

Higher
energy prices

41%

of contacts
surveyed

Not cited

of contacts
surveyed

or in emerging markets—such as those that could arise from China or be driven by inflationary
pressures—could spill over to the United States. In addition, elevated inflation and rising rates in
the United States could negatively affect domestic economic activity, asset prices, credit quality,
and financial conditions more generally. As concerns over cyber risk have increased, U.S. government agencies and their private-sector partners have been stepping up their efforts to protect the
financial system and other critical infrastructures. If any of these near-term risks were realized,
and especially should such events precipitate a marked worsening of the economic outlook, their
effects could be amplified through the financial vulnerabilities identified in this report.
The report includes additional boxes that analyze salient topics related to financial stability, including two boxes on recent notable events in financial markets—namely, “Recent Liquidity Strains
across U.S. Treasury, Equity Index Futures, and Oil Futures Markets” and “Commodity Market
Stresses following Russia’s Invasion of Ukraine.” Additional boxes include “LIBOR Transition
Update,” “Central Bank Digital Currency and Financial Stability,” and “Stresses in China’s Real
Estate Sector.”

Asset Valuations

Increased uncertainty about the economic outlook led to large
fluctuations in asset prices
Since the November 2021 Financial Stability Report, amid news about the highly contagious Omicron variant, higher-than-expected inflation, and the Russian invasion of Ukraine, uncertainty about
the economic outlook increased, and prices of financial assets fluctuated widely. The Russian
invasion of Ukraine and the subsequent imposition of sanctions on Russia disrupted commodity markets, resulting in a significant rise in commodity prices (see the box “Commodity Market
Stresses following Russia’s Invasion of Ukraine”). On net, Treasury yields increased markedly,
broad equity prices declined notably, and corporate bond spreads widened considerably. While the
effect of recent developments on asset cash flows remained uncertain, valuation measures based
on current expectations of cash flows continued to be high relative to historical norms.
House prices continued to rise at a rapid pace that further outstripped rent growth. With valuations at high levels, house prices could be particularly sensitive to shocks. Nonetheless, little
evidence to date exists of an erosion in mortgage underwriting standards or a surge in speculative
practices, suggesting that while a negative shock to house prices may hurt homeowners, such a
shock is unlikely to be amplified by the financial system.
Driven by the multifamily and industrial sectors, overall commercial real estate (CRE) prices continued to increase since the November report, with some price indexes surpassing their 2006 peaks.
With capitalization rates at low levels and capitalization spreads at moderate levels, CRE valuation
pressures remained somewhat on the high side. Farmland prices were elevated relative to rents
and incomes, although farm incomes are broadly expected to rise.
Table 1.1 shows the sizes of the asset markets discussed in this section. The largest asset markets are those for equities, residential real estate, CRE, and Treasury securities.

Amid high volatility, Treasury yields rose from very low levels to
somewhat above their pre-pandemic levels
Reflecting a less accommodative monetary policy stance associated with elevated inflation and a
tight labor market, yields on Treasury securities increased markedly and reached somewhat above
their pre-pandemic levels (figure 1.1). Model estimates of Treasury term premiums also increased
notably but remained moderate by historical standards (figure 1.2).3 Further increases in Treasury
yields, especially if accompanied by a weaker economic outlook, could put downward pressure on
valuations in various other markets. Consistent with heightened uncertainty about the economic

Treasury term premiums capture the difference between the yield that investors require for holding longer-term Treasury
securities and the expected yield from rolling over shorter-dated ones.

Financial Stability Report

Table 1.1. Size of selected asset markets
Outstanding
(billions of dollars)

Growth,
2020:Q4–2021:Q4
(percent)

Average annual growth,
1997–2021:Q4
(percent)

Equities

58,562

24.8

9.8

Residential real estate

48,825

16.5

6.1

Commercial real estate

23,787

12.7

7.2

Treasury securities

22,558

7.7

8.2

Investment-grade corporate bonds

6,738

3.3

8.2

Farmland

2,693

2.0

5.3

High-yield and unrated corporate bonds

1,753

8.3

7.1

Leveraged loans*

1,341

12.4

14.3

Commercial real estate**

9.4

3.1

Residential real estate***

10.4

2.6

Item

Price growth (real)

Note: The data extend through 2021:Q4. Average annual growth rates are measured from Q4 of the year immediately preceding the period
through Q4 of the final year of the period. Equities, real estate, and farmland are at nominal market value; bonds and loans are at nominal
book value.
* The amount outstanding shows institutional leveraged loans and generally excludes loan commitments held by banks. For example, lines of
credit are generally excluded from this measure. Average annual growth of leveraged loans is from 2000:Q4 to 2021:Q4, as this market was
fairly small before then.
** One-year growth of commercial real estate prices is from December 2020 to December 2021, and average annual growth is from
1998:Q4 to 2021:Q4. Both growth rates are calculated from value-weighted nominal prices deflated using the consumer price index (CPI).
*** One-year growth of residential real estate prices is from December 2020 to December 2021, and average annual growth is from
1997:Q4 to 2021:Q4. Nominal prices are deflated using the CPI.
Source: For leveraged loans, S&P Global, Leveraged Commentary & Data; for corporate bonds, Mergent, Fixed Income Securities Database; for
farmland, Department of Agriculture; for residential real estate price growth, CoreLogic, Inc.; for commercial real estate price growth, CoStar
Group, Inc., CoStar Commercial Repeat Sale Indices; for all other items, Federal Reserve Board, Statistical Release Z.1, “Financial Accounts of
the United States.”

Figure 1.1. Yields on nominal Treasury securities
Percent, annual rate
Monthly

2-year
10-year

Apr.

1997

2002

2007

2012

2017

2022

Source: Federal Reserve Board, Statistical Release H.15, “Selected Interest Rates.”

outlook, a forward-looking measure of Treasury market volatility derived from options prices
increased significantly and remained elevated (figure 1.3). Since the November report, liquidity
metrics, such as market depth, suggest a notable deterioration in Treasury market liquidity

8
7
6
5
4
3
2
1
0

Asset Valuations

(figure 1.4).4 In addition, the price spread of the most recently issued Treasury securities over previously issued comparable-maturity Treasury securities widened, reflecting a willingness to pay a
higher premium for holding actively traded liquid securities. Low market liquidity likely contributed
to large fluctuations in prices of financial assets, but markets functioned well overall. For more
information on market liquidity developments, see the box “Recent Liquidity Strains across U.S.
Treasury, Equity Index Futures, and Oil Futures Markets.” Of note, last November, the Inter-Agency
Working Group for Treasury Market Surveillance released a report analyzing the disruptions to
the U.S. Treasury markets at the onset of the COVID-19 pandemic in March 2020 and discussing
potential reforms.5

Figure 1.2. Term premium on 10-year nominal
Treasury securities
Percentage points
Monthly

Figure 1.3. Implied volatility of 10-year
swap rate
Basis points

2.5

Monthly

2.0

200

1.5
1.0
Apr.

Apr.

0.5
Median

−1.0
2002

2007

2012

2017

2022

150
100

0.0
−0.5

1997

250

−1.5
2004

Source: Department of the Treasury; Wolters Kluwer,
Blue Chip Financial Forecasts; Federal Reserve Bank
of New York; Federal Reserve Board staff estimates.

2007

2010

2013

2016

2019

2022

Source: Barclays.

Figure 1.4. Treasury market depth
35
30

Millions of dollars

5-day moving average

5-year (right scale)
10-year (right scale)
30-year (left scale)

300
250
200

150

15
10

Apr.
22

5
0

350

Jan.

Apr.

July
2019

Oct.

Jan.

Apr.

July
2020

Oct.

Jan.

Apr.

July
2021

Oct.

Jan.
Apr.
2022

100
50
0

Source: Inter Dealer Broker Community.

Market depth indicates the quantity of an asset available to buy or sell at the best posted bid and ask prices.

For details on past disruptions to U.S. Treasury market functioning and potential market structure reforms that could
help improve resilience, see U.S. Department of the Treasury, Board of Governors of the Federal Reserve System,
Federal Reserve Bank of New York, U.S. Securities and Exchange Commission, and U.S. Commodity Futures Trading
Commission (2021), Recent Disruptions and Potential Reforms in the U.S. Treasury Market: A Staff Progress Report (Washington: Inter-Agency Working Group for Treasury Market Surveillance, November), https://home.treasury.gov/system/
files/136/IAWG-Treasury-Report.pdf.

Financial Stability Report

Box 1.1. Recent Liquidity Strains across U.S. Treasury, Equity
Index Futures, and Oil Futures Markets
Market liquidity—the ease of buying and selling desired quantities of an asset—is an important indicator of how well markets are functioning . According to some measures, market liquidity has declined
since late 2021 in the markets for recently issued U .S . cash Treasury securities and for equity index
futures . These markets play important roles in the functioning of the economy and financial system and
are usually highly liquid . Low liquidity in these markets can amplify price volatility and result in unexpected tightening in financial conditions . In extreme cases, such as the market turmoil at the onset
of the pandemic in March 2020, low liquidity can impair the ability of the financial system to respond
to a large shock because investors may not be able to adjust their holdings of assets to raise cash or
hedge risks, or they may be able to do so only at a substantial cost . While the recent deterioration in
liquidity has not been as extreme as in some past episodes, the risk of a sudden significant deterioration appears higher than normal . In addition, since the Russian invasion of Ukraine, liquidity has been
somewhat strained at times in oil futures markets, while markets for some other affected commodities have been subject to notable dysfunction, as discussed in the box “Commodity Market Stresses
following Russia’s Invasion of Ukraine .”

Different measures capture different dimensions of market liquidity
Trading in the financial markets considered here takes place on electronic central limit order books
(CLOBs) . On a CLOB, market participants can either provide liquidity by posting quotes to buy and sell
securities or consume liquidity by submitting an order to buy or sell at the best available quoted price .
Measures that capture different dimensions of market liquidity in CLOB markets include the bid-ask
spread and quoted depth . The bid-ask spread is the difference between the best “bid” quote to buy an
asset and the best “ask” quote to sell that asset . Smaller bid-ask spreads indicate lower trading costs
and, hence, more liquid markets . Quoted depth is the quantity of an asset available to buy or sell at
the best quoted prices . Greater depth indicates the ability to trade larger amounts without accepting a
worse price and, hence, more liquid markets .1
Liquidity providers bear the risk that the quotes they post become stale and are taken advantage of by
faster traders if the prevailing price moves . This risk is of greater concern when prices become more
volatile . In addition, the risk associated with holding inventories of securities also increases with higher
volatility . Liquidity providers reduce these risks by quoting in lower quantities and possibly also widening bid-ask spreads . Thus, markets tend to be less liquid during periods of higher volatility . In extreme
cases, some liquidity providers may pull back from the market altogether, which can result in very low
depth and wider-than-usual bid-ask spreads .

Market depth has recently deteriorated across a range of markets
Quoted depth has decreased since late 2021 for the interdealer U .S . Treasury securities, S&P 500
E-mini futures, and West Texas Intermediate crude oil futures markets (figure A) . Initially, in Treasury
and equity markets, the decline in depth reﬂected rising uncertainty about the outlook for monetary
policy; in the Treasury market, the decreases in depth were greatest for bonds with shorter maturities
because the prices of those securities are more sensitive to expectations for monetary policy over the
near term . In oil markets, depth has declined particularly sharply in recent months as a result of the
elevated level of uncertainty and volatility associated with the Russian invasion of Ukraine .
(continued)

For a description of other measures of market liquidity, see, among others, the box “What Has Been Happening to the Liquidity
of U .S . Treasury and Equity Futures Markets?” in Board of Governors of the Federal Reserve System (2019), Financial Stability
Report (Washington: Board of Governors, November), pp . 14–16, https://www .federalreserve .gov/publications/files/financialstability-report-20191115 .pdf; and Abdourahmane Sarr and Tonny Lybek (2002), “Measuring Liquidity in Financial Markets,”
IMF Working Paper 02/232 (Washington: International Monetary Fund, December), https://www .imf .org/en/Publications/WP/
Issues/2016/12/30/Measuring-Liquidity-in-Financial-Markets-16211 .

Asset Valuations

Box 1.1.—continued
Figure A. Market depth
Treasury market
120
90

Millions of dollars
Daily

Equity and oil futures market
Millions of dollars
2-year (right scale)
10-year (left scale)
30-year (left scale)

600

60
30

800

400
Apr.
22

200
0

Number of contracts

Daily

Equity (right scale)
Oil (left scale)

300
250

200

150

Apr.
22

50
0

Apr. Oct. Apr. Oct. Apr. Oct. Apr.
2019
2020
2021
2022

100

Apr. Oct. Apr. Oct. Apr. Oct. Apr.
2019
2020
2021
2022

Source: For left panel, Inter Dealer Broker Community; for right panel, Refinitiv, DataScope Tick History .

Recently, depth in these markets has been lower
than is typical even after taking into account the
level of volatility, as shown for the oil market in
figure B . This markedly low depth could indicate
that liquidity providers are being particularly
cautious, and liquidity may be more fragile than
usual . Declining depth at times of rising uncertainty and volatility could result in a negative feedback loop, as lower liquidity in turn may cause
prices to be more volatile .

Bid-ask spreads remain more stable
in the most liquid markets

Figure B. Market depth and volatility in
oil futures

300

Intraday volatility
(percent, annual rate)

200
Since the Russian invasion
Other days

100

0
While depth has been low, quoted bid-ask spreads
75
25
50
100
paint a more mixed picture (figure C) . Average
Market depth (number of contracts)
bid-ask spreads in the most liquid Treasury and
Source: Refinitiv, DataScope Tick History .
equity markets have increased only slightly above
2
their typical levels . These mild increases suggest
that, though liquidity providers have been less
willing to quote in large size, they have replenished quotes sufficiently quickly to meet incoming orders
without exhausting all quotes at the best prices . Depleting the best quotes would have caused bid-ask
spreads to widen until new quotes at narrower spreads were posted subsequently . Moreover, at least
some market participants may have been able to split trades into smaller transaction sizes to avoid
exhausting all the quotes available at the best prices .3

(continued)

Average bid-ask spreads in most of these markets, except for the longest-tenor Treasury securities, are usually only slightly higher
than a single “tick,” the smallest permitted difference between quoted prices . The tick size for the 2-year Treasury note is 1/256
of a dollar per $100 of par value, while that for the 10-year Treasury note and the 30-year Treasury bond is 4/256 of a dollar per
$100 of par value . The tick size for the S&P 500 E-mini futures contract is $0 .25 per index point, and that for the West Texas
Intermediate crude oil futures contract is $0 .01 per barrel .

Electronic trading allows investors to minimize the cost of trading by splitting larger transactions into multiple smaller transaction
amounts, allowing quoted depth to get replenished in between . For example, see Bank for International Settlements, Markets
Committee (2020), FX Execution Algorithms and Market Functioning (Basel, Switzerland: BIS, October), https://www .bis .org/publ/
mktc13 .pdf; and Dhara Ranasinghe and Saikat Chatterjee (2020), “Pandemic Propels Old-School Bond Traders towards an Electronic Future,” Reuters, June 22 .

Financial Stability Report

Box 1.1.—continued
Figure C. Bid-ask spreads
Equity and oil futures market

Treasury market
15

Ticks

Daily

2-year (right scale)
10-year (right scale)
30-year (left scale)

Apr.
22

6
3
0

Apr. Oct.
2019

Apr. Oct.
2020

Apr. Oct. Apr.
2021
2022

Ticks

Daily

5
4

Equity
Oil

Apr.
22

Apr. Oct.
2019

Apr. Oct.
2020

Apr. Oct.
2021

Apr.
2022

Source: For left panel, Inter Dealer Broker Community; for right panel, Refinitiv, DataScope Tick History .

However, bid-ask spreads in some other markets increased more notably before partially falling back,
as illustrated in figure C for oil futures . To shed more light on liquidity provision for oil futures, figure D
shows the 10th and 90th percentiles of bid-ask spreads within each day, along with their average level,
for the period since the beginning of the year . On days of larger variations in spreads (as captured
by a widening of the gray area between the 10th and 90th percentiles), incoming orders more often
exhausted all available quotes at the best prices, causing spreads to widen temporarily until new
quotes at narrower spreads were posted . However, even on those days, there were times during the
day when quoted spreads were fairly tight, and more trading took place at these times .4 These findings
suggest that investors who are capable of timing their trades to when spreads are narrow are able to
(continued)
Figure D. Bid-ask spreads for oil futures
Ticks
Daily

8
7
6

Mean
10th–90th percentile

5
Apr.
22

4
3
2
1

Jan. 4

Jan. 18

Feb. 1

Feb. 15

Mar. 1
2022

Mar. 15

Mar. 29

Apr. 12

Apr. 26

Source: Refinitiv, DataScope Tick History .

For comparison, in March 2020, the intraday variations in quoted bid-ask spreads for recently issued 30-year Treasury bonds
were significantly larger—and spreads were reverting closer to their typical levels much less frequently—than observed during the
current episode in the oil market, suggesting that the deterioration in liquidity provision was more severe during the March 2020
episode . Nonetheless, similar to the current episode, trading volumes were somewhat more concentrated at times when quoted
spreads were narrower, as documented in Dobrislav Dobrev and Andrew Meldrum (2020), “What Do Quoted Spreads Tell Us about
Machine Trading at Times of Market Stress? Evidence from Treasury and FX Markets during the COVID-19-Related Market Turmoil
in March 2020,” FEDS Notes (Washington: Board of Governors of the Federal Reserve System, September 25), https://doi .org/
10 .17016/2380-7172 .2748 .

Asset Valuations

Box 1.1.—continued
avoid large increases in trading costs . Furthermore, market commentary does not point to substantial
difficulties in obtaining quotes in oil markets, and the increases in bid-ask spreads are less extreme
when measured relative to prices .

It is difficult to predict periods of extreme market illiquidity
While recent low depth in the most liquid Treasury and equity markets has not generally been accompanied by extremely high and volatile bid-ask spreads, that situation could change if liquidity providers
were to slow or stop replenishing quotes in response to incoming orders . However, as demonstrated
in two recent episodes of low market depth in August 2019 and March 2020, it is difficult to predict
whether market liquidity would deteriorate in this way . Figure E compares the evolution of quoted depth
and bid-ask spreads for the 10-year Treasury note during these two episodes . The left panel shows that
quoted depth decreased rapidly from late February to early March 2020 . Bid-ask spreads stayed low
and stable until early March but then increased dramatically in mid-March after some liquidity providers
scaled down their market-making activity . In contrast, the right panel shows an episode in August 2019
when a prolonged period of low depth was not followed by heightened bid-ask spreads .5

Figure E. Bid-ask spreads and market depth for the 10-year Treasury note
March 2020 onset of COVID-19 pandemic
220
200
180
160
140
120
100
80
60
40
20
0

Millions of dollars
Daily

August 2019 global growth concerns

Cents per $100 of par value
Bid-ask spreads
(right scale)
Market depth
(left scale)
Apr.
30

1
Feb. 8

Feb. 29

Mar. 21 Apr. 11 May 2
2020
Source: Inter Dealer Broker Community .

220
200
180
160
140
120
100
80
60
40
20
0

Millions of dollars

Cents per $100 of par value

Daily
Bid-ask spreads (right scale)
Market depth (left scale)

Oct.
1

1
July 15

Aug. 5

Aug. 26 Sept. 16
2019

Oct. 7

In conclusion, quoted depth is currently low in Treasury, equity, and oil markets, but there have been
no reports of severe market functioning problems, and the effect on trading costs for many investors
has likely been limited . Thus, the current state of liquidity in these key markets does not appear to be
a substantial barrier to efficient capital allocation and risk management within the economy . However,
the low level of depth means that liquidity provision remains fragile due to heavier reliance on sufficiently rapid quote replenishment to meet trading demands without resulting in sharp price moves . This
dependence on higher-velocity quote replenishment when depth is low could pose an important vulnerability in these markets, as it suggests that there is a higher-than-normal risk that a significant deterioration in liquidity provision could make prices even more volatile and lead to market dysfunction .6

A more comprehensive comparison of Treasury market depth following different episodes of market stress can be found in Alex
Aronovich, Dobrislav Dobrev, and Andrew Meldrum (2021) . “The Treasury Market Flash Event of February 25, 2021,” FEDS Notes
(Washington: Board of Governors of the Federal Reserve System, May 14), https://doi .org/10 .17016/2380-7172 .2909 .

An extreme case of slow quote replenishment could increase the risk of observing large directional price moves and reversals
even on thin trading flows . Episodes such as the sterling flash event on October 7, 2016, further reveal the potential for extreme
events of this kind to have some broader economic effects as noted by Bank for International Settlements, Markets
Committee (2017), The Sterling ‘Flash Event’ of 7 October 2016 (Basel, Switzerland: BIS, January), https://www .bis .org/publ/
mktc09 .pdf .

Financial Stability Report

Corporate bond valuations eased somewhat but remained high
Heightened uncertainty weighed on risk appetite for corporate bonds, increasing their yields considerably more than those on comparable-maturity Treasury securities (figure 1.5).6 Consequently,
corresponding corporate-to-Treasury spreads widened, easing valuation pressures somewhat. Even
so, corporate bond spreads remained low by historical standards, suggesting that valuations continued to be high (figure 1.6).7 The excess bond premium, which is a measure that captures the
gap between corporate bond spreads and expected credit losses, also suggests that investor risk
appetite was high. In March, the premium stood at the bottom decile of its historical distribution
(figure 1.7).8
Figure 1.5. Corporate bond yields
Percent
Monthly
Triple-B
High-yield

Apr.

1997

2002

2007

2012

2017

2022

24
22
20
18
16
14
12
10
8
6
4
2
0

Source: ICE Data Indices, LLC, used with permission.

Figure 1.6. Corporate bond spreads to similar-maturity Treasury securities
12
11
10
9
8
7
6
5
4
3
2
1
0

Percentage points

Monthly
Triple-B (left scale)
High-yield (right scale)

Apr.

1997

2002

2007

2012

2017

2022

24
22
20
18
16
14
12
10
8
6
4
2
0

Source: ICE Data Indices, LLC, used with permission.

For a detailed discussion on risk appetite, see the box “Vulnerabilities from Asset Valuations, Risk Appetite,
and Low Interest Rates” in Board of Governors of the Federal Reserve System (2021), Financial Stability Report
(Washington: Board of Governors, May), pp. 15–18, https://www.federalreserve.gov/publications/files/financial-stabilityreport-20210506.pdf.

Spreads between yields on corporate bonds and comparable-maturity Treasury securities reflect the extra compensation
investors require to hold debt that is subject to corporate default or include a liquidity risk premium.

For a description of the excess bond premium, see Simon Gilchrist and Egon Zakrajšek (2012), “Credit Spreads and
Business Cycle Fluctuations,” American Economic Review, vol. 102 (June), pp. 1692–720.

Asset Valuations

Figure 1.7. Excess bond premium
Percentage points

Monthly

3
2
1
0
−1

Mar.

1997

2002

2007

2012

2017

−2

2022

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.

Reflecting higher interest rates and heightened uncertainty, corporate bond issuance declined in
recent months but generally stayed solid. Meanwhile, the share of new speculative-grade bonds
with the lowest ratings was at low levels by historical standards. In contrast, the share of outstanding bonds with the lowest investment-grade ratings—the so-called triple-B cliff—reached its
highest level in two decades, suggesting that many investment-grade bonds remain vulnerable to
being downgraded to speculative-grade in the event of a negative economic shock.
Risk appetite in the leveraged loan market appeared to have changed little and continued to be
somewhat elevated. Spreads on lower-rated leveraged loans in the secondary market were little
changed and stood at the lower quintile of their historical distribution for the period since the
2008 financial crisis (figure 1.8). Despite a temporary slowdown due to the Russian invasion of
Ukraine, leveraged loan issuance remained solid, on balance, as demand for floating-rate products
stayed strong amid expectations for further rate increases and was supported by elevated risk
appetite. Separately, leveraged loan market benchmark interest rates are transitioning smoothly
from LIBOR to the Secured Overnight Financing Rate (SOFR) (see the box “LIBOR Transition
Update”).
Figure 1.8. Secondary-market spreads of leveraged loans
Percentage points
Monthly/weekly
B
BB

30
25
20
15
10

Apr.
15

1997

2002

2007

Source: S&P Global, Leveraged Commentary & Data.

2012

2017

2022

5
0

Financial Stability Report

Box 1.2. LIBOR Transition Update
There has been a clear shift away from the use of U .S . dollar (USD) LIBOR as a reference rate in financial contracts since the start of the year . This shift is consistent with supervisory guidance issued by
the Federal Reserve and other U .S . and global regulators encouraging banks to stop most new use of
USD LIBOR by the end of 2021 .
The transition away from LIBOR is now largely complete in ﬂoating-rate note markets, where nearly all
new issuance now references SOFR . In securitization markets, Fannie Mae and Freddie Mac stopped
accepting LIBOR adjustable-rate mortgages in 2021, and all associated mortgage-backed securities
(MBS) issuance is now tied to SOFR . Likewise, SOFR is now the dominant benchmark in interest rate
swaps trading between dealers and in cross-currency basis swaps between USD and other major
currencies (figure A) .
The syndicated loan market, which had been slower to move away from LIBOR, shifted almost entirely
to SOFR-referenced products in early 2022 (figure B) . Data on bilateral (nonsyndicated) loans are
less available, but supervisory assessments indicate that most banks have reduced LIBOR lending
(continued)

Figure A. Transition progress in several markets is near completion
Percent of new issuance volume referencing SOFR
Monthly

100
90
80
70
60
50
40
30
20
10
0

FRNs
Agency ARMs
Cross-currency basis
swap volumes

Sept.

Dec.

Mar.

2020

June
2021

Sept.

Dec.

Mar.
2022

Source: Black Knight, Inc .—eMBS, Clarus Perspective .

Figure B. Syndicated lending
Billions of dollars
Monthly
LIBOR
SOFR

200
150
100
50

Sept. 2021

Oct. 2021

Nov. 2021

Dec. 2021

Jan. 2022

Source: S&P Global, Leveraged Commentary & Data; Refinitiv LPC DealScan .

Feb. 2022

Mar. 2022

Asset Valuations

Box 1.2.—continued
sharply since the start of the year, with most loans now referencing SOFR . There appears to be only
limited lending activity based on credit-sensitive alternatives to SOFR . Hedging opportunities for those
rates also appear to be limited; while futures markets and swaps clearing have developed on some
credit-sensitive rates, activity has thus far remained negligible .
Despite this progress, there are still some specific areas in which USD LIBOR use has continued, most
notably in exchange-traded futures and options markets, where supervised entities play a less significant role . While SOFR futures have grown noticeably over the past several months, LIBOR has still
accounted for a substantial proportion of interest rate futures trading . Because futures markets play
an important role in helping end users hedge their risks, which are now associated with SOFR, it will be
important to see continued progress away from LIBOR over this year .
The start of the year marked the end of publication of two little-used USD LIBOR tenors (the one-week
and two-month USD LIBOR rates) as well as all tenors of Swiss franc and euro LIBOR . Several tenors
of sterling and yen LIBOR also ended, while some other tenors continued to be published as nonrepresentative “synthetic” rates that are now based on spread-adjusted risk-free rates rather than on
polls of banks . The transition from all four of the non-USD LIBOR currencies went smoothly as a result
of extensive preparations .
With most new use of USD LIBOR now at an end, attention has turned toward addressing the risks
in legacy contracts . While the one-week and two-month USD LIBOR rates were little used, there are
substantial legacy positions in the remaining overnight, one-month, three-month, six-month, and oneyear USD LIBOR tenors, which will cease to be published as panel-based, representative rates after
June 30, 2023 . In March 2021, the Alternative Reference Rates Committee estimated outstanding
legacy USD LIBOR exposures at roughly $223 trillion . Approximately $74 trillion of these legacy contracts are set to mature beyond the critical date of June 2023, and some of those contracts lack adequate fallback language .
In March, the Congress passed, and President Biden signed into law, new statutory provisions that
address LIBOR contracts that do not have adequate fallback language . The legislation marked an
important step in helping ensure that these legacy contracts can smoothly transition away from LIBOR .
The law requires the Federal Reserve Board to issue rules to designate spread-adjusted, SOFR-based
fallbacks for such contracts .

Financial Stability Report

Broad equity prices were highly volatile and declined notably on net
Amid increasing interest rates and news on both the Omicron variant and the Russian invasion
of Ukraine, broad equity prices fluctuated widely and declined notably, on net, since the November 2021 Financial Stability Report. While the effect of high inflation and the Russia–Ukraine
conflict on corporate earnings remained uncertain, earnings forecasts of private-sector analysts
were revised a bit higher. Consequently, prices relative to earnings forecasts declined somewhat
from previously very elevated levels but were still in the top quintile of their historical distribution,
suggesting that valuations eased slightly (figure 1.9). Meanwhile, the difference between the forward earnings-to-price ratio and the expected
real yield on 10-year Treasury securities—a

Figure 1.9. Forward price-to-earnings ratio of
S&P 500 firms
Ratio
Monthly

Apr.

Median

rough measure of the extra compensation
that investors require for holding stocks rel-

30
27

ative to risk-free bonds, known as the equity

premium—declined moderately (figure 1.10).

Option-implied volatility increased significantly

18
15

before reversing part of the run-up to still-

elevated levels (figure 1.11). Consistent with

9
1990 1994 1998 2002 2006 2010 2014 2018 2022

the large price fluctuations and the uncertainty

over the outlook for corporate profitability, the
pace of initial public offerings declined and

Source: Federal Reserve Board staff calculations
using Refinitiv, Institutional Brokers’ Estimate System
estimates.

was low compared with historical standards.

Figure 1.10. Spread of forward earnings-to-price ratio of S&P 500 firms to expected 10-year real
Treasury yield
Percentage points
Monthly

10
8

Apr.
Median

6
4
2
0

1992

1997

2002

2007

2012

2017

2022

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.

−2

Asset Valuations

Figure 1.11. S&P 500 return volatility
Percent
Monthly

Option-implied volatility
Realized volatility

80
70
60
50
40
30
20

Apr.

1997

2002

2007

2012

2017

10
0

2022

Source: Refinitiv, DataScope Tick History; Federal Reserve Board staff estimates.

Commercial real estate valuations remained somewhat on the
high side
Since the November Financial Stability Report, aggregate CRE price indexes continued to increase,
driven by the multifamily and industrial sectors (figure 1.12). Capitalization rates at the time of
property purchase, which measure the annual income of commercial properties relative to their
prices, continued to decline and were at historical lows in February (figure 1.13). However, the
spreads of capitalization rates to real Treasury yields—which provide a measure of risk appetite in
this market—were little changed through February, remaining near their historical averages. Valuations in some segments of the CRE markets reflected weaker fundamentals compared with other
segments. For example, vacancy rates and increases in asking rents were weaker in the retail
and office sectors, and capitalization rates for those property types remained higher than those
for other property types. Meanwhile, in the January Senior Loan Officer Opinion Survey on Bank

Figure 1.12. Commercial real estate
prices (real)

Figure 1.13. Capitalization rate at property
purchase

Jan. 2001 = 100
Monthly
Equalweighted
Valueweighted

Jan.

200
180

Percent
Monthly

160
140
120
100
80

Feb.

60
1997

2002

2007

2012

2017

2022

Source: CoStar Group, Inc., CoStar Commercial
Repeat Sale Indices; Bureau of Labor Statistics,
consumer price index via Haver Analytics.

2002

2006

2010

2014

2018

2022

10.0
9.5
9.0
8.5
8.0
7.5
7.0
6.5
6.0
5.5
5.0

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.

Financial Stability Report

Lending Practices (SLOOS), banks reported stronger demand for CRE loans and easier lending
standards for the last quarter of 2021, largely reflecting strengthening fundamentals (figure 1.14).
Considering all these factors, CRE valuations appeared somewhat on the high side across property types.

Figure 1.14. Change in bank standards for commercial real estate loans
Net percentage of banks reporting
Tightening

Quarterly

Easing

1997

2001

2005

2009

2013

2017

2021

100
80
60
40
20
0
−20
−40
−60
−80
−100

Source: Federal Reserve Board, Senior Loan Officer Opinion Survey on Bank Lending Practices; Federal Reserve Board
staff calculations.

Farmland prices relative to rents remained elevated
Farmland prices were at high levels, and the ratios of farmland prices to rents remained close to
their historical highs (figures 1.15 and 1.16). Nevertheless, recent price increases in commodity
markets suggest that the outlook for farm income was strong, on balance, as the positive effects
of a substantial rise in prices of agricultural commodities, such as wheat and corn, appeared to
outweigh the negative effects of higher prices for inputs, like fuel and fertilizers.

Figure 1.15. Farmland prices

Figure 1.16. Farmland price-to-rent ratios

2020 dollars per acre
Annual

Midwest index
United States

7000

Ratio
Annual

6000

Midwest index
United States

5000

4000
Median

3000

Median

2000
1971

1981

1991

2001

2011

2021

1000

Source: Department of Agriculture; Federal Reserve
Bank of Minneapolis staff calculations.

1971

1981

1991

2001

2011

2021

Source: Department of Agriculture; Federal Reserve
Bank of Minneapolis staff calculations.

Asset Valuations

House prices continued to increase at a rapid pace, and price-to-rent
ratios remained high relative to historical levels
House prices continued to increase at a rapid pace, which may reflect strong demand for
housing space as people continued to spend more time at home, as well as constraints on supply
(figure 1.17). Nationwide, house price-to-rent ratios increased further and stood slightly above the
peak of the mid-2000s. A model of house price valuation also points to stretched valuations
(figure 1.18). However, house valuations do not seem as stretched if valuation measures incorporate market-based measures of rents. For example, using the latest asking rents that tenants
would pay when current leases expire and are renewed, house valuations appeared to be well
below their peak of the mid-2000s. House price increases were widespread across regions
and property types, and price-to-rent ratios also increased noticeably across regional markets
(figure 1.19). Loan-to-value ratios and debt-to-income ratios were stable in recent years, suggesting that there is little evidence to date that recent house price increases were driven by a surge in
speculative activity, an erosion in mortgage underwriting standards, or increased use of highleverage loan products.
Figure 1.17. Growth of nominal prices of
existing homes

Figure 1.18. House price valuation measure
Percent

12-month percent change
Monthly

Zillow
CoreLogic
Case-Shiller

2004 2007 2010 2013 2016 2019 2022

25
20
15
10
5
0
−5
−10
−15
−20
−25

Source: CoreLogic Real Estate Data; Zillow, Inc.,
Zillow Real Estate Data; S&P Case-Shiller Home Price
Indices.

Quarterly
Q1

40
30
20
10
0
−10

1982

1992

2002

2012

2022

−20

Source: For house prices, Zillow, Inc., Zillow Real
Estate Data; for rent data, Bureau of Labor Statistics.

Figure 1.19. Selected local housing price-to-rent ratio indexes
Jan. 2010 = 100
Monthly
Phoenix
Miami
Los Angeles
Median
Middle 80 percent
of markets

1997

Mar.

2002

2007

2012

2017

Source: For house prices, Zillow, Inc., Zillow Real Estate Data; for rent data, Bureau of Labor Statistics.

2022

240
220
200
180
160
140
120
100
80
60
40

Financial Stability Report

Hence, a negative shock to house prices may hurt homeowners, but such a shock is unlikely
to be amplified by the financial system. Credit availability for borrowers with lower credit scores
improved slowly but remained below pre-pandemic levels. After staying at extremely low levels for
most of the pandemic period, the number of foreclosure starts rose following the expiration of
federal foreclosure protections at the end of 2021, returning to roughly their pre-pandemic levels.

Borrowing by Businesses and
Households

Vulnerabilities from business and household debt are moderate
Key indicators of vulnerabilities arising from business debt, including debt-to-GDP ratio and gross
leverage, largely returned to near or below pre-pandemic levels, and median interest coverage
ratios improved, reaching their highest level over the past two decades in the second half of 2021.
Indicators of household vulnerabilities—including the household-credit-to-GDP ratio as well as
mortgage, auto, and credit card delinquencies—were in the bottom range of the levels observed
over the past 20 years. Nonetheless, rising inflation, increasing borrowing costs, and ongoing geopolitical tensions pose risks to the economic outlook, particularly for businesses that were most
affected by the pandemic and for households that face the expiration of federal support programs.
These segments of businesses and households might be more vulnerable to adverse shocks.
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 fourth quarter of 2021. Total outstanding private credit was split about evenly between businesses and households, with businesses
owing $18.5 trillion and households owing $17.9 trillion.

The ratio of business and household debt to gross domestic product
continued to decline
Although the combined total debt of nonfinancial businesses and households grew throughout
2021, the debt-to-GDP ratio further declined from its pandemic highs because of the rapid pace of
nominal GDP growth (figure 2.1). Regarding the individual sectors, the ratios of both business and
household debt-to-GDP decreased in the second half of 2021 (figure 2.2).

Key indicators point to a reduction in business debt vulnerabilities,
but balance sheet leverage remains high in some sectors
Overall, business debt vulnerabilities continued to decrease, even as business debt adjusted for
inflation grew modestly in the second half of 2021, driven by robust commercial and industrial
(C&I) loan origination volumes (figure 2.3). A number of factors were moderating vulnerabilities in
the business sector during this period. Firms continued to maintain large cash buffers, as strong
earnings offset a faster pace of share repurchases and increased capital outlays. Moreover, low
interest rates continued to mitigate investor concerns about default risk arising from high leverage. The net issuance of high-yield bonds declined, while the net issuance of institutional leveraged loans remained strong as investors continued to demand floating-rate products amid expectations of rate increases. On net, issuance of total risky business debt—high-yield bonds and
institutional leveraged loans—declined since the November report (figure 2.4).

Financial Stability Report

Table 2.1. Outstanding amounts of nonfinancial business and household credit
Outstanding
(billions of dollars)

Growth,
2020:Q4–2021:Q4
(percent)

Average annual growth,
1997–2021:Q4
(percent)

Total private nonfinancial credit

36,474

5.9

5.6

Total nonfinancial business credit

18,541

4.5

5.8

11,650

5.1

5.2

Bonds and commercial paper

7,390

2.5

5.7

Bank lending

1,533

1.8

3.0

Leveraged loans*

1,248

11.7

14.2

Noncorporate business credit

6,891

3.6

7.2

Commercial real estate credit

2,820

7.3

6.2

Total household credit

17,933

7.3

5.4

Mortgages

11,743

7.6

5.5

Consumer credit

4,434

6.0

5.1

Student loans

1,749

2.7

8.5

Auto loans

1,314

7.3

5.0

Credit cards

1,043

7.0

3.1

24,008

11.3

4.3

Item

Corporate business credit

Nominal GDP

Note: The data extend through 2021:Q4. Outstanding amounts are in nominal terms. Average annual growth rates are measured from Q4 of
the year immediately preceding the period through Q4 of the final year of the period. The table reports the main components of corporate business credit, total household credit, and consumer credit. Other, smaller components are not reported. The commercial real estate (CRE) row
shows CRE debt owed by both corporate and noncorporate businesses. The total household-sector credit includes debt owed by other entities,
such as nonprofit organizations. GDP is gross domestic product.
* Leveraged loans included in this table are an estimate of the leveraged loans that are made to nonfinancial businesses only and do not
include the small amount of leveraged loans outstanding for financial businesses. The amount outstanding shows institutional leveraged loans
and generally excludes loan commitments held by banks. For example, lines of credit are generally excluded from this measure. The average
annual growth rate shown for leveraged loans is computed from 2000 to 2021:Q4, as this market was fairly small before 2000.
Source: For leveraged loans, S&P Global, Leveraged Commentary & Data; for GDP, Bureau of Economic Analysis, national income and product
accounts; for all other items, Federal Reserve Board, Statistical Release Z.1, “Financial Accounts of the United States.”

Figure 2.1. Private nonfinancial-sector credit-to-GDP ratio
Ratio
Quarterly

2.0
1.7

1.4
1.1

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

2012

2015

2018

2021

0.8

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

Figure 2.2. Nonfinancial business- and household-sector credit-to-GDP ratios
1.1

Ratio

Ratio
Quarterly

1.0

1.0
0.9

0.9

0.8

0.8
0.7

0.6

Nonﬁnancial business
(right scale)
Household (left scale)

0.5
0.4
0.3

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

2012

2015

0.7

0.5

2018

2021

0.4

Figure 2.3. Growth of real aggregate debt of the business sector
Percent change, annual rate
Quarterly

20
15
10

5
0
−5

1997

2003

2009

2015

2021

−10

Source: Federal Reserve Board, Statistical Release Z.1, “Financial Accounts of the United States.”

Figure 2.4. Net issuance of risky business debt
Billions of dollars
Quarterly

Institutional leveraged loans
High-yield and unrated bonds
Q1

2004

2007

2010

2013

2016

2019

Source: Mergent, Fixed Income Securities Database; S&P Global, Leveraged Commentary & Data.

2022

120
100
80
60
40
20
0
−20
−40
−60

Financial Stability Report

Gross leverage of large businesses—the

Figure 2.5. Gross balance sheet leverage of
public nonfinancial businesses
Percent
Quarterly

75th percentile
All ﬁrms

ratio of debt to assets for all publicly traded
nonfinancial firms—declined to somewhat
55
50
45

2000 2003 2006 2009 2012 2015 2018 2021

below pre-pandemic levels in the second half
of 2021 (figure 2.5). This measure, however,
remained at record-high levels for large firms

in industries most affected by the pandemic,

such as airlines, hospitality and leisure, and

restaurants. The share of total nonfinancial

public firm debt owed by these industries
stood at 5.6 percent. Over the same period,

Source: Federal Reserve Board staff calculations
based on S&P Global, Compustat.

net leverage—the ratio of debt less cash
to total assets—held stable at below prepandemic levels among all large businesses,

Figure 2.6. Interest coverage ratios for public
nonfinancial businesses
Ratio
Quarterly
Median
25th percentile

2000 2003 2006 2009 2012 2015 2018 2021
Source: Federal Reserve Board staff calculations
based on S&P Global, Compustat.

supported by ample cash holdings, but
remained high relative to its history. Similarly,
8

although net leverage in hard-hit industries

edged up in the second half of 2021, it contin-

ued to remain below pre-pandemic levels.

As earnings among large firms continued to

increase and interest rates remained low,

−2

the ratio of earnings to interest expenses

−4

(the interest coverage ratio) continued to rise
during the second half of 2021, indicating
that large firms were better able to service
debt. The median interest coverage ratio
reached its highest level in the past two

decades (figure 2.6). Nevertheless, the effect of high inflation, rising interest rates, supply chain
disruptions, and the ongoing geopolitical conflict on corporate profitability is uncertain. A significant decline in corporate profitability or an unexpectedly large increase in interest rates could
curtail the ability of some firms to service their debt. In addition, the upward pressure on oil
prices, if sustained, could curb the recovery in hard-hit industries such as airlines. (See the box
“Commodity Market Stresses following Russia’s Invasion of Ukraine.”)
An important caveat to the noted improvements in leverage and interest coverage ratios is that
comprehensive data are only available for publicly traded firms.9 These firms tend to be large and

It is important to note, however, that the credit aggregates shown in figures 2.1, 2.2, and 2.3 include debt of both public
and private firms.

Borrowing by Businesses and Households

have better access to capital markets, which allowed them to more easily weather disruptions,
such as those associated with the pandemic. By contrast, smaller firms that are privately held
tend to have higher leverage than public firms and to primarily borrow from banks, private credit
and equity funds, and sophisticated investors.
Since the November report, the credit quality of outstanding corporate bonds remained largely
unchanged at a strong level, in part because of high corporate profitability. The volume of credit
rating upgrades continued to outpace that of downgrades. The fraction of nonfinancial corporate
bonds with speculative-grade ratings—the higher-risk segment of the market—was little changed
in the last quarter of 2021. Expected one-year-ahead bond defaults remained low, well below their
long-run medians.
After falling sharply in 2021, default rates on leveraged loans stabilized below pre-pandemic levels
as of March 2022, even as underwriting standards for newly issued loans weakened (figure 2.7).
For instance, the share of newly issued loans to large corporations with high leverage—defined as
those with ratios of debt to earnings before interest, taxes, depreciation, and amortization greater
than 6—exceeded historical highs (figure 2.8).

Figure 2.7. Default rates of leveraged loans
Percent
Monthly

14
12
10
8
6
4

Mar.

2
0

2001

2004

2007

2010

2013

2016

2019

2022

−2

Source: S&P Global, Leveraged Commentary & Data.

Figure 2.8. Distribution of large institutional leveraged loan volumes, by debt-to-EBITDA ratio
Percent
Debt multiples ≥ 6x
Debt multiples 5x–5.99x
Debt multiples 4x–4.99x
Debt multiples < 4x

100
80
60
40
20

2001

2004

2007

2010

2013

2016

2019

Source: Mergent, Fixed Income Securities Database; S&P Global, Leveraged Commentary & Data.

2022

Financial Stability Report

Many small businesses could be adversely affected by rising costs
Credit quality for small businesses continued to improve, with short- and long-term delinquencies
declining below their pre-pandemic levels. Moreover, data from the April 2022 Census Bureau
Small Business Pulse Survey showed that the share of small businesses with at least three
months of cash on hand, relative to expenses, remains near its pandemic-era high. However,
increasing labor costs and prices for other inputs may reduce small firms’ earnings and their ability to service their loans.

Vulnerabilities from household debt remained moderate
The financial position of many households continued to improve since the previous Financial
Stability Report, supported in part by a strong labor market, high personal savings, remaining
pandemic relief programs, and rising house prices. Still, some households remained financially
strained and more vulnerable to future shocks, especially with the expiration of loan forbearance
and persistently high inflation.

Borrowing by households continued to rise in line with income and is
concentrated among borrowers with low credit risk
Borrowers with prime credit scores (more

Figure 2.9. Total household loan balances
Trillions of dollars (real)
Quarterly

than half of the total number of borrowers)
12

accounted for all the increase in total house-

hold debt in real terms, including gains in

8
Q4

Prime
Near prime

4
2

Subprime

2001

2005

2009

2013

2017

2021

mortgage and credit card debt. By contrast,
loan balances for borrowers with near-prime
and subprime scores stayed roughly stable
(figure 2.9). However, subprime debt balances
may increase with the expiration of loan forbearance programs.10

Source: Federal Reserve Bank of New York Consumer
Credit Panel/Equifax; Bureau of Labor Statistics,
consumer price index via Haver Analytics.

Credit risk of outstanding household debt remained generally low
Mortgage debt accounted for roughly two-thirds of total household debt, with new mortgage extensions skewed toward prime borrowers in recent years (figure 2.10). Mortgage forbearance programs helped significantly reduce the effect of the pandemic on mortgage delinquencies
(figure 2.11). The share of mortgages that were either delinquent or in a loss-mitigation program,

Households may have been able to use the liquidity afforded by the forbearance programs to avoid borrowing more.
Once that flexibility expires, these households may borrow more to finance their consumption.

Borrowing by Businesses and Households

Figure 2.10. Estimates of new mortgage volumes to households
Billions of dollars (real)
Annual

Subprime
Near prime
Prime

1600
1200
800
400

2000

2003

2006

2009

2012

2015

2018

2021

Source: Federal Reserve Bank of New York Consumer Credit Panel/Equifax; Bureau of Labor Statistics, consumer price
index via Haver Analytics.

Figure 2.11. Mortgage loss mitigation and delinquency
Percent of mortgages
Quarterly

10
8
6
4

Delinquent
Delinquent/loss mitigation

2001

2005

2009

2013

2017

2021

Source: Federal Reserve Bank of New York Consumer Credit Panel/Equifax.

including forbearance, fell to slightly above
4 percent in December 2021, below pre-

Figure 2.12. Estimate of mortgages with
negative equity

pandemic levels. Forbearance for mortgages
continued to wind down, but about 800,000

Percent of mortgages
Monthly

borrowers, representing about 1.5 percent of
20

all mortgaged properties, were still in forbearance plans as of January 2022. The recent

robust house price increases put many borrowers in a solid equity position (figure 2.12).
Unlike in the years before the Great Recession,
borrower leverage did not increase relative
to home values, even when measuring home
values as a function of rents and other market
fundamentals (figure 2.13).

Dec.

2011

2013

2015

2017

2019

Source: CoreLogic, Inc., Real Estate Data.

2021

Financial Stability Report

Figure 2.13. Estimates of housing leverage
1999:Q1 = 100
Quarterly

Relative to model-implied values
Relative to market value

180
160
140

120
100
80

2001

2005

2009

2013

2017

2021

Source: Federal Reserve Bank of New York Consumer Credit Panel/Equifax; Zillow, Inc., Zillow Real Estate Data; Bureau
of Labor Statistics via Haver Analytics.

Most of the remaining one-third of household

Figure 2.14. Consumer credit balances
Billions of dollars (real)
Quarterly
Student loans

Credit cards
Auto loans

2001

2005

2009

2013

2017

2021

debt was consumer credit, which consisted
2000
1800
1600
1400
1200
1000
800
600
400
200

primarily of student loans, auto loans, and
credit card debt (table 2.1). Inflationadjusted consumer credit edged down in
2021, as student debt declined, auto debt
was flat, and credit card debt increased
slightly in real terms (figure 2.14). Auto
loan balances expanded moderately, on
net, among borrowers with near-prime credit

Source: Federal Reserve Bank of New York Consumer
Credit Panel/Equifax; Bureau of Labor Statistics,
consumer price index via Haver Analytics.

scores and contracted slightly among prime
borrowers (figure 2.15). The share of auto
loans that were either delinquent or in loss
mitigation remained around 3.5 percent in

Figure 2.15. Auto loan balances
Billions of dollars (real)
Quarterly
Q4
Prime

Near prime

Subprime

2001

2005

2009

2013

2017

750
700
650
600
550
500
450
400
350
300
250
200
150

2021

Source: Federal Reserve Bank of New York Consumer Credit Panel/Equifax; Bureau of Labor Statistics, consumer price
index via Haver Analytics.

Borrowing by Businesses and Households

December 2021, with outright delinquency
rates rising above 2 percent but remaining low

Figure 2.16. Auto loss mitigation and
delinquency

by historical standards (figure 2.16).

Percent
Quarterly

Aggregate real student loan balances con-

10
8

Delinquent
Delinquent/loss mitigation

tinued to decline in the second half of 2021

(figure 2.14). The risk that student loan debt
poses to the financial system appears lim-

4
Q4

ited because most of the loans were issued

through government programs and are owed
by households in the top 40 percent of the

2001

income distribution. However, some borrowers
may be adversely affected by the scheduled

2005

2009

2013

2017

2021

Source: Federal Reserve Bank of New York Consumer
Credit Panel/Equifax.

expiration of forbearance relief programs in
August 2022.
In the last quarter of 2021, consumer credit card balances increased slightly from the low levels
reached following the pandemic (figure 2.17). Delinquency rates were roughly flat for borrowers
with prime scores and ticked up slightly for near-prime and subprime borrowers in the fourth
quarter of 2021 (figure 2.18). Although credit card delinquencies for subprime and near-prime
borrowers remained far below pre-pandemic levels, they may be adversely affected by increasing
interest rates.

Figure 2.18. Credit card delinquency rates

Figure 2.17. Credit card balances
Billions of dollars (real)
Quarterly
Prime

550

Percent
Quarterly

450
Q4

Near prime

25
Subprime

15
10
Near prime

150
2001

2005

350
250

Subprime

2009

2013

2017

2021

Source: Federal Reserve Bank of New York Consumer
Credit Panel/Equifax; Bureau of Labor Statistics,
consumer price index via Haver Analytics.

2001

2005

2009

5
0

Prime

2013

2017

2021

Source: Federal Reserve Bank of New York Consumer
Credit Panel/Equifax.

Leverage in the Financial Sector

Leverage remained low at banks and broker-dealers but high at life
insurance companies and somewhat elevated at hedge funds
The banking sector continued to be well capitalized, but banks have a large share of long-duration
assets that are exposed to rising interest rates. Leverage at broker-dealers and at property and
casualty (P&C) insurers remained at historically low levels. Leverage continued to be high at life
insurance companies, and the most comprehensive available measures of hedge fund leverage
remained somewhat above their historical averages. However, comprehensive measures of hedge
fund leverage are only available with a considerable lag, and the sector is difficult to monitor in
real time. Issuance volumes of non-agency securitized products reached new post-2008 highs, and
bank lending to nonbank financial institutions (NBFIs) continued to grow rapidly. Direct exposures
of U.S. financial institutions to Russia were small, but the ongoing geopolitical tensions could
affect the U.S. financial sector through indirect channels.
Table 3.1 shows the sizes and growth rates of the types of financial institutions discussed in this
section.
Table 3.1. Size of selected sectors of the financial system, by types of institutions and vehicles
Total assets
(billions of dollars)

Growth,
2020:Q4–2021:Q4
(percent)

Average annual growth,
1997–2021:Q4
(percent)

Banks and credit unions

25,606

9.2

6.3

Mutual funds

22,209

13.5

10.1

Insurance companies

12,896

4.9

6.1

Life

9,785

3.9

6.2

Property and casualty

3,111

8.1

5.8

Hedge funds*

9,591

18.2

10.1

Broker-dealers**

5,160

8.9

5.2

12,016

6.4

5.5

10,646

5.8

5.9

1,370

11.8

3.5

Item

Outstanding
(billions of dollars)
Securitization
Agency
Non-agency***

Note: The data extend through 2021:Q4. Outstanding amounts are in nominal terms. Average annual growth rates are measured from Q4 of
the year immediately preceding the period through Q4 of the final year of the period. Life insurance companies’ assets include both general and
separate account assets.
* Hedge fund data start in 2012:Q4 and are updated through 2021:Q3. Growth rates for the hedge fund data are measured from Q3 of the
year immediately preceding the period through Q3 of 2021.
** Broker-dealer assets are calculated as unnetted values.
*** Non-agency securitization excludes securitized credit held on balance sheets of banks and finance companies.
Source: Federal Reserve Board, Statistical Release Z.1, “Financial Accounts of the United States”; Federal Reserve Board, “Enhanced Financial
Accounts of the United States.”

Financial Stability Report

Banks remained well capitalized
The common equity Tier 1 ratio (CET1)—a regulatory risk-based measure of bank capital
adequacy—remained at high levels relative to pre-2008 norms. In the second half of last year, this

ratio was unchanged at U.S. global systemically important banks (G-SIBs) and declined somewhat
for other large banks because of a general increase in bank lending (figure 3.1). In the first quarter
of 2022, CET1 ratios decreased at G-SIBs, as heightened market volatility caused risk-weighted
assets to rise. The ratio of tangible equity to total assets—a measure of bank capital adequacy
that does not account for the riskiness of credit exposures and excludes intangible items such as
goodwill from capital—continued to trend down in the second half of 2021 due to growth in lowrisk assets, funded by inflows of core deposits (figure 3.2). Bank profitability declined somewhat
in the first quarter of 2022 as banks increased loan loss provisions amid higher uncertainty about
the economic outlook, but banks continue to report that rising interest rates will support their
profitability going forward.
Measures of credit quality for most loan portfolios continued to improve during the second half of
2021. The outstanding amounts of bank loans to firms that experienced credit rating upgrades
Figure 3.1. Common equity Tier 1 ratio of banks
Percent of risk-weighted assets
Q4

Quarterly

14
12

G-SIBs—
Preliminary
Q1

G-SIBs
Large non–G-SIBs
Other BHCs

10
8
6
4
2

2001

2004

2007

2010

2013

2016

2019

2022

Source: Federal Reserve Board, Form FR Y-9C, Consolidated Financial Statements for Holding Companies.

Figure 3.2. Ratio of tangible bank equity to assets
Percent of total assets
Quarterly

12
10

8
6

G-SIBs
Large non–G-SIBs
Other BHCs

1985

1991

1997

2003

2009

2015

4
2
2021

Source: Federal Financial Institutions Examination Council, Call Report Form FFIEC 031, Consolidated Reports of
Condition and Income (Call Report).

Leverage in the Financial Sector

outpaced those that experienced credit rating
downgrades. The leverage of firms with out-

Figure 3.3. Borrower leverage for bank
commercial and industrial loans

standing loans at large banks declined during

Debt as percent of assets

the same period but remained somewhat

Quarterly

elevated relative to the levels observed since

2013 (figure 3.3). Delinquency rates on most

loans to businesses and households that
are held by banks continued to decline, but

the CRE sector, remained elevated.
The October 2021 and January 2022 SLOOS

30
28

Non-publicly-traded ﬁrms
Publicly traded ﬁrms

delinquency rates on C&I loans to COVID-19affected industries, and in certain segments of

2013

2015

2017

2019

26
24

2021

Source: Federal Reserve Board, Form FR Y-14Q
(Schedule H.1), Capital Assessments and Stress
Testing.

indicated that banks continued to ease lending standards on most types of loans in the
second half of 2021, albeit at a slower pace

Figure 3.4. Change in bank lending standards
for commercial and industrial loans

than in the first half of the year (figure 3.4).11

Net percentage of banks reporting

indicate that the continued easing of lending
standards for bank credit has led to a broad-

Tightening

To date, available measures do not seem to

based increase in risk-taking by banks. In
questions in the January 2022 SLOOS, banks

Easing

response to a set of special forward-looking

Quarterly

reported expecting an improvement in the
quality of most business loans and a deterioration in the quality of household loans in their
portfolio over 2022.

1997 2001 2005 2009 2013 2017 2021

100
80
60
40
20
0
−20
−40
−60
−80
−100

Source: Federal Reserve Board, Senior Loan Officer
Opinion Survey on Bank Lending Practices; Federal
Reserve Board staff calculations.

Vulnerabilities of U.S. banks to the Russian invasion of Ukraine appear to be limited. Before the
invasion, banks maintained relatively small footprints in Russia and Ukraine, and their outstanding loans to borrowers in those countries were small. Exposures of large banks to counterparties
that are active in commodity markets increased markedly, but banks appear to have managed
risks amid the extremely high volatility seen in these markets since the beginning of the invasion.
However, several indirect channels could pose risks for U.S. banks, including heightened volatility
in asset markets; disruptions in payment, clearing, and settlement systems due to sanctions; and
interconnections with large European banks, which could be adversely affected through the effect
of the conflict on the European economy, as discussed in the Near-Term Risks to the Financial
System section.

The survey is available on the Federal Reserve Board’s website at https://www.federalreserve.gov/data/sloos.htm.

Financial Stability Report

Leverage at broker-dealers stayed at historically low levels . . .
Broker-dealer leverage was little changed in

Figure 3.5. Leverage at broker-dealers

the second half of 2021 and remained near

Ratio of assets to equity
Quarterly

50
40

historically low levels (figure 3.5). Net secured
borrowing by primary dealers and their net
securities positions decreased modestly over

the same period. Gross secured borrowing

and lending—a measure of funding interme-

diation activity by dealers—stayed largely

1997 2001 2005 2009 2013 2017 2021
Source: Federal Reserve Board, Statistical
Release Z.1, “Financial Accounts of the United States.”

unchanged, but secured financing backed by
equity collateral remains near historical highs.
Measures of dealer balance sheet costs continued to lie in the lower range of their distributions over the past few years, and dealers’
trading revenues remained strong.

In the March 2022 Senior Credit Officer Opinion Survey on Dealer Financing Terms (SCOOS), which
covered the period between December 2021 and February 2022, dealers reported little change
in the use of leverage and in the terms associated with securities financing and over-the-counter
(OTC) derivatives transactions.12 In response to a set of special questions about the potential
effects of rising interest rates, nearly one-half of dealers expect somewhat increased demand for
funding from some hedge funds and insurance companies if interest rates across all maturities
increase by a similar amount. These responses suggest that if dealers are unable to meet the
increased demand for funding, rising interest rates could lead to a deterioration of market liquidity.

. . . but leverage at life insurance companies remained high . . .
Leverage at life insurers remained near its highest level of the past two decades (figure 3.6). Life
insurers continued to invest heavily in corporate bonds, collateralized loan obligations (CLOs),
and CRE debt, which leaves their capital positions vulnerable to sudden drops in the value of
these risky assets. Gradually rising interest rates improve the profitability outlook of life insurers,
as their liabilities generally have longer effective durations than their assets, and higher interest
rates may reduce life insurers’ incentives to invest in riskier assets. However, a large and unexpected increase in interest rates could induce policyholders to surrender their contracts at a
higher-than-expected rate. If the increase in surrenders is substantial enough, it could put downward pressure on life insurers’ financial performance.

The survey is available on the Federal Reserve Board’s website at https://www.federalreserve.gov/data/scoos.htm.

Leverage in the Financial Sector

Figure 3.6. Leverage at insurance companies
Ratio of assets to equity
Quarterly

Life
Property and casualty

12
9
Q4

6
3

2000

2003

2006

2009

2012

2015

2018

2021

Source: Generally accepted accounting principles data from 10-Q and 10-K filings accessed via S&P Global,
Capital IQ Pro.

Meanwhile, leverage at P&C insurers remained low relative to historical levels, and vulnerabilities
in the insurance sector arising from direct exposures to Russian-domiciled firms and indirect exposures through European banks appeared limited.

. . . and hedge fund leverage continued to be somewhat elevated
In response to the March 2022 SCOOS—the most recent source of information on hedge fund
leverage—dealers reported little change in hedge funds’ use of leverage over the previous three
months (figure 3.7). More comprehensive measures, based on confidential data collected by the
Securities and Exchange Commission (SEC), suggest that in the third quarter of 2021, on-balancesheet leverage increased modestly to a level above its historical average, while gross leverage,
which includes off-balance-sheet derivatives exposures, remained elevated (figure 3.8). Because
these measures are only available with a significant lag, real-time monitoring of hedge fund leverage is difficult.

Figure 3.7. Change in the use of financial leverage
Net percentage
Quarterly

60
40

20
0
−20

Hedge funds
Trading REITs

Insurance companies
Mutual funds

−40
−60

2012

2014

2016

2018

2020

Source: Federal Reserve Board, Senior Credit Officer Opinion Survey on Dealer Financing Terms.

2022

−80

Financial Stability Report

Figure 3.8. Gross leverage at hedge funds
Ratio
Quarterly

Mean
Median

2013

2015

2017

2019

2021

10
9
8
7
6
5
4
3
2
1

Source: Securities and Exchange Commission, Form PF, Reporting Form for Investment Advisers to Private Funds and
Certain Commodity Pool Operators and Commodity Trading Advisors.

According to confidential data collected by the SEC, large hedge fund advisers had small direct
exposures to Russia in the third quarter of 2021. However, hedge funds could be indirectly
exposed to the associated geopolitical tensions through their positions in commodity derivatives.

Issuance of non-agency securities by securitization vehicles reached
post-2008 highs . . .
Following a decline early in the pandemic, issuance of non-agency securities recovered in 2021
and reached new post-2008 highs, although they are still at a fraction of their pre-2008 levels
mainly due to a still-moribund market for non-agency residential mortgage-backed securities
(figure 3.9).13 Issuance was generally elevated across asset classes, with CLOs and commercial
mortgage-backed securities (CMBS) experiencing particularly high volumes. This growth was driven
by strong investor demand for products with wider spreads amid improving economic conditions.
Similar to bank loans, some securitized products are floating rate, which makes them attractive to
investors in a rising interest rate environment and has been further supporting investor demand
recently. Meanwhile, credit performance of assets underlying most securitized products improved,
although delinquencies in non-agency CMBS backed by properties hit the hardest by the pandemic
remained relatively high. Leverage embedded in securitization products remained generally stable.

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. Examples of the resulting securities include CLOs
(predominantly backed by leveraged loans), asset-backed securities (often backed by credit card and auto debt), CMBS,
and residential mortgage-backed securities. By funding assets with debt issued by investment 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 banks’ regulatory capital
requirements.

Leverage in the Financial Sector

Figure 3.9. Issuance of non-agency securitized products, by asset class
Billions of dollars (real)
Annual

3000
2500

Other
Private-label RMBS
Non-agency CMBS
Auto loan/lease ABS
CDOs (including CLOs and ABS CDOs)

2000
1500
1000
500

2002

2006

2010

2014

2018

2022

Source: Green Street Advisors, LLC, Commercial Mortgage Alert’s CMBS Database and Asset-Backed Alert’s ABS
Database; Bureau of Labor Statistics, consumer price index via Haver Analytics.

. . . and bank lending to nonbank financial institutions continued to
grow rapidly
Bank lending to NBFIs, which can be informative about the use of leverage by NBFIs and shed
light on their interconnectedness with the core of the financial system, continued to increase
notably. The growth in committed amounts of credit from large banks to NBFIs in 2021 outpaced
the already rapid growth of 2020, driven by lending to real estate lenders and lessors, open-end
investment funds, broker-dealers, and other financial vehicles (figure 3.10). The utilized amounts
of credit increased for most NBFI sectors during the same period (figure 3.11). However, delinquency rates on loans by large banks to NBFIs declined modestly in 2021, returning to their
average levels over the past decade. Further, the overall level of delinquency rates on loans by
large banks to NBFIs was below the delinquency rates on loans by large banks to nonfinancial
borrowers. Because NBFIs rely primarily on their bank credit lines to meet unexpected liquidity
needs, loan commitments can experience sudden, correlated drawdowns. These drawdowns could

Figure 3.10. Large bank lending to nonbank financial firms: Committed amounts
Billions of dollars
Quarterly
1. Financial transactions processing
2. Private equity, BDCs, and credit funds
3. Broker-dealers
4. Insurance companies
5. REITs
6. Open-end investment funds
7. Special purpose entities, CLOs, and ABS
8. Other ﬁnancial vehicles
9. Real estate lenders and lessors
10. Consumer lenders, other lenders, and lessors

Q4
3
4
6
7

1
2
5

8
9
10

2018
2019
2020
2021
Source: Federal Reserve Board, Form FR Y-14Q (Schedule H.1), Capital Assessments and Stress Testing.

2000
1750
1500
1250
1000
750
500
250
0

Financial Stability Report

Figure 3.11. Growth of loan commitments to and utilization by nonbank financial institutions in the
fourth quarter of 2021, by sector
Percent
Committed amounts
Utilized amounts

REITs

Financial Consumer, Insurance
PE,
transactions leasing, companies BDCs,
processing & other
& credit
lenders
funds

Broker- Open-end
dealers investment
funds

SPEs,
CLOs,
& ABS

Real
Other
estate
ﬁnancial
lenders vehicles
& lessors

Total

80
70
60
50
40
30
20
10
0
−10
−20
−30
−40

Source: Federal Reserve Board, Form FR Y-14Q (Schedule H.1), Capital Assessments and Stress Testing.

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. Some NBFIs—such
as commodity trading firms—have been directly affected by the Russia–Ukraine conflict, but loan
exposures of large U.S. banks to these firms are currently small.

Funding Risks

Funding risks at domestic banks are low, but structural vulnerabilities
persist at some money market funds, bond funds, and stablecoins
In 2021, the total amount of aggregate financial system liabilities that are vulnerable to runs
increased 6.3 percent to $19.1 trillion; that amount was equivalent to about 80 percent of nominal GDP (table 4.1 and figure 4.1).14 Banks relied only modestly on short-term wholesale funding and continued to hold large amounts of HQLA. Prime and tax-exempt MMFs as well as other
cash-investment vehicles remained vulnerable to runs, and some open-end mutual funds continued to be exposed to redemption risks because of their holdings of illiquid assets. The stablecoin sector continued to grow rapidly and remains exposed to liquidity risks. While a few signs of
Table 4.1. Size of selected instruments and institutions
Item

Outstanding/total assets
(billions of dollars)

Growth,
2020:Q4–2021:Q4
(percent)

Average annual growth,
1997–2021:Q4
(percent)

Total runnable money-like liabilities*

19,149

6.3

4.9

Uninsured deposits

8,054

17.7

12.3

Domestic money market funds**

4,756

9.7

5.6

4,228

14.7

16.1

441

−18.8

−1.1

−17.7

−2.7

Repurchase agreements

3,635

−9.1

5.2

Commercial paper

1,014

2.8

2.3

764

20.0

7.0

5,368

8.5

9.3

Government
Prime
Tax exempt

Securities lending***
Bond mutual funds

Note: The data extend through 2021:Q4. Outstanding amounts are in nominal terms. Average annual growth rates are measured from Q4 of
the year immediately preceding the period through Q4 of the final year of the period. Total runnable money-like liabilities exceed the sum of
listed components. Items not included in the table are variable-rate demand obligations, federal funds, funding-agreement-backed securities,
private liquidity funds, offshore money market funds, short-term investment funds, local government investment pools, and stablecoins.
* Average annual growth is from 2003:Q1 to 2021:Q4.
** Average annual growth is from 2001:Q1 to 2021:Q4.
*** Average annual growth is from 2000:Q1 to 2021:Q4.
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 H.6, “Money
Stock Measures” (M3 monetary aggregate, 1997–2001); 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); Morningstar, Inc.,
Morningstar Direct; Moody’s Analytics, Inc., CreditView, Asset-Backed Commercial Paper Program Index.

Table 4.1 and figure 4.1 do not include stablecoins.

Financial Stability Report

Figure 4.1. Runnable money-like liabilities as a share of GDP, by instrument and institution
Percent of GDP
Quarterly

1. Other
2. Securities lending
3. Commercial paper

4. Domestic money market funds
5. Repurchase agreements
6. Uninsured deposits

2003

2006

2009

2012

2015

2018

100

120

1
2
3

80
60

20
0

2021

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); Moody’s Analytics, Inc., CreditView, Asset-Backed Commercial Paper Program Index; Bureau of Economic
Analysis, gross domestic product via Haver Analytics.

funding pressures emerged after the Russian invasion of Ukraine, the effects in broad short-term
funding markets have been limited to date.

Banks maintained high levels of liquid assets and stable funding . . .
As a share of total assets, HQLA remained historically high at banks (figure 4.2). Reliance on
short-term funding stayed near all-time lows (figure 4.3). Maturity transformation reached historically high levels, as large banks rapidly increased their holdings of low-risk, longer-duration
securities funded by inflows of deposits. The increasing mismatch between the maturity profiles
of assets and liabilities exposes banks to interest rate risk. However, the losses on securities
holdings associated with rising interest rates could be at least partially offset by increasing net
interest margins. Together with banks’ strong capital positions, the improved profitability could
mitigate banks’ vulnerability stemming from maturity transformation.

Figure 4.2. Liquid assets held by banks

Figure 4.3. Short-term wholesale funding of banks

Percent of assets
Quarterly
Q4

G-SIBs
Large non–G-SIBs
Other BHCs

32
28

Percent of assets
Quarterly

8
4
2001

2005

2009

2013

2017

2021

Source: Federal Reserve Board, Form FR Y-9C,
Consolidated Financial Statements for Holding
Companies.

2000 2003 2006 2009 2012 2015 2018 2021
Source: Federal Reserve Board, Form FR Y-9C,
Consolidated Financial Statements for Holding
Companies.

10
5

Funding Risks

. . . but structural vulnerabilities remained at some money market
funds and other cash-management vehicles
Assets under management at prime and tax-exempt MMFs, which began trending down in mid2020, have continued to decline, on net, in recent months (figure 4.4). These MMFs remain a
structural vulnerability due to their susceptibility to runs, and MMF reforms to mitigate this vulnerability continue to be a priority for domestic and international policymakers. In December, the SEC
published for public comment a proposed MMF reform package that includes a requirement that
those prime and tax-exempt funds that are offered to institutional investors adopt swing pricing,
which, if properly calibrated, could reduce investors’ incentive to run from funds amid stress.15
The proposal would also remove liquidity fees and redemption gate provisions in the existing
rule, increase MMFs’ minimum required liquidity buffers, and introduce additional reporting
requirements.16
Figure 4.4. Domestic money market fund assets
Billions of dollars (real)
Monthly

1. Government
2. Tax exempt
3. Retail prime
4. Institutional prime

Jan.

6000
5250
4500
3750
3000

2250
2
3
4

2001

2004

2007

2010

2013

2016

2019

1500
750

2022

Source: Federal Reserve Board staff calculations based on Investment Company Institute data; Bureau of Labor
Statistics, consumer price index via Haver Analytics.

Other cash-management vehicles, including dollar-denominated offshore funds and short-term
investment funds, also invest in money market instruments and are vulnerable to runs; moreover,
these vehicles are less transparent and regulated than MMFs. Over the past six months, the
assets under management at these vehicles remained at just over $1 trillion. Currently, between
$330 billion and $1 trillion of these vehicles’ assets are in portfolios similar to those of U.S.
prime MMFs, and a wave of redemptions from them could destabilize short-term funding markets.
The Russian invasion of Ukraine does not appear to have left a material imprint on broader shortterm funding markets. Trading conditions have been stable, and while spreads on some types of
commercial paper with maturities of 30 days or more increased notably, issuance continued and

Under the SEC’s proposal for MMFs, swing pricing would reduce an MMF’s price per share on days when it has costly
net redemptions. The reduction in share price would be calibrated to pass on the costs associated with redemptions to
redeeming investors.

For more information, see Securities and Exchange Commission (2021), “SEC Proposes Amendments to Money Market
Fund Rules,” press release, December 15, https://www.sec.gov/news/press-release/2021-258.

Financial Stability Report

spreads remained well below the levels reached in March 2020. Domestic MMFs have no direct
exposure to entities domiciled in Russia or Ukraine. Furthermore, Russian and Ukrainian entities
had a very limited presence in short-term funding markets before the escalation of the Russia–
Ukraine conflict. However, like domestic banks, MMFs and other cash-management vehicles could
be affected indirectly through their exposures to European banks if the conflict intensifies in a way
that causes significant adverse effects on the European economy or roils financial markets.

Stablecoins are also vulnerable to runs, and the sector continues to
grow rapidly
The aggregate value of stablecoins—digital assets that are designed to maintain a stable value
relative to a national currency or other reference assets—grew rapidly over the past year to more
than $180 billion in March 2022.17 The stablecoin sector remained highly concentrated, with the
three largest stablecoin issuers—Tether, USD Coin, and Binance USD—constituting more than
80 percent of the total market value.18
Stablecoins typically aim to be convertible, at par, to dollars, but they are backed by assets that
may lose value or become illiquid during stress; hence, they face redemption risks similar to those
of prime and tax-exempt MMFs. These vulnerabilities may be exacerbated by a lack of transparency regarding the riskiness and liquidity of assets backing stablecoins. Additionally, the increasing use of stablecoins to meet margin requirements for levered trading in other cryptocurrencies
may amplify volatility in demand for stablecoins and heighten redemption risks.19 The President’s
Working Group on Financial Markets, the Federal Deposit Insurance Corporation, and the Office of
the Comptroller of the Currency have made recommendations to address prudential risks posed by
stablecoins.
On March 9, 2022, President Biden issued an executive order (EO) outlining a coordinated interagency approach for the responsible development of digital assets, which, together with related
activities, have expanded considerably.20 Additionally, some crypto-assets—such as Bitcoin—have
experienced extreme price volatility. Among other things, the EO directs the FSOC to issue a report
on the financial stability risks and regulatory gaps posed by digital assets and include recommendations for addressing these risks. The EO also encourages the Board to continue research
on central bank digital currencies (CBDCs), including how they could improve the efficiency and
reduce the costs of payment systems. For a broader discussion of CBDCs, see the box “Central
Bank Digital Currency and Financial Stability.”

18
19

See International Organization of Securities Commissions (2022), IOSCO Decentralized Finance Report (Madrid: IOSCO,
March) https://www.iosco.org/library/pubdocs/pdf/IOSCOPD699.pdf.
See IOSCO, Decentralized Finance Report, in note 17.
See Gary B. Gorton, Chase P. Ross, and Sharon Y. Ross (2022), ”Making Money,“ NBER Working Paper Series 29710
(Cambridge, Mass.: National Bureau of Economic Research, January), https://www.nber.org/papers/w29710.
See Executive Office of the President (2022), “Ensuring Responsible Development of Digital Assets,” Executive Order
14067 of March 9 (Document No. 2022-05471), Federal Register, vol. 87 (March 14), pp. 14143–52.

Funding Risks

Box 4.1. Central Bank Digital Currency and Financial Stability
Recent technological advances have ushered in a wave of new private-sector financial products and
services, including digital wallets, mobile payment apps, and new digital assets such as cryptocurrencies and stablecoins . These technological advances have also led central banks around the globe to
explore the potential benefits and risks of issuing a CBDC .
A CBDC is a digital liability of a central bank that is widely available to the general public . In this
respect, it is analogous to a digital form of paper money .1 Today, Federal Reserve notes (that is, physical currency) are the only type of central bank money available to the general public . As a liability of
the Federal Reserve, a CBDC would be the safest digital asset available to the general public, with no
associated credit or liquidity risk . It could provide households and businesses with a variety of new
financial products and services, support faster and cheaper payments (including cross-border payments), and expand consumer access to the financial system .
However, a CBDC could pose a variety of risks and would raise important policy questions, including
how it might affect financial-sector market structure, the cost and availability of credit, the safety and
stability of the financial system, and the efficacy of monetary policy .
Like other central banks, the Federal Reserve is engaged in research into this topic . The Federal
Reserve’s work focuses on how a CBDC could improve on an already safe, effective, dynamic, and efficient domestic payments system, with full recognition that the implications and risks must be thought
through very carefully, including implications for financial stability .
In January, the Federal Reserve published a discussion paper as a first step in fostering a broad
and transparent public dialogue about the potential benefits and risks of a U .S . CBDC .2 The Federal
Reserve does not intend to proceed with issuance of a CBDC without clear support from the executive
branch and from the Congress, ideally in the form of a specific authorizing law .

Design of central bank digital currency
While no decisions have been made, the Federal Reserve’s January discussion paper indicates that a
potential CBDC would best serve the needs of the United States by being privacy protected, identity
verified, intermediated, and transferable:
• Privacy protected: Protecting user privacy is critical . The Federal Reserve is researching technological and policy options for a robust privacy framework .
• Identity veriﬁed: A CBDC would need to comply with rules designed to combat money laundering and
the financing of terrorism .
• Intermediated: Under an intermediated model, private-sector intermediaries would offer accounts or
digital wallets to facilitate the management of CBDC holdings and payments .
• Transferable: A CBDC must be seamlessly transferable between customers of different
intermediaries .
(continued)
1

In the United States, money takes multiple forms . Central bank money, a liability of the central bank, comes in the form of physical currency issued by the Federal Reserve and digital balances held by commercial banks at the Federal Reserve . Central bank
money has no associated credit or liquidity risk . Commercial bank money is the digital form of money that is most commonly used
by the public . Commercial bank money is held in accounts at commercial banks, and it has little credit or liquidity risk . Nonbank
money is digital money held as balances at nonbank financial service providers . These firms typically conduct balance transfers
on their own books using a range of technologies, including mobile apps . Nonbank money may carry more credit and liquidity risk,
depending on the design .

See Board of Governors of the Federal Reserve System (2022), “Money and Payments: The U .S . Dollar in the Age of Digital
Transformation” (Washington: Board of Governors, January), https://www .federalreserve .gov/publications/files/money-andpayments-20220120 .pdf .

Financial Stability Report

Box 4.1.—continued
Potential benefits and use cases
The Federal Reserve is considering how a CBDC might fit into the U .S . money and payments landscape .
A crucial test for a potential CBDC is whether it would provide benefits to households, businesses, and
the overall economy that exceed any costs and risks and whether it would yield such benefits more
effectively than other methods .
A CBDC has the potential to support financial stability . In a rapidly digitizing economy, the proliferation
of new types of digital money, including stablecoins, could present risks to both individual users and
the financial system as a whole . A CBDC could provide the public with broad access to digital money
that is free from credit and liquidity risk .
A CBDC might also help level the playing field in payment innovation for private-sector firms of all sizes .
A CBDC could serve as a safe and robust form of digital money that could allow private-sector innovators to focus on new access services, distribution methods, and related service offerings .
A CBDC might generate new capabilities to meet the evolving speed and efficiency requirements of the
digital economy . Depending on the design, a CBDC may improve cross-border payments, support the
dollar’s international role, and promote financial inclusion .

Key risks and policy considerations
Although the introduction of a CBDC could benefit consumers and the broader financial system, such a
potential step also raises complex policy issues and risks .
A CBDC could fundamentally change the structure of the U .S . financial system, altering the roles and
responsibilities of the private sector and the central bank . A widely available CBDC could serve as a
close substitute for commercial bank deposits or other low-risk assets such as government MMFs
and Treasury bills . A shift away from these assets could reduce credit availability or raise credit costs
for households, businesses, and governments . In times of stress, the ability to convert other forms of
money into CBDC could make runs on financial firms more likely or more severe .
Additionally, depending on the design, a CBDC could affect the efficacy of monetary policy implementation . Any CBDC would also need to be extremely resilient to operational disruptions and cybersecurity
risks, and it would need to strike an appropriate balance between safeguarding consumer privacy and
affording the transparency necessary to deter criminal activity .

Next steps
The Federal Reserve has not advanced any specific policy outcome and will not be making any imminent decisions about the appropriateness of issuing a U .S . CBDC . Rather, it is seeking input from a
wide range of stakeholders that might use a CBDC or be affected by its introduction .

Funding Risks

Bond mutual funds experienced modest outflows and remained
exposed to liquidity and interest rate 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 aggregate value of U.S. corporate bonds held by mutual funds declined somewhat in the second half of 2021 but remained
high compared with historical levels (figure 4.5). Total assets under management at high-yield
and bank loan mutual funds, which primarily hold riskier and less liquid assets, remained high as
of January 2022 (figure 4.6). Beginning in December 2021, U.S. investment-grade bond mutual
funds experienced modest outflows, as increases in interest rates weighed on these funds’ performance. Meanwhile, bank loan funds, which generally hold floating-rate instruments and are less
prone to suffer losses when interest rates rise, attracted inflows (figure 4.7).

Figure 4.6. Bank loan and high-yield bond
mutual fund assets

Figure 4.5. U.S. corporate bonds held by
U.S. mutual funds
Billions of dollars (real)
Quarterly
Q4

2100
1800
1500
1200

2000 2003 2006 2009 2012 2015 2018 2021

Billions of dollars (real)
Monthly
Feb.

Bank loan mutual funds
High-yield
bond mutual funds

525
450
375
300

900

225

600

150

300

Source: Federal Reserve Board staff estimates based
on Federal Reserve Board, Statistical Release Z.1,
“Financial Accounts of the United States”; Bureau
of Labor Statistics, consumer price index via Haver
Analytics.

2001 2004 2007 2010 2013 2016 2019 2022

Source: Investment Company Institute; Bureau of
Labor Statistics, consumer price index via Haver
Analytics.

Figure 4.7. Net flows to selected bond and bank loan mutual funds
Billions of dollars
Monthly
Investment-grade bond mutual funds
Bank loan mutual funds
High-yield bond mutual funds

150
100
50
0
−50
−100

Feb. May Aug. Nov. Feb. May Aug. Nov. Feb. May Aug. Nov. Feb. May Aug. Nov. Feb. May Aug. Nov. Feb.
2017
2018
2019
2020
2021
2022
Source: Investment Company Institute.

−150

Financial Stability Report

The Russian invasion of Ukraine may have increased the liquidity risks at mutual funds with
exposures to Russia or European countries affected by the war. However, the number of U.S.
mutual funds with direct exposures to Russian securities was small before the Russian invasion
of Ukraine, and while these funds suffered losses on these securities following the invasion, they
have continued to meet redemption requests to date.21

Central counterparties made larger margin calls amid elevated
market volatility
Elevated market volatility driven by the Russian invasion of Ukraine—particularly in commodity
markets—caused CCPs to make large margin calls, which put pressure on some clearing participants (see the box “Commodity Market Stresses following Russia’s Invasion of Ukraine”). To
date, clearing members have been able to meet these margin calls, and, in general, CCPs effectively managed the increased risks and higher trading volumes. Based on the increase in initial
margin observed at certain derivatives CCPs so far this year, prefunded resources at CCPs are
expected to have increased since the latest observation in the fourth quarter of 2021, climbing
further above pre-pandemic levels.22 Additionally, cash increased as a share of CCPs’ prefunded
resources in the second half of 2021, and banks, which provide credit lines to CCPs, are well positioned to meet potential draws from CCPs due to high levels of HQLA. However, ongoing concerns
remain around increased retail trading of equities and related derivatives, as well as concentration
of clients at the largest clearing members.

Liquidity risks at life insurers continued to increase
Over the past decade, the liquidity of life insurers’ assets declined and the liquidity of their
liabilities increased, potentially making it more difficult for life insurers to meet a sudden rise in
withdrawals and other claims. On the asset side, life insurers increased the share of risky, illiquid
assets—including CRE loans, less liquid corporate debt, and alternative investments—on their
balance sheets (figure 4.8). At the same time, life insurers increasingly relied on nontraditional
liabilities, such as funding-agreement-backed securities, Federal Home Loan Bank advances, and
cash received through repurchase agreements and securities lending transactions. These liabilities, which are generally more vulnerable to rapid withdrawals than most policyholder liabilities,
have grown steadily in recent years (figure 4.9).

Following the invasion, several Russia-focused equity exchange-traded funds (ETFs) listed in the United States began
trading at significant premiums to their net asset values, reflecting market participants’ expectations that the ETFs’
sponsors would be forced to halt share creation due to the suspension of trading in their underlying securities and the
effects of U.S. sanctions on the movement and ownership of Russian securities. On March 4, U.S. stock exchanges
halted trading in five of these ETFs, although redemptions from these funds were still available, and spillovers to large,
diversified emerging market equity ETFs that also hold Russian securities were limited.
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.

Funding Risks

Figure 4.8. Less liquid general account assets held by U.S. insurers
Percent share

Billions of dollars

1. Other ABS
2. CRE
3. CRE, securitized

50
40

4. Alternative investments
5. Illiquid corporate debt
6. Illiquid corporate debt,
securitized

Share of life insurer assets (left scale)
Share of P&C insurer assets (left scale)

30
20
10
0

2006

2008

2010

2012

2014

2016

2018

2020

2750
2500
2250
2000
1750
1500
1250
1000
750
500
250
0

Source: Staff estimates based on data from Bloomberg Finance L.P. and National Association of Insurance
Commissioners Annual Statutory Filings.

Figure 4.9. Nontraditional liabilities of U.S. life insurers, by liability type
Billions of dollars (real)
Repurchase agreements
Securities lending
FHLB advances
Funding-agreement-backed securities

2007

2009

2011

2013

2015

2017

2019

2021

550
500
450
400
350
300
250
200
150
100
50
0

Source: Bureau of Labor Statistics, consumer price index 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.

Financial Stability Report

Box 4.2. Commodity Market Stresses following Russia’s
Invasion of Ukraine
Russia’s invasion of Ukraine and subsequent international sanctions disrupted global trade in commodities, leading to surging prices and heightened volatility in agriculture, energy, and metals markets .
These markets include spot and forward markets for physical commodities as well as futures, options,
and swaps markets that involve an array of financial intermediaries and infrastructures . Stresses
in financial markets linked to commodities could disrupt the efficient production, processing, and
transportation of commodities by interfering with the ability of commodity producers, consumers, and
traders to lock in prices and hedge risks . Such stresses can also increase liquidity and credit risks
for financial institutions that are active in commodity markets . To date, however, the financial market
stresses do not appear to have significantly disrupted broader economic activity or created substantial
pressure on key financial intermediaries, including banks .

Commodity price dynamics since the invasion
Russia is a major global exporter of oil, natural gas, and certain metals . The invasion and sanctions
disrupted supplies of some commodities . Although Russian energy exports have generally kept ﬂowing,
market participants are highly concerned with future prospects . In addition, both Russia and Ukraine
are major exporters of grain, and the ongoing war as well as sanctions on Belarus’s fertilizer exports
are seen as likely to disrupt future production of grain and other agricultural commodities .
In this environment, prices for many commodities have risen sharply, on net, and ﬂuctuated dramatically in response to geopolitical developments (figure A) . A notable exception has been natural gas for
delivery in North America, where the price has been relatively stable due to limited capacity for shipping North American natural gas to Europe to replace Russian exports .

Commodity trading, clearing, and settlement
The simplest commodity transactions occur in spot markets, where a seller immediately delivers the
commodity to a buyer for cash . A buyer and a seller who wish to plan ahead can also engage in a bilateral forward contract, establishing a price and future date at which delivery will occur .
(continued)

Figure A. Front-month futures prices
22.5
20.0
17.5
15.0
12.5
10.0
7.5
5.0
2.5
0.0

Dollars per bushel or MMBtu (U.S.)

Dollars per barrel or MMBtu (Dutch)

Daily

Wheat (SRW) (left scale)
U.S. (Henry Hub) natural
gas (left scale)

Dutch (TTF) natural gas (right scale)
Oil (WTI)
(right scale)
Apr.
22

2000

2003

2006

2009

2012

2015

2018

2021

Jan.

Feb.

Mar.
2022

Source: Bloomberg Finance L .P .

Apr.

175
150
125
100
75
50
25
0
−25
−50

Funding Risks

Box 4.2. —continued
Commodities are also traded on futures exchanges, which standardize contract terms (such as
expiration dates and the precise definition of the reference commodity) and establish trading rules
(such as limits on the size or speed of price changes) . Since the invasion, for most commodities,
futures trading volumes and open interest—the number of contracts outstanding at the end of the
day—have remained in normal ranges . However, in the key contract for natural gas in Europe, trading
volume spiked to unprecedented levels in late February and early March, indicating rapid changes in
market participants’ positions . This spike occurred even as open interest continued to trend downward
for the year to date as participants somewhat reduced their exposure to the market on net (figure B) .
Futures are cleared at CCPs, which stand between buyers and sellers to guarantee that contracts will
be fulfilled . To manage their risks, CCPs require initial margin (that is, collateral posted to the CCP), collect variation margin (that is, daily or more frequent cash payments to cover mark-to-market changes in
value), and maintain additional resources to cover losses in the event of a participant’s default . CCPs
require participants to post sufficient initial margin to cover at least the 99th percentile of potential
price changes over a defined period of risk, typically one or two days for commodity futures . Because
the size of potential price changes can rise rapidly during volatile periods, CCPs typically set initial margin requirements above this minimum level when markets are calm, reducing the need to raise require(continued)
Figure B. Trading volume and open interest of commodity futures
Dutch (Title Transfer Facility) natural gas
2.5

Contracts (millions)
Daily

2.0

Wheat (soft red winter)

Contracts (thousands)

Volume (right scale)
Open interest (left scale)

500

Contracts (thousands)
Daily

Volume
Open interest

400

1.5

500
400

300
Apr.
22

1.0
0.5

Apr.
22

200
100

0.0

Apr. Oct. Apr. Oct. Apr. Oct. Apr.
2019
2020
2021
2022

U.S. (Henry Hub) natural gas

300
200
100

Apr. Oct.
2019

Apr. Oct.
2020

Apr. Oct.
2021

Apr.
2022

Oil (West Texas Intermediate)

Contracts (thousands)
Daily

600

Volume
Open interest

2000

Contracts (thousands)
Daily
Volume
Open interest

1500

5000
4000
3000

Apr.
22

1000
2000
Apr.
22

500

Apr. Oct.
2019

Apr. Oct.
2020

Apr. Oct.
2021

Source: Bloomberg Finance L .P .

Apr.
2022

Apr. Oct.
2019

Apr. Oct.
2020

Apr. Oct.
2021

Apr.
2022

1000
0

Financial Stability Report

Box 4.2.—continued
ments during stress . Still, as volatility rose in response to geopolitical developments in February and
March, CCPs substantially increased initial margin requirements . The initial margin requirement tripled
for the main wheat futures contract, and for oil it rose to match the May 2020 peak (figure C) .
Figure C. Initial margin for front-month futures in dollars
Dollars per contract or per 100 contracts for Dutch natural gas
Daily

Wheat (SRW)
U.S. (Henry Hub) natural gas
Oil (WTI)
Dutch (TTF) natural gas

15000
12500
10000

Apr.
22

7500
5000
2500
0

Jan.

Apr.

July
2020

Oct.

Jan.

Apr.

July
2021

Oct.

Jan.

Apr.
2022

Source: CME Group Inc .; Intercontinental Exchange, Inc . (made available in accordance with ICE Terms of Use) .

The initial margin increases were partly due to increases in contract values, but requirements also
rose as a percentage of contract values—a more precise indicator of the risk that collateral can absorb
(figure D) . For European natural gas, initial margin as a percentage of contract value had been rising
since late 2021 and soared to 80 percent of the contract value as the Russian invasion continued . Initial margin as a percentage of contract value also reached the top of the historical range for wheat and
U .S . natural gas but remained well below the 2020 peak for oil . Despite the margin increases, daily
price moves in wheat futures exceeded the CCP’s initial margin requirement at the contract level on
seven trading days from February 22 through the end of the first quarter, far above the expected
frequency for a 99 percent coverage level .
(continued)
Figure D. Futures margin as a percentage of contract value
30
27
24
21
18
15
12
9
6
3
0

Percent

Absolute percent

Daily

Wheat (SRW) (left scale)
U.S. (Henry Hub) natural gas
(left scale)

Oil (WTI) (right scale)
Dutch (TTF) natural gas
(right scale)
Apr.
22

2003

2006

2009

2012

2015

2018

2021

Jan.

Feb.

Mar.

Apr.

2022
Source: Federal Reserve staff calculations based on data from Bloomberg Finance L .P .; CME Group Inc .;
Intercontinental Exchange, Inc . (made available in accordance with ICE Terms of Use) .

100
90
80
70
60
50
40
30
20
10
0

Funding Risks

Box 4.2.—continued
Commodity futures can be cash settled or physically settled . For a contract settled in cash, participants
exchange payments at the expiration date based on a price for the underlying commodity . In a physically settled contract, participants who hold short positions at expiration deliver the commodity at a
specified time and place in return for payment of the determined settlement price . Short sellers include
commodity producers, such as farmers or miners, who are hedging the risk of a price decrease on their
output, as well as traders speculating on the direction of prices . Short sellers who do not own a sufficient, immediately deliverable amount of the commodity generally seek to close their positions by buying an offsetting long contract before expiration . However, if the commodity is in limited supply, buying
a long contract to offset a short may be expensive . Additionally, when market liquidity is constrained,
covering by short sellers may cause prices to rise more sharply than normal .
In early March, at the London Metal Exchange, the prospect of interruptions in Russia’s nickel exports
generated heavy pressure on short sellers of nickel, whose concentrated positions appeared to amplify
the shock . The exchange experienced unprecedented price spikes that caused severe financial stress
for some participants . In order to recover, the exchange cancelled trades at the peak prices and called
a multiday trading halt . In markets for other commodities, traders, exchanges, and CCPs managed
through the stress without severe incidents .
Commodity derivatives, particularly swaps, are also traded in OTC markets . The terms of OTC commodity derivatives can be customized to help participants precisely hedge particular risks . OTC commodity
derivatives are not always guaranteed by CCPs or subject to the same uniform risk-management rules
as exchange-traded derivatives .

Implications for commodity producers and consumers
Businesses that produce commodities or that use commodities to produce other products and services often rely on futures to hedge price risk . For example, a wheat farmer or grain elevator may take
a short position in wheat futures to hedge the risk of receiving a low price on the crop, while a ﬂour
mill may take a long position in wheat futures to hedge the risk of having to pay a high price for inputs .
Commodity trading firms are also important users of commodity futures . These firms move commodities from producers to consumers, sometimes storing or processing them along the way . A trading
firm’s physical exposures can be both long (for example, ownership of a tanker full of oil) and short (for
example, a commitment to deliver oil to a refinery) and, correspondingly, may be hedged with both short
and long futures positions . A market participant that primarily uses futures to hedge its physical risks
is known as a hedger .
Recent developments increased the cost of hedging in commodity futures markets in three ways:
1 . Producers and trading firms needed funding liquidity to make variation margin payments to CCPs
on short futures positions after price increases, even as these hedgers’ physical holdings gained
in value . Obtaining such funding can be difficult or costly, especially for smaller firms or on short
notice . For example, Peabody Energy, the United States’ largest coal producer, announced in March
that it obtained a $150 million unsecured credit facility at a 10 percent interest rate to cover derivatives funding needs .
2 . The risk of futures positions increased with higher volatility, even for participants whose combined
physical and futures positions were perfectly hedged . The resulting higher initial margin requirements on exchange-traded futures meant that both short and long hedgers needed cash to post
additional collateral to CCPs . In addition, some financial institutions reportedly asked customers to
limit futures positions in light of the risks and associated capital requirements, which raise the institutions’ costs of intermediating between customers and CCPs .
(continued)

Financial Stability Report

Box 4.2.—continued
3 . Market liquidity, the ease of entering or exiting a position, diminished as trading became more
costly for end users and as market makers pulled back to manage their own risks . Bid-ask spreads
widened, and the price effect of large trades increased (figure E; for more information, see the box
“Recent Liquidity Strains across U .S . Treasury, Equity Index Futures, and Oil Futures Markets”) .
In wheat futures, for several consecutive days, the price rose by a daily limit set by the exchange .
While these price limits were binding, trading volume appeared to be reduced, and for a time the
May wheat futures price was significantly below implied prices in related markets, such as options, that
were not subject to the same limits . Price changes also reached daily limits in corn futures at times .
Figure E. Wheat (soft red winter) futures liquidity measures
Bid-ask spread
Ticks
Daily

6
5
4

Apr.
22

3
2
1

2017

2019

2021

Jan.

Feb.

Mar.

Apr.

2022
Source: Refinitiv, DataScope Tick History.

Price sensitivity
Basis point change per 100 contracts traded
Daily

150
125

Daily coefficient
5-day moving average

100
Apr.
22

75
50
25
0

2017

2019

2021

Jan.

Feb.

Mar.
Apr.
2022
Source: Federal Reserve Board staff estimates based on data from CME Group, Inc., DataMine, https://datamine.cmegroup.com.

Businesses that produce or use commodities are potentially vulnerable to these financial stresses, but,
so far, the stresses do not appear to have significantly altered their production or usage . Higher hedging costs could, in principle, deter commodity producers from making investments that would increase
output, users from expanding factories that employ commodity inputs, or trading companies from shipping commodities around the world . Such reactions to higher hedging costs could conceivably reduce
the supply of commodities or prevent them from being put to the most productive use . The first sign
that higher hedging costs were weighing on end users would likely be decreases in commodity futures
positions of producers, consumers, and other hedgers . To date, hedgers’ positions in major U .S . com(continued)

Funding Risks

Box 4.2.—continued
modity futures contracts remain within historical ranges, even as Russia’s invasion of Ukraine has
roiled commodity markets (figure F) . As previously mentioned, open interest in the key Dutch natural
gas futures contract has trended downward, but the data are not broken out to show how much of the
decrease is in the positions of hedgers .

Figure F. Producer, merchant, processor, and user positions in commodity futures
Wheat (soft red winter)

Oil (West Texas Intermediate)

Thousands
Weekly
Long
Short

Apr.
19

2006 2010 2014 2018 2022

800
700
600
500
400
300
200
100
0

Thousands
Weekly
Long
Short

Apr.
19

2006 2010 2014 2018 2022

U.S. (Henry Hub) natural gas
800
700
600
500
400
300
200
100
0

Thousands
Weekly
Long
Short

Apr.
19

800
700
600
500
400
300
200
100
0

2006 2010 2014 2018 2022

Source: Bloomberg Finance L .P .

Implications for financial intermediaries
Financial institutions such as banks and broker-dealers can be exposed to risks in commodity markets as a result of the institutions’ own trades or as a result of guaranteeing their customers’ futures
trades . Most participants access commodity futures markets through financial institutions that are
members of the relevant CCP . Members must cover any margin calls that their customers fail to meet .
In addition, if a customer fails to deliver a physical commodity, the clearing member is liable for the
replacement cost of the missing goods .
Banks and dealers frequently use futures to offset the risks from customized OTC transactions with
their clients . For example, a bank might enter an OTC swap with a mining company to allow the mining company to hedge the price risk on its metal output over multiple years . The bank could then use
exchange-traded futures to hedge the price risk of the swap . As long as the customer paid the amounts
due under the swap, the bank would be hedged against movements in the price of the metal . However,
if the customer defaulted, the bank could be left with an unhedged or partially hedged futures position .
Pressures on most large banks from exposures to commodity markets so far have been modest relative to the banks’ sizable capital and liquidity resources, in part because the most extreme volatility
has been confined to specific commodity markets such as nickel, wheat, and European natural gas,
and because clients have largely been able to cover their obligations . Nevertheless, commodity markets are stressed . Ongoing and more widespread extreme volatility associated with the Russian invasion of Ukraine or other adverse shocks could pose greater challenges, especially if major clients were
to require significantly more liquidity or if defaults were to become widespread .

Near-Term Risks to the Financial
System

The Federal Reserve routinely engages in discussions with domestic and international policy
makers, academics, community groups, and others to gauge the set of risks of particular concern
to these groups. As noted in the box “Survey of Salient Risks to Financial Stability,” contacts were
mostly focused on the possible adverse effects of the Russia–Ukraine war, the downside risks of
persistent inflation and monetary policy tightening, and an abrupt correction to valuations of risky
assets. For the United States, concerns over cyber risk have increased following the invasion.
Shocks caused by cyber events, especially cyberattacks, may spread through the financial system
through complex and often unrecognized interdependencies across financial firms and market
participants and, if sufficiently disruptive, can affect financial stability. Various U.S. government
agencies and their private-sector partners are taking steps to further protect the financial system
and other critical infrastructures against the increased risk of cyber-related incidents.
The following analysis considers possible interactions of existing vulnerabilities with four broad
categories of risk, some of which were also identified in the survey conversations: risks emanating
from the Russian invasion of Ukraine; the potential for a marked worsening of the U.S. economic
outlook; stresses in China, including in the real estate sector; and stresses in other emerging
market economies (EMEs).

Russia’s ongoing war in Ukraine could affect U.S. financial stability
through multiple channels
The Russian invasion of Ukraine roiled financial markets, disrupted international trade, and
prompted sharp increases in prices for oil and other commodities, pushing up global inflation further. (For more details on the associated stresses to financial market functioning, see the boxes
“Recent Liquidity Strains across U.S. Treasury, Equity Index Futures, and Oil Futures Markets” and
“Commodity Market Stresses following Russia’s Invasion of Ukraine.”) The hostilities have led to
escalating sanctions on Russia and Russian countermeasures. Most U.S. and European banks
and investors have modest direct exposures to Russia and Ukraine and to commodity prices. But
a prolonged conflict, particularly if accompanied by severe and widespread commodity shortages,
could lead to substantial volatility in commodity and financial markets, a downturn in economic
activity concentrated in Europe, higher inflation and interest rates worldwide, and a broad pullback from risk-taking, transmitting stress to institutions that are exposed. Through declines in
both asset prices and the repayment capacity of borrowers, European banks would be particularly
affected. Stresses in European financial institutions could affect U.S. financial institutions through
their strong interconnections to European banks, including via dollar funding markets, and could

Financial Stability Report

transmit to U.S. financial conditions through a pullback in lending from European banks to U.S.
businesses and households.

Elevated and persistent inflation combined with a sharp rise in rates
could pose risks to the economy and the financial system
In the United States, inflation has been higher and interest rates have risen more than was
expected at the time of the last Financial Stability Report. Further adverse surprises in inflation
and interest rates, particularly if accompanied by a decline in economic activity, could negatively
affect the financial system. This combination could weaken the balance sheets of households and
businesses, leading to an increase in delinquencies, bankruptcies, and other forms of financial
distress. In particular, households could be affected by job losses, higher interest payments, and
a reduction in house prices caused by higher mortgage rates and decreased housing demand. The
resulting stresses may be especially pronounced for homeowners currently in mortgage forbearance or in the subprime and near-prime risk categories. Also, business credit quality could be
eroded by a steep rise in rates that would increase business borrowing costs, which in turn could
have negative consequences on employment and business investment. Additionally, a sharp rise
in interest rates could lead to higher volatility, stresses to market liquidity, and a large correction
in prices of risky assets, potentially causing losses at a range of financial intermediaries, reducing
their ability to raise capital and retain the confidence of their counterparties.

Stresses in China, including in the real estate sector, could spill over
to the United States
In China, debt levels are high in the real estate sector, where activity and prices turned down significantly last year (see the box “Stresses in China’s Real Estate Sector”). If this downturn intensifies, its effects on Chinese markets and financial institutions could be amplified by lockdowns or
other disruptions to the economy from further flare-ups in COVID-19 cases, new regulatory restrictions (including further actions to curb the tech sector), or any pullback in trade or investment from
other countries due to geopolitical motives or risk concerns. Given the size of China’s economy
and financial system as well as its extensive trade linkages with the rest of the world, financial
stresses in China could strain global financial markets through a deterioration of risk sentiment
and disruptions to economic activity, potentially affecting the United States.

Inflationary pressures and adverse external shocks could lead to
stresses in other emerging market economies that could affect the
United States
Increased debt levels in many EMEs since the onset of the pandemic have made these economies
more vulnerable to adverse shocks. More recently, higher food and energy prices have worsened
the terms of trade for some EMEs—particularly commodity importers—and could exacerbate
social and political stresses and trigger a downturn in investor risk sentiment and capital outflows.

Near-Term Risks to the Financial System

Meanwhile, ongoing policy rate hikes by many EME central banks, while necessary to reduce
inflation to target levels, have been leading to tighter financial conditions and are weighing on
economic activity. Reduced repayment capacity and higher debt-servicing costs for EME sovereigns
and businesses could stress EMEs’ financial systems. Widespread and persistent EME stresses
could adversely affect the U.S. financial system, primarily through indirect channels, via effects
on U.S. businesses with strong links to EMEs; direct financial exposures to EME businesses and
sovereigns are small.

Financial Stability Report

Box 5.1. Stresses in China’s Real Estate Sector
For the past several decades, expansionary policies in China have helped sustain rapid economic
growth, which has outpaced that of most other countries . China’s share of world GDP has reached
about 17 percent (figure A) . Credit to Chinese businesses has increased even faster, supporting GDP
growth, but the resulting leverage in the corporate sector makes it increasingly vulnerable to shocks .
Nonfinancial business credit in China has reached about 160 percent of GDP, a level that is much
higher than in most other EMEs (figure B) . Corporate indebtedness has become particularly high in
China’s real estate sector—which has been a key engine of China’s rapid growth—and lending for property development and related activities has grown rapidly .
Figure A. Share of world gross domestic
product
Percent
Annual

United States
China
EU countries

1990

1996

2002

2008

2014

Figure B. Credit to the nonfinancial
business sector
40
35
30
25
20
15
10
5
0

2020

Source: World Bank, World Development Indicators
Online, https://databank .worldbank .org/source/
world-development-indicators .

Percent of GDP
Quarterly

240
200

China
Other EMEs

160
Q3

120
80
40

2009

2012

2015

2018

2021

Source: Bank for International Settlements .

In the past few years, the Chinese government has tightened regulation of property markets, including
the imposition of new constraints on home purchases, banks’ property-sector exposure, and mortgage
lending in some markets .1 In August 2020, regulators announced further measures directly focused
on property developers: progressively tighter restrictions on borrowing, based on specific prudential
limits for leverage and liquidity (commonly known as “the three red lines”) . In the longer term, these
constraints should help keep leverage in check and increase the resilience of the property sector and
the financial system .
Not long after these initiatives were implemented, property sales slowed sharply (figure C) .2 Home
prices and construction activity also declined . Customers typically make payments to construction
companies in advance of project completion, and adverse dynamics could be amplified if buyers lose
confidence in developers’ ability to complete housing units . There have already been payment defaults
by several property developers and a sharp liquidity crunch for others with respect to both domestic
(continued)

Concerns about large and rising financial and social imbalances, including housing affordability and the marked increase in
income and wealth inequality that has occurred over time, also led the Chinese government to announce in 2021 a “common
prosperity” drive for more equitable and sustainable long-term growth .

The International Monetary Fund demonstrated that the red lines were binding on a significant segment of the property industry
when introduced . See page 9 of International Monetary Fund (2022), “People’s Republic of China: 2021 Article IV Consultation—
Press Release; Staff Report; and Statement by the Executive Director for the People’s Republic of China,” IMF Country
Report No . 22/21 (Washington: IMF, January), https://www .imf .org/-/media/Files/Publications/CR/2022/
English/1CHNEA2022001 .ashx .

Near-Term Risks to the Financial System

Box 5.1.—continued
Figure C. New property sales
Millions of square feet, 12-month rolling sum
Monthly

2000

1500

Mar.

1000

2013

2016

2019

2022

500

Source: National Bureau of Statistics of China via
Haver Analytics .

Figure D. High-yield corporate bond yield
spreads to similar-maturity U.S. Treasury
securities
Percentage points
Monthly

35
30

United States
China offshore

25
20
15
Mar.

10
5

2004 2007 2010 2013 2016 2019 2022

and offshore funding . After years of robust growth,
domestic bank loans to property developers are
declining, and bonds issued by some of the larger
Chinese property developers in the offshore dollar
market are trading at increasingly distressed levels this year (figure D) .
Although the Chinese government has managed
to contain its effects so far, a significant worsening of the downturn in property markets could
affect China’s financial system . Chinese banks
have direct exposure to developers amounting to
more than half of their Tier 1 capital and substantial indirect exposure to property markets from
loans to other firms that are collateralized by real
estate . Chinese banks are also exposed to real
estate developers indirectly through banksponsored wealth-management products sold
to retail investors . Local governments are also
exposed to China’s property market because
they generate a significant portion of their fiscal
revenues from land sales, and they too are highly
leveraged . A broad estimate of local government
debt that includes off-balance-sheet financing
vehicles exceeded 70 percent of GDP last year .3
In December, the national government announced
relaxed restrictions on bond finance by local
governments in the first quarter of 2022, which
should partially alleviate near-term pressures
and provide funding for infrastructure investment .
Local-government issuance appears to have been
strong in the first quarter, and growth in fixed
asset investment in China accelerated at the
start of the year, reﬂecting the heavy front-loading
of fiscal stimulus this year .

Source: ICE Data Indices, LLC, used with
permission .

Spillovers to the United States so far have been
limited in scope, in part because direct U .S .
exposures to mainland China are relatively modest . U .S . bank exposures amount to less than
10 percent of their Tier 1 capital . Other U .S . investors also have limited exposure: Available data suggest holdings of Chinese securities (including securities issued through offshore affiliates) represent
only about 1 percent of U .S . portfolio investment .4 In addition, recent research estimates that sales to
China make up less than 5 percent of U .S . firms’ revenues .5
(continued)
3

For details, see table 5 in IMF, “People’s Republic of China,” in note 2 .

From Treasury International Capital (TIC) data by residence, adjusted to a nationality basis using the methodology of Carol Bertaut, Beau Bressler, and Stephanie Curcuru (2019), “Globalization and the Geography of Capital Flows,” FEDS Notes (Washington:
Board of Governors of the Federal Reserve System, September 6), https://doi .org/10 .17016/2380-7172 .2446 .

This value is estimated for 2016 to 2019, with firm-level revenue shares weighted by stock market capitalization . For methodological details, see Carol Bertaut, Beau Bressler, and Stephanie Curcuru (2021), “Globalization and the Reach of Multinationals
Implications for Portfolio Exposures, Capital Flows, and Home Bias,” Journal of Accounting and Finance, vol . 21 (November),
pp . 92–104, https://doi .org/10 .33423/jaf .v21i5 .4738 .

Financial Stability Report

Box 5.1.—continued
But if the property market fallout intensifies and leads to significant strains at Chinese banks that
reduce bank lending and GDP growth, the transmission of stresses to the United States could be
strong through both real and financial channels—notably trade and global risk sentiment . The trade
channel is significant, given China’s large role in the global economy, and Federal Reserve staff
research finds a negative Chinese GDP surprise tends to decrease both global commodity prices and
the volume of trade among other countries .6 Risk sentiment can also be a significant international
spillover channel, and past periods of acute stresses in China have roiled global markets, such as in
2015, when a change in the Chinese government’s exchange-rate-management mechanism heightened
concerns about Chinese growth (figure E) .7 The consequent acceleration of capital outﬂows and sharp
correction in Chinese equity prices were accompanied by volatility in global and U .S . markets and a sizable appreciation of the dollar .

Figure E. S&P 500 return option-implied volatility and China events
Percent
Daily

Currency
devaluation

8 percent decline in
equity index

Halt in equity
market trading

50
40
30
20

June
30

Mar.

June

Sept.

Dec.

2015

Mar.
2016

June

10
0

Source: Bloomberg Finance L .P ., Bloomberg per Security Data License; Dow Jones, Wall Street Journal .

For details, see Shaghil Ahmed, Ricardo Correa, Daniel A . Dias, Nils Goernemann, Jasper Hoek, Anil Jain, Edith Liu, and Anna
Wong (2019), “Global Spillovers of a China Hard Landing,” International Finance Discussion Papers 1260 (Washington: Board of
Governors of the Federal Reserve System, October), https://doi .org/10 .17016/IFDP .2019 .1260 .

See Ahmed and others, “Global Spillovers of a China Hard Landing,” in note 6 .

Near-Term Risks to the Financial System

Box 5.2. 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 . financial stability . From late January to mid-April,
the staff surveyed 22 contacts, including professionals at broker-dealers, investment funds, research
and advisory organizations, and universities . Since the previous survey results published in November,
the Russian invasion of Ukraine has emerged as a top source of risk, raising short-term concerns over
higher energy prices and cyberattacks as well as long-term concerns of foreign divestment from U .S .
assets . Risks related to persistent inﬂation and tighter monetary policy, the most cited potential shock
from the fall 2021 survey, remained top of mind in the spring 2022 survey, contributing to heightened
concerns over risk asset valuations and corporate fundamentals . A number of risks that ranked highly
last year declined in prominence, including diminished concern over the effect of COVID-19, climaterelated shocks, and cryptocurrencies or stablecoins . This discussion summarizes the most cited risks
in this round of outreach .

Russian invasion of Ukraine
A majority of respondents cited the situation in Ukraine as a substantial source of uncertainty with high
potential for financial disruptions . Many were attentive to the adverse effects of a large rise in energy
prices, including increased short-term inﬂationary pressures, negative effects on global growth, vulnerabilities at energy-sensitive corporates, and the potential for acute distress at CCPs or exchanges . Contacts also highlighted the risk of distress at European banks due to exposure to Russia or to heavily
affected European firms . Additionally, while cyberattacks have appeared on the list of the most cited
potential shocks in previous reports, discussion of cyber risk in this survey round was focused largely
on Russian state-sanctioned cyber threats as an escalation of the conﬂict .
Several respondents raised concerns regarding longer-term structural consequences of sanctions on
Russia, with particular attention given to the decision to restrict access to foreign reserves and the
SWIFT (Society for Worldwide Interbank Financial Telecommunication) payments system . These actions
were seen as increasing the risk of a retreat by some countries from reliance on the U .S . dollar and
potential foreign divestment of U .S . assets, most notably sales of U .S . Treasury securities by foreign
holders .

Persistent inflation and monetary tightening
Respondents remained concerned about the prospect of inﬂationary pressures being more persistent
than anticipated, requiring a sharper tightening of monetary policy than reﬂected in market prices .
Many observed that this tightening may occur amid a weakening economic environment, amplifying its
negative effect . Several contacts noted the global nature of tighter monetary policy and the potential
for tighter financial conditions to cause strains in corporate and sovereign debt markets . A number of
respondents were focused on the possibility of a large correction in risk asset prices, noting that valuations in U .S . equity and corporate credit markets appeared elevated despite clear signals that monetary policy would continue to tighten .
Many respondents also highlighted the potential for longer-term structural risks to emerge as a result
of persistent inﬂation . Chief among these risks was the possibility of a significant increase in mediumand long-term inﬂation expectations triggering sharp movements in financial markets, with some noting
this could weigh heavily on the exchange value of the U .S . dollar . A few respondents also voiced concern over the potential for central banks to lose credibility if they are unable to rein in inﬂation or provide monetary accommodation in the face of weaker growth while inﬂation remains high .
(continued)

Financial Stability Report

Box 5.2.—continued
Figure A. Spring 2022: Most cited potential risks over the next 12 to 18 months
Russian invasion of Ukraine
Persistent inflation; monetary tightening
Risk asset valuations/correction
Foreign divestment from U.S. assets
Higher energy prices
Corporate credit stress
Elevated inflation regime
Cyberattacks
U.S.-China tensions
COVID-19 variants
Central counterparty/exchange distress
Cryptocurrencies/stablecoins
China growth slowdown
Real estate correction

Percentage of respondents
0

Source: Federal Reserve Bank of New York survey of 22 contacts from January to April .

Figure B. Fall 2021: Most cited potential risks over the next 12 to 18 months
Persistent inflation; monetary tightening
COVID-19
China regulatory/property risks
U.S.–China tensions
Cryptocurrencies/stablecoins
Climate/weather
Risk asset valuations/correction
Political uncertainty
Fiscal cliff effects
Cyberattacks
Real yield spike/taper tantrum
EME risks
China growth slowdown

Percentage of respondents
0

Source: Federal Reserve Bank of New York survey of 26 contacts from August to October .

Appendix

Figure Notes

Figure 1.1. Yields on nominal Treasury securities
The 2-year and 10-year Treasury rates are the constant-maturity yields based on the most actively
traded securities.
Figure 1.2. Term premium on 10-year nominal Treasury securities
The data extend through April 25, 2022. Term premiums are estimated from a 3-factor term structure model using Treasury yields and Blue Chip interest rate forecasts.
Figure 1.3. Implied volatility of 10-year swap rate
The data extend through April 22, 2022. Implied volatility on the 10-year swap rate, 1 month
ahead, is derived from swaptions. The median value is 81.14 basis points.
Figure 1.4. Treasury market depth
Market depth is defined as the average top 3 bid and ask quote sizes for on-the-run Treasury
securities.
Figure 1.5. Corporate bond yields
The data extend through April 22, 2022. 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 1.6. Corporate bond spreads to similar-maturity Treasury securities
The data extend through April 22, 2022. 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 highyield series reflects the option-adjusted spread of the ICE BofAML U.S. High Yield Index (H0A0).
Figure 1.7. Excess bond premium
The excess bond premium (EBP) is the residual of a regression of corporate bond spreads on controls for firms’ expected defaults. By construction, its historical mean is zero. Positive (negative)
EBP values indicate that investors’ risk appetite is below (above) its historical mean.
Figure 1.8. Secondary-market spreads of leveraged loans
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 line break represents the data transitioning from monthly to weekly in
November 2013.
Figure 1.9. Forward price-to-earnings ratio of S&P 500 firms
The figure shows the aggregate forward price-to-earnings ratio of S&P 500 firms, based on
expected earnings for 12 months ahead. The median value is 15.42.

Financial Stability Report

Figure 1.10. Spread of forward earnings-to-price ratio of S&P 500 firms to expected 10-year real
Treasury yield
The figure shows the aggregate forward earnings-to-price ratio of S&P 500 firms 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 estimated from off-the-run securities. The median value is 4.77 percentage points.
Figure 1.11. S&P 500 return volatility
The data extend through April 22, 2022. 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 1.12. Commercial real estate prices (real)
Series are deflated using the consumer price index and seasonally adjusted by Federal Reserve
Board staff. The data begin in 1998 for the equal-weighted curve and 1996 for the valueweighted curve.
Figure 1.13. Capitalization rate at property purchase
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 1.14. Change in bank standards for 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 1.15. Farmland prices
The data for the United States start 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 data
extend through July 2021. Data are annual as of July. The median value is 2,815.95 dollars.
Figure 1.16. Farmland price-to-rent ratios
The data for the United States start in 1998. Midwest index is the weighted average of Corn Belt
and Great Plains states derived from staff calculations. The data extend through July 2021. Data
are annual as of July. The median value is 18.02.
Figure 1.17. Growth of nominal prices of existing homes
The data extend through January 2022 for Case-Shiller, February 2022 for CoreLogic, and
March 2022 for Zillow.

Figure Notes

Figure 1.18. House price valuation measure
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. Selected local housing price-to-rent ratio indexes
The data are seasonally adjusted. The data for Phoenix start in 2002. Monthly rent values for
Phoenix are interpolated from semiannual numbers. Percentiles are based on 19 metropolitan
statistical areas.
Box 1.1. Recent Liquidity Strains across U.S. Treasury, Equity Index Futures, and Oil
Futures Markets
Figure A. Market depth
Market depth is computed as the average of the posted quote sizes at the best bid and ask prices.
Figure B. Market depth and volatility in oil futures
Intraday volatility is calculated daily from 1-minute intraday returns. Market depth is computed as
the average of the posted quote sizes at the best bid and ask prices. The data sample is from
January 1, 2007, to April 22, 2022. The blue dots are days since the Russian invasion of Ukraine,
starting from February 24, 2022. The black dots are all other days before F ebruary 24, 2022.
Figure C. Bid-ask spreads
Bid-ask spreads are expressed as a multiple of tick size (minimum price increment). The tick size
for the 2-year Treasury note is 1/256 of a dollar per $100 of par value, while that for the 10-year
Treasury note and the 30-year Treasury bond is 4/256 of a dollar per $100 of par value. The tick
size for the S&P 500 E-mini futures contract is $0.25 per index point, and that for the West Texas
Intermediate crude oil futures contract is $0.01 per barrel.
Figure D. Bid-ask spreads for oil futures
Bid-ask spreads are expressed as a multiple of tick size (minimum price increment). The tick size
for the West Texas Intermediate crude oil futures contract is $0.01 per barrel.
Figure E. Bid-ask spreads and market depth for the 10-year Treasury note
Market depth is computed as the average of the posted quote sizes at the best bid and ask prices.
Box 1.2. LIBOR Transition Update
Figure A. Transition progress in several markets is near completion
FRNs are floating-rate notes; ARMs are adjustable-rate mortgages; SOFR is the Secured Overnight
Financing Rate.
Figure B. Syndicated lending
SOFR is the Secured Overnight Financing Rate. The key identifies bars in order from left to right.

Financial Stability Report

Figure 2.1. Private nonfinancial-sector credit-to-GDP ratio
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. Nonfinancial business- and household-sector credit-to-GDP ratios
The shaded bars with top caps indicate periods of business recession as defined by the National
Bureau of E
conomic 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. Growth of real aggregate debt of the business sector
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.
Figure 2.4. Net issuance of risky business debt
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 data value).
Figure 2.5. Gross balance sheet leverage of public nonfinancial businesses
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 break
in the series due to the 2019 compliance deadline for Financial Accounting Standards Board rule
Accounting Standards Update 2016-02. The new accounting standard requires operating leases,
previously considered off-balance-sheet activities, to be included in measures of debt and assets.
Figure 2.6. Interest coverage ratios for public nonfinancial businesses
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 of leveraged loans
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. Distribution of large institutional leveraged loan volumes, by debt-to-EBITDA ratio
Volumes are for large corporations with earnings before interest, taxes, depreciation, and amortization (EBITDA) 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 Notes

Figure 2.9. Total household loan balances
Subprime are those with an Equifax Risk Score below 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 2021 dollars using the consumer price index.
Figure 2.10. Estimates of new mortgage volumes to households
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 below
620; near prime are from 620 to 719; prime are greater than 719. Scores were measured 1 year
ago. The data are converted to constant 2021 dollars using the consumer price index. The key
identifies bars in order from left to right.
Figure 2.11. Mortgage loss mitigation and delinquency
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 at least 30 days past due.
Figure 2.13. Estimates of housing leverage
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 2.14. Consumer credit balances
The data are converted to constant 2021 dollars using the consumer price index. Student loan
data begin in 2005.
Figure 2.15. Auto loan balances
Subprime are those with an Equifax Risk Score below 620; near prime are from 620 to 719; prime
are greater than 719. Scores are measured contemporaneously. The data are converted to constant 2021 dollars using the consumer price index.
Figure 2.16. Auto loss mitigation and delinquency
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
Risk Assessment, Data Analysis, and Research until 2017, after which they are reported quarterly.
The data for delinquent/loss mitigation begin in the first quarter of 2001.

Financial Stability Report

Figure 2.17. Credit card balances
Subprime are those with an Equifax Risk Score below 620; near prime are from 620 to 719; prime
are greater than 719. Scores are measured contemporaneously. The data are converted to constant 2021 dollars using the consumer price index.
Figure 2.18. Credit card delinquency rates
Delinquency is at least 30 days past due, excluding severe derogatory loans. Subprime are
those with an Equifax Risk Score below 620; near prime are from 620 to 719; prime are greater
than 719. Credit scores are lagged 4 quarters.
Figure 3.1. Common equity Tier 1 ratio of banks
The data are seasonally adjusted by Federal Reserve Board staff. Sample consists of domestic
bank holding companies (BHCs) and intermediate holding companies (IHCs) with a substantial
U.S. commercial banking presence. G-SIBs are global systemically important U.S. 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 3.2. Ratio of tangible bank equity to assets
The data are seasonally adjusted by Federal Reserve Board staff. Sample consists of domestic
bank holding companies (BHCs), intermediate holding companies (IHCs) with a substantial U.S.
commercial banking presence, and commercial banks. G-SIBs are global systemically important
U.S. 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. 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 3.3. Borrower leverage for bank commercial and industrial loans
Weighted median leverage of nonfinancial firms that borrow using commercial and industrial loans
from the 26 banks that have filed in every quarter since 2013:Q1. Leverage 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 3.4. Change in bank lending standards for 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

Figure Notes

Bureau of Economic Research: March 2001–November 2001, December 2007–June 2009, and
February 2020–April 2020.
Figure 3.5. Leverage at broker-dealers
Leverage is calculated by dividing total assets by equity.
Figure 3.6. Leverage at insurance companies
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 primarily doing business in the U.S. are included. Based on
U.S. insurance assets as of the most recent year end. The figure reflects an update in methodology
from the corresponding chart in the November 2021 Financial Stability Report.
Figure 3.7. Change in the use of financial leverage
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 3.8. Gross leverage at hedge funds
Leverage is computed as the ratio of hedge funds’ gross notional exposure to net asset value.
Gross notional exposure includes the nominal value of all long and short positions and derivative notional exposures. Options are delta adjusted, and interest rate derivatives are reported at
10-year bond equivalents. The mean is weighted by net asset value. The data are reported on a
2-quarter lag, starting in the first quarter of 2013.
Figure 3.9. Issuance of non-agency securitized products, by asset class
The data from the first quarter of 2022 are annualized to create the 2022 bar. CMBS is commercial mortgage-backed securities; CDO is collateralized debt obligation; RMBS is residential
mortgage-backed securities; 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 2022 dollars using
the consumer price index. The key identifies bars in order from top to bottom.
Figure 3.10. Large bank lending to nonbank financial firms: Committed amounts
Committed amounts on credit lines and term loans extended to nonbank financial firms by a
balanced panel of 26 bank holding companies that have filed Form FR Y-14Q in every quarter
since 2018:Q1. Nonbank financial firms 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), special purpose
entities, collateralized loan obligations (CLOs), and asset-backed securities (ABS). REITs incorporate both mortgage (trading) REITs and equity REITs. Broker-dealers also include commodity

Financial Stability Report

contracts dealers and brokerages and other securities and commodity exchanges. Other financial
vehicles include closed-end investment and mutual funds. BDC is business development company.
Figure 3.11. Growth of loan commitments to and utilization by nonbank financial institutions in the
fourth quarter of 2021, by sector
2021:Q4-over-2020:Q4 growth rates as of the end of the fourth quarter of 2021. REIT is real
estate investment trust; PE is private equity; BDC is business development company; SPE is special 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. Runnable money-like liabilities as a share of GDP, by instrument and institution
The black striped area denotes the period from 2008:Q4 to 2012:Q4, when insured deposits increased because of the Transaction Account Guarantee program. “Other” consists of
variable-rate demand obligations (VRDOs), federal funds, funding-agreement-backed securities,
private liquidity funds, offshore money market funds, and local government investment pools.
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 (Washington: Board of Governors of the Federal Reserve System, September 3), https://www.federalreserve.gov/econresdata/notes/fedsnotes/2015/the-runnables-20150903.html.
Figure 4.2. Liquid assets held by banks
Sample consists of domestic bank holding companies (BHCs), intermediate holding companies
(IHCs) with a substantial U.S. commercial banking presence, and commercial banks. G-SIBs are
global systemically important U.S. 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 securities that qualify as high-quality liquid assets as defined by the Liquidity Coverage Ratio requirement. Accordingly, Level 1 assets and discounts and restrictions on Level 2 assets are incorporated into the estimate.
Figure 4.3. Short-term wholesale funding of banks
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 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. Domestic money market fund assets
The data are converted to constant 2022 dollars using the consumer price index.

Figure Notes

Figure 4.5. U.S. corporate bonds held by U.S. mutual funds
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 2021 dollars using the consumer
price index.
Figure 4.6. Bank loan and high-yield bond mutual fund assets
The data are converted to constant 2022 dollars using the consumer price index. The key identifies series in order from top to bottom.
Figure 4.7. Net flows to selected bond and bank loan mutual funds
Mutual fund assets under management as of February 2022 included $2,537 billion in investment-grade bond funds, $275 billion in high-yield bond funds, and $116 billion in bank loan funds.
The key identifies series in order from top to bottom.
Figure 4.8. Less liquid general account assets held by U.S. insurers
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 placements, 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 4.9. Nontraditional liabilities of U.S. life insurers, by liability type
The data are converted to constant 2021 dollars using the consumer price index. FHLB is Federal
Home Loan Bank. The key identifies series in order from top to bottom.
Box 4.2. Commodity Market Stresses following Russia’s Invasion of Ukraine
Figure A. Front-month futures prices
The data for Dutch natural gas start in 2005. Dutch Title Transfer Facility (TTF) natural gas is
quoted in euros per megawatt hour; the price has been converted into dollars per metric million
British thermal units (MMBtu). SRW is soft red winter. WTI is West Texas Intermediate. The shaded
area with a top cap represents an expanded window focusing on the period from J anuary 1, 2022,
onward.
Figure C. Initial margin for front-month futures in dollars
SRW is soft red winter; WTI is West Texas Intermediate; TTF is Title Transfer Facility.
Figure D. Futures margin as a percentage of contract value
SRW is soft red winter. The data for U.S. (Henry Hub) natural gas and West Texas Intermediate
(WTI) oil start in 2009. The data for Dutch Title Transfer Facility (TTF) natural gas start in 2016.
The shaded area with a top cap represents an expanded window focusing on the period from
January 1, 2022, onward.

Financial Stability Report

Figure E. Wheat (soft red winter) futures liquidity measures
The shaded area with a top cap represents an expanded window focusing on the period from
January 1, 2022, onward. Bid-ask spreads are expressed as a multiple of tick size (minimum price
increment). The tick size for soft red winter wheat futures is 1/4 of $0.01 ($0.0025) per bushel.
Box 5.1. Stresses in China’s Real Estate Sector
Figure A. Share of world gross domestic product
National gross domestic product figures are converted to U.S. dollars at market exchange rates.
The European Union (EU) aggregate continues to include the United Kingdom in 2020.
Figure B. Credit to the nonfinancial business sector
Credit is defined as total credit to the private nonfinancial business sector. The “Other EMEs” category consists of Argentina, Brazil, Chile, Colombia, the Czech Republic, Hungary, India, Indonesia,
Israel, Malaysia, Mexico, Poland, Russia, Saudi Arabia, South Korea, Thailand, and Turkey. GDP is
gross domestic product; EMEs are emerging market economies.
Figure D. High-yield corporate bond yield spreads to similar-maturity U.S. Treasury securities
As of March 2022, the ICE China Dollar High Yield Index (ticker ECNH) contained $58.9 billion in
property-firm bonds out of a total face value of $80.4 billion for bonds in the index.
Figure E. S&P 500 return option-implied volatility and China events
Vertical lines indicate a currency devaluation on August 11, 2015; an 8 percent decline in the
Shanghai Composite Index on August 24, 2015; and a temporary halt in equity market trading on
January 4, 2016.
Box 5.2. Survey of Salient Risks to Financial Stability
Figure A. Spring 2022: Most cited potential risks over the next 12 to 18 months
Responses are to the following question: “Over the next 12 to 18 months, which shocks, if realized, do you think would have the greatest negative effect on the functioning of the U.S. financial
system?”
Figure B. Fall 2021: Most cited potential risks over the next 12 to 18 months
EME is emerging market economy. Responses are to the following question: “Over the next 12 to
18 months, which shocks, if realized, do you think would have the greatest negative effect on the
functioning of the U.S. financial system?”

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