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Financial Stability Report

November 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

November 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 and Framework. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1 Asset Valuations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Box 1.1. Liquidity Conditions in Treasury and Other Core Financial Markets . . . . . . . . . . . . . . 8

2 Borrowing by Businesses and Households . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
3 Leverage in the Financial Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
4 Funding Risks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Box 4.1. Digital Assets and Financial Stability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

5 Near-Term Risks to the Financial System. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Box 5.1. International Risks and U.S. Financial Stability. . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Box 5.2. Climate Scenario Analysis: An Explainer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Box 5.3. Survey of Salient Risks to Financial Stability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

Appendix: Figure Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

Note: This report generally reflects information that was available as of October 21, 2022.

Purpose and Framework
This report presents the Federal Reserve Board’s current assessment of the stability of the U.S.
financial system. By publishing this report, the Board intends to promote public understanding by increasing transparency around, and creating accountability for, the Federal Reserve’s
views on this topic. Financial stability supports the objectives assigned to the Federal Reserve,
including full employment and stable prices, a safe and sound banking system, and an efficient
payments system.
A financial system is considered stable when
banks, other lenders, and financial markets
are able to provide households, communities,

More on the Federal
Reserve’s Monitoring Efforts

and businesses with the financing they need
to invest, grow, and participate in a well-
functioning economy—and can do so even
when hit by adverse events, or “shocks.”
Consistent with this view of financial stabil-

See the Financial Stability section of the
Federal Reserve Board’s website for more
information on how the Federal Reserve
monitors the stability of the U.S. and world
financial systems.
The website includes:

ity, the Federal Reserve Board’s monitoring
and vulnerabilities of, the financial system.

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

Shocks are inherently difficult to predict, while

• more data and research on related topics;

framework distinguishes between shocks to,

vulnerabilities, which are the aspects of the
financial system that would exacerbate stress,
can be monitored as they build up or recede
over time. As a result, the framework focuses
primarily on assessing vulnerabilities, with an

• information on how we coordinate, cooperate, and otherwise take action on financial
system issues; and
• public education resources describing the
importance of our efforts.

emphasis on four broad categories and how
those categories might interact to amplify
stress in the financial system.1
1. Valuation pressures arise when asset prices are high relative to economic fundamentals or
historical norms. These developments are often driven by an increased willingness of investors
to take on risk. As such, elevated valuation pressures may increase the possibility of outsized
drops in asset prices (see Section 1, Asset Valuations).

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

Financial Stability Report

2. Excessive borrowing by businesses and households exposes the borrowers to distress if
their incomes decline or the assets they own fall in value. In these cases, businesses and
households with high debt burdens may need to cut back spending, affecting economic activity
and causing losses for investors (see Section 2, Borrowing by Businesses and Households).
3. Excessive leverage within the financial sector increases the risk that financial institutions will
not have the ability to absorb losses without disruptions to their normal business operations
when hit by adverse shocks. In those situations, institutions will be forced to cut back lending,
sell their assets, or even shut down. Such responses can impair credit access for households
and businesses, further weakening economic activity (see Section 3, Leverage in the
Financial Sector).
4. Funding risks expose the financial system to the possibility that investors will rapidly
withdraw their funds from a particular institution or sector, creating strains across markets
or institutions. Many financial institutions raise funds from the public with a commitment
to return their investors’ money on short notice, but those institutions then invest much of
those funds in assets that are hard to sell quickly or have a long maturity. This liquidity and
maturity transformation can create an incentive for investors to withdraw funds quickly in
adverse situations. Facing such withdrawals, financial institutions may need to sell assets
quickly at “fire sale” prices, thereby incurring losses and potentially becoming insolvent, as
well as causing additional price declines that can create stress across markets and at other
institutions (see Section 4, Funding Risks).
The Federal Reserve’s monitoring framework also tracks domestic and international 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 spread through the U.S. financial system, given our current assessment of
vulnerabilities.
While this framework provides a systematic way to assess financial stability, some potential
risks may be novel or difficult to quantify and therefore are not captured by the current approach.
Given these complications, we rely on ongoing research by the Federal Reserve staff, 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

Purpose and Framework

and through the Financial Stability Oversight Council (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 the aftermath of the 2007–09 financial
crisis, these actions have included requirements for more and higher-quality capital, an innovative stress-testing regime, and new liquidity regulations applied to the largest banks in the United
States. In addition, the Federal Reserve’s assessment of financial vulnerabilities informs decisions regarding the countercyclical capital buffer (CCyB). The CCyB is designed to increase the
resilience of large banking organizations when there is an elevated risk of above-normal losses
and to promote a more sustainable supply of credit over the economic cycle.

vii

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-sector leverage, and funding risks. It also highlights several near-term risks that, if realized, could interact with these vulnerabilities.
Since the May 2022 Financial Stability Report was released, the economic outlook has weakened,
and uncertainty about the outlook has remained elevated. Inflation remains unacceptably high in
the United States and is also elevated in many other countries. Central banks around the world,
including the Federal Reserve, have tightened monetary policy in response. A weaker outlook,
higher interest rates, and elevated uncertainty have contributed to a substantial tightening in
financial conditions. Economic, financial, and geopolitical risks also have risen across advanced

Overview of financial system vulnerabilities

Asset valuations

• Prices of risky assets
generally fell amid a less
favorable outlook and
rising interest rates.
• Risk premiums in equity
and corporate bond
markets were near the
middle of their historical
distributions.
• Real estate valuations
remained very elevated
even though activity
weakened and price
increases slowed
markedly.

Borrowing by businesses
and households

Leverage in the
financial sector

• Although debt of
nonfinancial businesses
and households grew in
the first half of 2022,
the ratio of debt to
gross domestic product
(GDP) was little changed
and remained at a
moderate level.

• Banks’ risk-based
capital ratios have
remained in the middle
of the range that has
prevailed since 2010,
and stress tests show
the system remains
resilient to a severe
recession.

• Interest coverage ratios
for large businesses
reached historically
high levels, and debt
issuance by the riskiest
companies slowed. The
business debt-to-GDP
ratio remained high.

• Leverage was somewhat
elevated at hedge funds,
and bank lending to the
broader set of nonbank
financial institutions
continued to grow.

• Household debt was at
modest levels relative to
GDP and concentrated
among prime-rated
borrowers.

• Monitoring some
parts of the nonbank
financial sector, where
hidden pockets of
leverage could amplify
adverse shocks, could
be enhanced with more
comprehensive and
timely data.

Funding risks

• Domestic banks
maintained high levels of
liquid assets and stable
funding.
• Structural vulnerabilities
persist at money market
funds, some other
mutual funds, and
stablecoins.
• Central counterparties
maintain elevated
margin requirements
amid high market
volatility, which
clearing members have
continued to meet.

Financial Stability Report

and emerging market economies (EMEs), further contributing to asset price declines and periods
of significant market volatility. These developments, and future shocks, have the potential to be
amplified by vulnerabilities associated with asset valuations, borrowing by households and businesses, financial-sector leverage, and funding risks.
Against this backdrop, our view of the current level of vulnerabilities is as follows:
1. Asset valuations. Higher interest rates and a weaker outlook for the economy led prices of
financial assets to fall amid heightened volatility, but real estate prices remained elevated.
Measures of equity prices relative to expected earnings declined. Risk premiums in equity
and corporate bond markets were near the middle of their historical distributions. In contrast,
property markets still show elevated valuations. Although housing activity weakened and
national average price increases slowed sharply year over year, home prices remained
historically high relative to rents. Valuations of commercial real estate (CRE) were also elevated
(see Section 1, Asset Valuations).
2. Borrowing by businesses and households. On balance, vulnerabilities arising from borrowing
by nonfinancial businesses and households were little changed over the first half of 2022
and remained at moderate levels. Borrowing by businesses remained at high levels relative to
gross domestic product (GDP) in the first half of 2022, but some measures of their ability to
service that debt improved as the effects of rising interest rates were offset by higher business
earnings. Household debt remained at modest levels relative to GDP, and most of that debt
is owed by households with strong credit histories or considerable home equity. Nonetheless,
borrowing costs continue to rise and inflation is reducing real incomes, a combination that may
pose risks to the ability of some businesses and households to service their debts, especially
in the event of further adverse shocks to income or inflation (see Section 2, Borrowing by
Businesses and Households).
3. Leverage in the financial sector. Banks maintained risk-based capital ratios near their post2010 averages, and broker-dealer leverage remained historically low. Leverage at life insurance
companies declined to about the middle of its historical range. In contrast, hedge fund leverage
likely remained somewhat above its historical average, though comprehensive data are
available only with a lag. Bank lending to nonbank financial institutions (NBFIs), an indicator
of NBFI leverage, reached new highs. More generally, monitoring some parts of the nonbank
financial sector, where hidden pockets of leverage could amplify adverse shocks, could be
enhanced with more comprehensive and timely data (see Section 3, Leverage in the Financial
Sector).
4. Funding risks. Short-term funding markets continue to have structural vulnerabilities, as some
markets and institutions remain vulnerable to large and unexpected withdrawals, especially
considering the highly uncertain outlook. Funding risks at domestic banks are low, given their
large holdings of liquid assets and limited reliance on short-term wholesale funding. Prime

Overview

and tax-exempt money market funds (MMFs), as well as other cash-investment vehicles,
remain vulnerable to runs. Many bond and bank-loan mutual funds continue to be susceptible
to large redemptions, because they hold assets that can become illiquid amid stress. The
market capitalization of stablecoins—which have a set of structural vulnerabilities, including
weaknesses in regulatory oversight, opacity, and consumer protection issues—continued to
decline after falling sharply earlier in the year. Central counterparties (CCPs) have maintained
a high level of financial resources to cover potential credit exposures in case of default by one
or more clearing members, and participants have continued to meet their margin calls to date
(see Section 4, Funding Risks).
In addition, market liquidity—the ability to trade assets without a large effect on market prices—
remained low in several key asset markets since the May report, as discussed in the box “Liquidity
Conditions in Treasury and Other Core Financial Markets.” Low liquidity amplifies the volatility of
asset prices and may ultimately impair market functioning. It could also increase funding risks to
financial intermediaries that rely on marketable securities as collateral. These potential amplification channels may interact with leverage in the financial system.
This report also discusses potential near-term risks based in part on the most frequently
cited risks to U.S. financial stability as gathered from outreach to a wide range of researchers,
academics, and market contacts (discussed in the box “Survey of Salient Risks to Financial
Stability”). Contacts expressed increased concern about market functioning, including the
possibility of disorderly markets and extreme volatility. In addition, persistently and unexpectedly

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.”

Persistent inflation;
monetary tightening

November
2022

May
2022

62%

of contacts
surveyed

68%

of contacts
surveyed

Russia’s invasion
of Ukraine

62%

of contacts
surveyed

77%

of contacts
surveyed

Market liquidity
strains and volatility

54%

Higher
energy prices

54%

of contacts
surveyed

Not cited

of contacts
surveyed

41%

China–Taiwan
conflict

42%

of contacts
surveyed

14%

of contacts
surveyed

Financial Stability Report

high inflation, combined with further rate increases in the United States, could negatively affect
domestic economic activity and financial conditions, which would affect the ability of businesses
and households to service their debts and, as a result, the credit risk faced by financial intermediaries. As described in the box “International Risks and U.S. Financial Stability,” consequences of
Russia’s invasion of Ukraine, stresses in China, the strength of the dollar, and other developments
abroad could lead to adverse developments in some economies, which could affect U.S. financial
stability. Moreover, shocks caused by cyber events, especially cyberattacks, could impair the U.S.
financial system. 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 also contains additional boxes that analyze salient topics related to financial stability:
“Climate Scenario Analysis: An Explainer” and “Digital Assets and Financial Stability.”

Asset Valuations

A deteriorating economic outlook and higher interest rates lowered
corporate valuations, while real estate valuations remained elevated
Since the May 2022 Financial Stability Report, the economic outlook deteriorated amid growing
downside risks and heightened uncertainty. Central banks around the world tightened monetary
policy in response to persistently high inflation. Against this backdrop, yields on long-term Treasury securities rose notably, which, along with diminished risk appetite, contributed to a decline in
broad equity indexes and a widening of corporate credit spreads. The valuation measures tracked
for most corporate financial assets are now near or below their historical averages.
In contrast, valuation pressures in real estate remained high. National average house prices
continued to rise year over year, although recent data show a significant slowdown in growth and
falling prices in some geographic locations. With valuations at high levels, house prices could be
particularly sensitive to shocks. CRE prices continued to increase since the previous report, albeit
at a slower pace in recent months. With both capitalization rates and capitalization spreads—the
difference between capitalization rates and real Treasury yields—at low levels, CRE valuation pressures moved higher from already stretched levels. Farmland prices were also elevated relative to
rents, driven by rising crop prices and limited inventories of land.
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.

Treasury yields increased amid high volatility
Reflecting a tighter monetary policy stance associated with a very tight labor market and inflation
far above the Federal Open Market Committee’s 2 percent inflation objective, yields on Treasury
securities further increased since the May report to near or above their median levels over
the past quarter-century (figure 1.1). In contrast, a model estimate of nominal Treasury term
premiums—a measure of the compensation investors require to hold longer-term Treasury securities rather than shorter-term ones—was little changed and low relative to its long-run history
(figure 1.2).2 Consistent with heightened uncertainty about the economic outlook, a forward-looking
measure of interest rate volatility derived from options prices increased from previously elevated

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,
2021:Q2–2022:Q2
(percent)

Average annual growth,
1997–2022:Q2
(percent)

Residential real estate

53,004

16.8

6.3

Equities

46,511

−15.0

8.4

Commercial real estate

23,465

8.7

6.9

Treasury securities

23,253

7.2

8.1

Investment-grade corporate bonds

6,973

3.9

8.1

Farmland

2,707

1.5

5.1

High-yield and unrated corporate bonds

1,773

2.8

6.8

Leveraged loans*

1,414

12.4

14.0

Commercial real estate**

3.9

2.9

Residential real estate***

4.8

2.7

Item

Price growth (real)

Note: The data extend through 2022:Q2. Growth rates are measured from Q2 of the year immediately preceding the period through Q2 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 to 2022:Q2, as this market was fairly
small before then.
** One-year growth of commercial real estate prices is from August 2021 to August 2022, and average annual growth is from 1998:Q4 to
2022:Q2. 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 August 2021 to August 2022, and average annual growth is from 1997:Q4 to
2022:Q2. Nominal prices are deflated using the CPI.
Source: For leveraged loans, PitchBook Data, Leveraged Commentary & Data; for corporate bonds, Mergent, Inc., Corporate 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. Nominal Treasury yields increased to levels seen before 2008
Percent, annual rate
Monthly

2-year
10-year
Oct.

1997

2002

2007

2012

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

2017

2022

8
7
6
5
4
3
2
1
0

Asset Valuations

levels (figure 1.3). Liquidity metrics, such as market depth, suggest that Treasury market liquidity has remained below historical norms (figure 1.4).3 Market liquidity strains could amplify price
shocks and increase costs for investors when they adjust their holdings. Moreover, persistent
liquidity strains could result in higher liquidity premiums and, as a result, lower valuations. For
more information on market liquidity developments, see the box “Liquidity Conditions in Treasury
and Other Core Financial Markets.”

Figure 1.2. An estimate of the nominal
Treasury term premium was low relative to its
long-run history

Figure 1.3. Interest rate volatility increased
amid heightened uncertainty
Basis points

Percentage points

Monthly

2.5

Monthly

200

2.0
1.5

Oct.

1.0
0.5

150
100

0.0
Oct.

250

Median

−0.5
−1.0

1997

2002

2007

2012

2017

2022

2007

−1.5

2010

2013

2016

2019

2022

Source: ICAP, Swaptions and Interest Rate Caps and
Floors Data.

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

Figure 1.4. Treasury market depth suggests liquidity remained below historical norms

35
30

Millions of dollars

5-day moving average

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

300
250
200

20
Oct.
20

150

100

Jan.

Apr.

July
2019

Oct.

Jan.

Apr.

July
2020

Oct.

Jan.

Apr.

July
2021

Oct.

Jan.

Apr.
July
2022

Source: Inter Dealer Broker Community.

350

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

Oct.

Financial Stability Report

Box 1.1. Liquidity Conditions in Treasury and Other Core
Financial Markets
Market liquidity—the ease of buying and selling an asset—is a key indicator of how well markets are
functioning . Low liquidity can amplify the volatility of asset prices and result in larger price moves in
response to shocks . In extreme cases, low liquidity can threaten market functioning, leading to a situation in which participants are unable to trade without incurring a significant cost . Liquidity conditions
in the markets for Treasury securities are particularly important due to the key role those securities
play in the financial system . This discussion updates the assessment of liquidity conditions in Treasury
and other core financial markets from the May report . The Treasury market has continued to function
smoothly over the period from the May report, but measures of trading costs have remained moderately elevated and liquidity appears to be less resilient than is typical . These liquidity strains appear
to be primarily a consequence of the elevated interest rate volatility associated with uncertainty about
the economic outlook . While measures of trading costs such as bid-ask spreads are only moderately
elevated, the fact that intermediaries are posting historically low volumes of quotes may mean that the
risk of a sharp further increase in trading costs could be higher than usual . Liquidity conditions in various other major markets remain moderately strained . Looking ahead, the Inter-Agency Working Group
on Treasury Market Surveillance is expected to provide an update on its progress toward enhancing the
resilience of the U .S . Treasury market .1 These enhancements include proposals intended to improve
data quality and public transparency and enhance the resilience of market intermediation and market
oversight .

Measuring liquidity depends on how trading takes place
The most liquid component of the Treasury market is the interdealer broker market in on-the-run Treasury securities, where trading takes place predominantly on platforms employing central limit order
books (CLOBs) .2 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 . In contrast, dealer-to-client trading in off-the-run securities largely takes place using the
“request for quote” (RFQ) protocol, whereby clients of Treasury securities dealers can obtain quotes
for buying or selling a certain amount . Measures that capture different dimensions of liquidity include
market depth, which is relevant only for CLOB-based markets, and the bid-ask spread, which can be
observed for both CLOB- and RFQ-based markets . Market depth at the top of the book is the average
of quantities available to buy or sell at the best quoted prices; greater market depth indicates a greater
ability to instantaneously trade larger amounts without moving the price and, hence, a more liquid market .3 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 .4
(continued)

The Inter-Agency Working Group on Treasury Market Surveillance is composed of staff from the U .S . Department of the Treasury,
the Board of Governors of the Federal Reserve System, the Federal Reserve Bank of New York, the U .S . Securities and Exchange
Commission, and the U .S . Commodity Futures Trading Commission .

On-the-run Treasury securities are the most recently auctioned securities of a given maturity, while off-the-run securities are those
that were auctioned earlier .

In practice, market depth is an imperfect measure of the ability to trade without moving the price, because quotes can be both
rapidly canceled or rapidly replenished in response to incoming order flow .

In liquid CLOB-based markets, the bid-ask spread is often close to or at the minimum tick size, the smallest allowed difference
between bid and ask prices, and widens only for short periods during the day in response to incoming orders . However, average
bid-ask spreads over the course of a day may still be informative about the variation in liquidity conditions over time .

Asset Valuations

Box 1.1—continued
Liquidity remained low in the U.S. Treasury market
Figure A shows average top-of-book market depth for 2- and 10-year on-the-run Treasury securities .
Between about October 2021 and the end of April 2022, market depth fell notably, which primarily
reﬂected growing caution on the part of liquidity providers about posting quotes in large volumes in the
face of heightened price volatility . That heightened volatility in turn reﬂected substantial uncertainty
about the economic outlook and the appropriate monetary policy response . The reduction in market
depth for shorter-maturity securities was relatively large—to levels around the low point seen during the
onset of the COVID-19 pandemic—because the prices of those securities are more sensitive to news
about the near-term economic outlook . Since the May report, market depth has remained low, reﬂecting
the continued uncertainty about the economic outlook .

Figure A. Top-of-book average market depth for 2- and 10-year on-the-run Treasury notes
60

Millions of dollars

Millions of dollars
May 2022 FSR

5-day moving average

300

200

100

20
2-year OTR depth (right scale)
10-year OTR depth (left scale)

Oct.
19

0
Oct.
2019

Jan.

Apr.

July
2020

Oct.

Jan.

Apr.

July
2021

Oct.

Jan.

Apr.
July
2022

Oct.

Source: BrokerTec; Federal Reserve Board staff calculations .

Figure B shows average bid-ask spreads . Spreads rose between October 2021 and mid-March 2022
and remain moderately wide . While spreads are moderately wider than was typical during the years
before the pandemic, the fact that they have remained well below the pandemic-related peak in
(continued)
Figure B. Average bid-ask spreads for 2- and 10-year on-the-run Treasury notes
3.0

Cents per $100 notional value

Cents per $100 notional value
May 2022 FSR

5-day moving average

0.6

2-year OTR bid-ask spreads (right scale)
10-year OTR bid-ask spreads (left scale)

2.5

0.7

0.5
2.0

Oct.
19

0.4
0.3

1.5
Oct.
2019

Jan.

Apr.

July
2020

Oct.

Jan.

Apr.

Source: BrokerTec; Federal Reserve Board staff calculations .

July
2021

Oct.

Jan.

Apr.
July
2022

Oct.

Financial Stability Report

Box 1.1—continued
March 2020 contrasts with market depth remaining close to its pandemic-related troughs, particularly
for shorter-maturity securities . This pattern of exceptionally low market depth but only moderately high
spreads suggests that liquidity providers have continued to replenish the limited volume of quotes on
the CLOB sufficiently rapidly in response to incoming order ﬂow to prevent outsized moves in the best
quoted prices over short periods . At the same time, the average size of trades (not shown) trended
downward in the first quarter of 2022 and remained stable since the May report, suggesting that market participants have adapted to low market depth by splitting trades into smaller chunks to minimize
the effect on prices . That said, splitting trades into smaller chunks may entail increased trading costs
for some market participants—for example, because it may lengthen the time taken to execute trades .
Moreover, the continued low level of market depth means that liquidity remains more sensitive to the
actions of liquidity providers that use high-frequency trading strategies to replenish the order book rapidly . Greater concentration of liquidity provision among firms that may follow similar strategies can be
a source of fragility, making it more likely that liquidity could further deteriorate sharply in response to
future shocks .
The likely predominant driver of recent low liquidity appears to be elevated uncertainty about the economic situation and the outlook for monetary policy . In general, volatility and liquidity tend to move in
opposite directions because higher volatility increases the riskiness of providing liquidity, and intermediaries therefore tend to either reduce the amount they quote as a way of managing the risk or charge
more compensation for the risk of providing liquidity, in the form of a wider bid-ask spread . Current
levels of liquidity appear broadly in line with the historical relationship between liquidity and volatility .
This situation is in contrast to that at the height of the COVID-19 pandemic crisis, when liquidity deteriorated by more than the historical relationship with volatility would suggest, as intermediaries became
less willing to provide liquidity in response to heavy selling pressures, as discussed in the November 2020 report .
Liquidity conditions in other parts of the Treasury market generally have also remained low in recent
months, albeit to varying degrees . Treasury futures liquidity is low relative to its typical levels; however,
it has been less strained than in the cash market over the past year . In contrast, for the off-the-run
nominal securities and Treasury Inﬂation-Protected Securities, liquidity strains are more acute .5 That
said, market participants are not reporting major problems obtaining quotes or executing trades .

Liquidity in other financial markets has also remained low
Liquidity conditions in some other crucial financial markets have remained strained since the May
report . Figure C shows bid-ask spreads in the S&P 500 equity index, the West Texas Intermediate
crude oil, and wheat futures markets . While equity futures’ bid-ask spreads have narrowed since the
May report, they remain elevated compared with historical levels .6 Bid-ask spreads in the oil futures
market brieﬂy widened significantly following Russia’s invasion of Ukraine, to levels substantially
higher than observed during the pandemic-related strains, but subsequently narrowed and have
remained relatively stable since the May report . In contrast, bid-ask spreads in the wheat futures market have continued to narrow since the May report . Similar to the market for on-the-run Treasury securities, market depth in all of these other markets remains historically low, suggesting that in these
(continued)
5

The hierarchy of liquidity conditions being least strained in the futures market and most strained in the off-the-run cash market
is consistent with typical patterns; for example, as discussed by Dobrev and Meldrum (2020), the futures Treasury market was
notably more liquid than the cash market during the height of the COVID-19 pandemic crisis . See 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://www .federalreserve .gov/econres/notes/feds-notes/what-do-quoted-spreads-tellus-about-machine-trading-market-stress-march-2020-20200925 .html .

The bid-ask spreads for the E-mini S&P 500 futures are currently around the 75th percentile of their distribution since 2018 .

Asset Valuations

Box 1.1—continued
Figure C. Bid-ask spreads for E-mini S&P 500, crude oil, and wheat futures
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5

Dollar spread (ticks)

Dollar spread (ticks)
May 2022 FSR

5-day moving average

1.5
1.4

Equity (right scale)
Oil (left scale)
Wheat (left scale)

1.3
1.2
Oct.
19

1.1
1.0

Oct.
2019

Jan.

Apr.

July
2020

Oct.

Jan.

Apr.

July
2021

Oct.

Jan.

Apr.
July
2022

Oct.

0.9

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

markets, too, liquidity providers have replenished limited volumes of quotes sufficiently rapidly to
prevent outsized moves in the best quoted prices over short periods . Nonetheless, these conditions
suggest a higher-than-normal risk that bid-ask spreads may widen in the face of further shocks, making
prices even more volatile . Also broadly similar to the Treasury market, bid-ask spreads in the corporate
bond market widened slightly since the May report but remain well below their peaks at the onset of
the pandemic .

Financial Stability Report

Corporate debt market valuations fell just below historical medians
Since the May report, corporate bond yields increased more than those on comparable-maturity
Treasury securities (figure 1.5). Consequently, corresponding corporate-to-Treasury spreads widened to somewhat above their historical medians, easing valuation pressures (figure 1.6).

Figure 1.5. Corporate bond yields rose to their highest levels in more than a decade
Percent
Monthly
Triple-B
High-yield
Oct.

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. As risk appetite declined, spreads to similar-maturity Treasury securities widened
12
11
10
9
8
7
6
5
4
3
2
1
0

Percentage points

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

Oct.

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.

The excess bond premium, a measure that captures the gap between corporate bond spreads and
expected credit losses, was slightly above its historical median, indicating moderate risk appetite
(figure 1.7). Reflecting higher interest rates and elevated market volatility, corporate bond issuance declined in recent months.
Risk appetite in the leveraged loan market declined to low levels since the May report. Demand
from both retail and institutional investors fell amid concerns that higher interest rates will weigh
on profitability and credit quality. Spreads on leveraged loans in the secondary market widened
and stood well above their respective averages since the 2007–09 financial crisis (figure 1.8).
Furthermore, amid market volatility and fewer refinancing opportunities, leveraged loan issuance
slowed considerably in the third quarter to its lowest quarterly level since 2009.

Asset Valuations

Figure 1.7. The excess bond premium returned to a level consistent with its historical norm
Percentage points
Monthly

4
3
2

Sept.

1
0
−1

1997

2002

2007

2012

2017

2022

−2

Source: Federal Reserve Board staff calculations based on Lehman Brothers Fixed Income Database (Warga); Intercontinental Exchange, Inc., ICE Data Services; Center for Research in Security Prices, CRSP/Compustat Merged
Database, Wharton Research Data Services; S&P Global, Compustat.

Figure 1.8. Spreads in the leveraged loan market also increased
Percentage points
Monthly/weekly
B
BB

30
25
20
15

Oct. 14

10
5

1997

2002

2007

2012

2017

2022

Source: PitchBook Data, Leveraged Commentary & Data.

Equity market valuation pressures declined to near
historical medians
Broad equity prices declined amid continued
volatility over the period since the May report.
Prices relative to earnings forecasts fell from

Figure 1.9. The price-to-earnings ratio of
S&P 500 firms declined but remained a bit
above its historical median

previously elevated levels to be modestly
above median levels, suggesting that valua-

Ratio
Monthly

30
27

tions were moderate (figure 1.9). Meanwhile,

the difference between the forward earnings-

to-price ratio and the expected real yield on
10-year Treasury securities—a rough measure

Median
Sept.

15
12
9

of the extra compensation that investors
require for holding stocks relative to risk-free
bonds, known as the equity premium—
declined a bit to its historical median
(figure 1.10). Reflecting the considerable

1990 1994 1998 2002 2006 2010 2014 2018 2022
Source: Federal Reserve Board staff calculations
using Refinitiv, Institutional Brokers’ Estimate System
estimates.

Financial Stability Report

uncertainty in the markets, option-implied volatility continued to be elevated (figure 1.11). At the
same time, the pace of initial public offerings was low compared with historical standards, following the exceptionally high issuance in 2021 and due to the recent volatility in prices.

Figure 1.10. An estimate of the equity premium declined to about its historical median
Percentage points
Monthly

10
8

Sept.
Median

6
4
2
0

1992

1997

2002

2007

2012

2017

2022

−2

Source: Federal Reserve Board staff calculations using Refinitiv, Institutional Brokers’ Estimate System estimates;
Department of the Treasury; Federal Reserve Bank of Philadelphia, Survey of Professional Forecasters.

Figure 1.11. Volatility in equity markets remained elevated
Percent
Monthly

Option-implied volatility
Realized volatility

80
70
60
50

Oct.

40
30
20
10

1997

2002

2007

2012

2017

2022

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

Commercial real estate valuations remained high
Since the May report, valuation pressures for commercial properties increased further from
already considerable levels. Aggregate CRE price indexes moved to record-high levels, although
price increases have slowed sharply, partially in response to higher borrowing costs. Furthermore,
some inflation-adjusted price measures began showing declines (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 (figure 1.13). Moreover, the
spreads of capitalization rates to real Treasury yields—which provide a measure of risk appetite in
this market—remained at the bottom third of their historical distributions through August. Although
the levels of valuations across property types all remained high, some differences in valuations

Asset Valuations

Figure 1.12. Commercial real estate prices,
adjusted for inflation, remained at high levels
Jan. 2001 = 100
Monthly
Equalweighted
Valueweighted

Aug.

Figure 1.13. Income of commercial properties
relative to prices continued declining to
historically low levels

200
180

Percent

10.0
9.5
9.0
8.5
8.0
7.5
7.0
6.5
6.0
5.5
5.0

Monthly

160
140
120
100
80
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.

Aug.

40
2002

2006

2010

2014

2018

2022

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.

across segments of the CRE market reflected comparably weaker fundamentals. 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 for other property types. Meanwhile,
in the July Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS), banks reported
weaker demand for most CRE loan categories and tighter lending standards for the second quarter
of 2022 (figure 1.14).4

Figure 1.14. Banks reported tightening lending standards in commercial real estate loans

Easing

Tightening

Net percentage of banks reporting
Quarterly

1997

2002

2007

2012

2017

2022

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.

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

Financial Stability Report

Farmland valuations increased further from already high levels
Farmland prices continued to increase since the May report and remained at high levels
(figure 1.15). The ratios of farmland prices to rents increased to new historical highs (figure 1.16).
Farmland valuations were supported by high and rising commodity prices, 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. Moreover, the
inventory of farmland was limited.

Figure 1.15. Farmland prices were at
high levels
2021 dollars per acre
Annual
Midwest index
United States

Figure 1.16. Farmland prices rose more
than rents
Ratio

7000

Annual

6000

Midwest index
United States

5000

30
25

4000
Median

3000

Median

2000
1972

1982

1992

2002

2012

2022

1000

1972

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

1982

1992

2002

2012

2022

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

House prices have decelerated sharply, but valuations remained high
Year-over-year house price increases have slowed significantly, with some measures pointing to
outright declines in recent months, likely owing in part to rising borrowing costs (figure 1.17).

Figure 1.17. After rising rapidly in recent years, house prices decelerated
12-month percent change
Monthly

Zillow
CoreLogic
Case-Shiller

2004

2007

2010

2013

2016

2019

2022

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

25
20
15
10
5
0
−5
−10
−15
−20
−25

Asset Valuations

Nationwide, house price-to-rent ratios leveled
off but still stood above their mid-2000s peak

Figure 1.18. A model-based measure pointed
to stretched house price valuations

even as prices in some locations began falling. A model of house price valuation based

Percent
Quarterly
Q3

on prices relative to owners’ equivalent rent

40
30

and interest rates points to stretched valua-

tions (figure 1.18). However, a measure

10
0

of house valuations that incorporates
market-based measures of rents (based on
the rent for a new lease by a new tenant)
is somewhat less elevated. As house price
increases slowed across regions and property

−10
1982

1992

2002

2012

2022

−20

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

types, price-to-rent ratios also flattened out
across regional markets (figure 1.19).

Figure 1.19. House price-to-rent ratios remained elevated across geographic areas
Jan. 2010 = 100
Monthly

240
200

Median
Middle 80 percent
of markets

Sept.

160
120
80

1997

2002

2007

2012

2017

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

2022

Borrowing by Businesses and
Households

Vulnerabilities from business and household debt remained moderate
On balance, vulnerabilities arising from borrowing by businesses and households were little
changed over the first half of 2022 and remained at moderate levels. The business debt-to-GDP
ratio and gross leverage stood at high levels (although significantly lower than the record highs
reached at the onset of the pandemic). In contrast, median interest coverage ratios continued to
improve, bolstered by strong earnings, and have reached record highs. Taken together, vulnerabilities from business leverage appeared moderate. Indicators of household vulnerabilities, including the household debt-to-GDP ratio and the aggregate household debt service ratio, remained
at modest levels, but nominal household debt continued to rise. Going forward, we expect that
inflation and rising borrowing costs may pose risks to the ability of some businesses and households to service their debts, especially for those holding adjustable-rate products. An economic
downturn or a correction in real estate prices would also put pressure on business and household
balance sheets.
Table 2.1 shows the amounts outstanding and recent historical growth rates of forms of debt
owed by nonfinancial businesses and households as of the second quarter of 2022. Total outstanding private credit was split about evenly between businesses and households, with businesses owing $19.5 trillion and households owing $18.5 trillion.

The ratio of business and household debt to gross domestic product
was stable and remained at a moderate level
The combined total debt of nonfinancial businesses and households grew roughly in line with
nominal GDP in the first half of 2022, leaving the debt-to-GDP ratio essentially flat and close to
its pre-pandemic level (figure 2.1). Regarding the individual sectors, the ratio of business debt to
GDP edged up and stood at high levels, while the ratio of household debt to GDP inched down and
stood at levels similar to those that existed before the buildup preceding the 2007–09 financial
crisis (figure 2.2).

Key indicators point to little change in business debt vulnerabilities,
which remained moderate relative to historical levels
Overall vulnerabilities from nonfinancial business debt remained moderate in the first half of
2022, as measures of leverage were little changed and solid earnings bolstered interest coverage

Financial Stability Report

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

Growth,
2021:Q2–2022:Q2
(percent)

Average annual growth,
1997–2022:Q2
(percent)

Total private nonfinancial credit

37,955

7.3

5.6

Total nonfinancial business credit

19,457

6.8

5.8

12,560

7.3

5.3

Bonds and commercial paper

7,542

1.3

5.5

Bank lending

2,021

19.1

4.0

Leveraged loans*

1,317

12.2

13.9

Noncorporate business credit

6,897

6.0

7.0

Commercial real estate credit

2,968

9.8

6.2

Total household credit

18,498

7.8

5.4

Mortgages

12,159

8.7

5.5

Consumer credit

4,582

7.6

5.0

Student loans

1,748

1.7

8.0

Auto loans

1,364

7.0

5.0

Credit cards

1,087

14.4

3.2

24,883

9.1

4.4

Item

Corporate business credit

Nominal GDP

Note: The data extend through 2022:Q2. Outstanding amounts are in nominal terms. Growth rates are measured from Q2 of the year immediately preceding the period through Q2 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 2022:Q2, as this market was fairly small before 2000.
Source: For leveraged loans, PitchBook Data, 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. The debt of households and businesses relative to GDP was flat in the first half of 2022
Ratio
Quarterly

2.0
1.7

1.4
1.1

1980

1986

1992

1998

2004

2010

2016

2022

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. Both business and household debt-to-GDP ratios moved sideways in the first half of 2022
1.1

Ratio

Ratio
Quarterly

1.0

0.9

0.8

0.8
0.7

0.6
0.4
1980

1986

1992

1998

2004

2010

2016

0.7
0.6

Nonﬁnancial business
(right scale)
Household (left scale)

0.5
0.3

1.0

0.5
2022

0.4

ratios, while risky debt growth slowed. Non-

Figure 2.3. Business debt adjusted for inflation
grew modestly in the first half of 2022

financial business debt adjusted for inflation
grew modestly in the same period (figure 2.3).
However, net issuance of risky debt was sub-

Percent change, annual rate
Quarterly

dued over the same period (figure 2.4). In par-

ticular, institutional leveraged loan issuance

10
Q2

slowed notably in recent months—falling back

to its historical average—as investor demand

weakened amid market volatility. In addition,

−5

the net issuance of high-yield and unrated

1997

bonds remained negative so far this year.

2002

2007

2012

2017

2022

−10

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

Figure 2.4. Net issuance of risky debt has been subdued so far this year
Billions of dollars
Quarterly

Institutional leveraged loans
High-yield and unrated bonds

2004

2007

2010

2013

2016

2019

Source: Mergent, Fixed Income Securities Database; PitchBook Data, Leveraged Commentary & Data.

2022

120
100
80
60
40
20
0
−20
−40
−60

Financial Stability Report

Gross leverage—the ratio of debt to assets—

Figure 2.5. Gross leverage of large businesses
remained at high levels
Percent
Quarterly

75th percentile
All ﬁrms

of all publicly traded nonfinancial firms inched
down in the first half of 2022, continuing the

decline from its historical peak in mid-2020.

That said, it remained elevated by historical

45
Q2

40
35

2001 2004 2007 2010 2013 2016 2019 2022

standards (figure 2.5). Net leverage—the
ratio of debt less cash to total assets—was

also high relative to its history and edged up

among all large businesses as they ran down

some of their cash reserves.

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

The ability of large businesses to service
their debt, as measured by the median ratio
of earnings to interest expenses (the inter-

Figure 2.6. Firms’ ability to service their debt,
as measured by the interest coverage ratio,
remained high
Ratio
Quarterly

est coverage ratio), continued to improve in
the first half of 2022, on net, and reached
6

its highest level in the past two decades in
the first quarter of the year (figure 2.6). This

4
Q2

2
Median for all ﬁrms
Median for all non-investment-grade ﬁrms

2001 2004 2007 2010 2013 2016 2019 2022
Source: Federal Reserve Board staff calculations
based on S&P Global, Compustat.

0
−2

development was due to solid earnings in the
first half of 2022. In addition, the effect of
rising interest rates was muted, as corporate
bonds—which account for the majority of the
debt of public firms—generally have fixed
interest rates and longer-term maturities.
In particular, only about 5 percent of outstanding bonds rated triple-B and 3 percent
of outstanding speculative-grade bonds are

due within a year. Nevertheless, further increases in interest expenses, combined with possible
declines in profitability stemming from high inflation, supply chain disruptions, or an economic
downturn, could curtail the ability of highly indebted firms to service their debt. Meanwhile, the
median interest coverage ratio for the subset of all publicly traded non-investment-grade firms
edged down in the first half of 2022 but remained at relatively high levels. While these firms represent a large share of the number of publicly traded firms (85 percent), their debt constitutes only
35 percent of the total debt in the sector.
The available data for smaller middle-market firms that are privately held—which have less access
to capital markets and primarily borrow from banks, private credit and equity funds, and sophisticated investors—also indicate that leverage continued to decline over the first half of 2022 and

Borrowing by Businesses and Households

was at levels similar to those at publicly traded firms. The interest coverage ratio for the median
firm in this category also improved during the same period and is above the level at publicly traded
firms. However, an important caveat is that the data on smaller middle-market firms are not as
comprehensive as those on large firms.
The credit performance of outstanding corporate bonds remained generally solid since the May
report. The volume of downgrades and defaults remained low, but market expectations of defaults
over the next year rose somewhat, as investor perceptions of the macroeconomic outlook worsened. More than half of investment-grade debt outstanding continues to be rated in the lowest category of the investment-grade range (triple-B). In an economic downturn, widespread downgrades
of bonds to speculative-grade ratings could lead investors to sell the downgraded bonds rapidly, as
some are constrained in their ability to hold speculative-grade debt, potentially increasing market
illiquidity and downward price pressures.
The credit quality of leveraged loans remained solid through the second quarter, but it has worsened lately. Over the summer, the volume of credit rating downgrades exceeded the volume of
upgrades, and default rates inched up, although from historically low levels (figure 2.7). In addition, leveraged loans feature floating interest rates, so rising interest rates, in combination with
a potential slowdown in earnings growth posed by the less favorable economic outlook, could put
pressure on the credit quality of outstanding debt going forward. Amid low volumes, the distribution of loans by one measure of leverage was little changed, on balance, this year. For instance,
the share of newly issued loans to large corporations with debt multiples—defined as the ratio of
debt to earnings before interest, taxes, depreciation, and amortization—greater than 5 decreased
slightly in the second and third quarters, indicating lower tolerance for additional leverage among
investors in this market, although it remained around historical highs (figure 2.8).

Figure 2.7. Default rates on leveraged loans inched up from historically low levels
Percent
Monthly

14
12
10
8
6
4

Sept.

2
0

2001

2004

2007

2010

Source: PitchBook Data, Leveraged Commentary & Data.

2013

2016

2019

2022

−2

Financial Stability Report

Figure 2.8. Majority of new leveraged loans this year have debt multiples above 5
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

2022

Source: Mergent, Fixed Income Securities Database; PitchBook Data, Leveraged Commentary & Data.

Delinquencies at small businesses edged up, but credit quality
remained solid
Credit quality for small businesses remained solid even as delinquency rates edged up lately from
relatively low levels. Borrowing costs increased in the first half of 2022, but they remained lower
than the prevailing pre-pandemic rates. In addition, the share of small businesses that borrow
regularly is rising, according to the National Federation of Independent Business Small Business
Economic Trends Survey, but it is still low relative to historical levels; the share of firms with unmet
financing needs remained quite low.

Vulnerabilities from household debt remained moderate
Despite a sharp decline in equity prices in the first half of 2022, household balance sheets
remained strong, with elevated levels of liquid assets and large home equity cushions. In addition,
prime-rated consumers continued to account for most of the increases in nominal total household
debt. That said, many households started to draw down the buffers of savings that had accumulated during the pandemic. Some households remain financially strained and more vulnerable to
future shocks, especially with persistently high inflation and the accompanying declines in real
income and increases in borrowing costs.

Borrowing by households continued to rise in line with income and is
mostly concentrated among borrowers with low credit risk
Outstanding household debt adjusted for inflation edged down across the credit score distribution,
remaining about flat for prime borrowers and decreasing for near-prime and subprime borrowers
(figure 2.9). Nominal household debt, however, continued to grow in the first half of 2022, except
for student loan debt. Borrowers with prime credit scores, which accounted for more than half of

Borrowing by Businesses and Households

Figure 2.9. Real household debt shrank in the first half of 2022
Trillions of dollars (real)
Quarterly

12
10

Prime
Near prime

4
2

Subprime

2001

2004

2007

2010

2013

2016

2019

2022

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

the total number of borrowers, continued to drive most of the growth. A note of caution, however,
is that this trend reflects both increased borrowing by prime-rated borrowers and a significant
increase in the share of households rated as prime after the distribution of pandemic-related relief
payments.5

Credit risk of outstanding household debt remained generally low
The ratio of total required household debt payments to total disposable income (the household
debt service ratio) increased somewhat in the first half of 2022, suggesting that some households have become more vulnerable to shocks. However, the ratio remained at modest levels after
reaching a historical low in the first quarter of 2021 amid extensive fiscal stimulus, credit card
paydowns, and low interest rates. With interest rates rising, the ratio could increase further. Only
a small share of household debt has a floating rate, mostly in the form of credit card debt, which
should limit the effect of increased interest rates in the near term. For most other types of household debt, rising interest rates increase borrowing cost only for new loan originations.
Mortgage debt accounted for roughly two-thirds of total household debt. New mortgage extensions skewed heavily toward prime borrowers in recent years, with originations of subprime loans
adjusted for inflation running at 25 percent of the peak level in 2006 (figure 2.10). The share
of mortgage balances in a loss-mitigation program continued to decline and stood at low levels.
However, the early payment delinquency rate—the share of balances becoming delinquent within
one year of mortgage origination—started to rise. This rise resulted in an uptick in the overall
5

Analysis suggests that the marked decline in the share of subprime-rated borrowers during the pandemic was in part
driven by the Coronavirus Aid, Relief, and Economic Security Act forbearance provisions and thus might not reflect an
improvement in the overall credit quality of households. Other contributing factors to this acceleration included income
support programs. See Sarena Goodman, Geng Li, Alvaro Mezza, and Lucas Nathe (2021), “Developments in the
Credit Score Distribution over 2020,” FEDS Notes (Washington: Board of Governors of the Federal Reserve System,
April 30), https://www.federalreserve.gov/econres/notes/feds-notes/developments-in-the-credit-score-distributionover-2020-20210430.html.

Financial Stability Report

Figure 2.10. New mortgage extensions in real terms to near-prime and subprime borrowers
have been subdued
Billions of dollars (real)
Annual

Subprime
Near prime
Prime

1600
1200
800
400

2001

2004

2007

2010

2013

2016

2019

2022

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

delinquency rate from a historically low level (figure 2.11). Amid continued house price growth,
just 1.9 percent of mortgage borrowers had negative equity in the second quarter of 2022
(figure 2.12). However, mortgages recently originated with low down payments are subject to entering negative equity quickly if house prices decline significantly. About half of recently originated
purchase mortgages have loan-to-value ratios above 90 percent, a share that has been about
unchanged for the past decade. In addition, these highly leveraged mortgage originations tend to
be associated with somewhat lower average borrower credit scores. Other measures of riskiness
remained modest. Estimates of housing leverage when measuring home values as a function of
rents and other market fundamentals increased in the first half of 2022, yet they remained significantly lower than their peak levels before 2008 (figure 2.13, black line). In addition, interest rate
risk for mortgage borrowers is currently limited. The share of adjustable-rate mortgages in new
home purchases rose to 10 percent in recent months but has been at or below that fraction since

Figure 2.11. Mortgage delinquency rates
remained at historically low levels
Percent of mortgages
Quarterly

Figure 2.12. Very few homeowners had
negative equity in their homes
10

Percent of mortgages
Monthly

8
20

6
4
Delinquent
Delinquent/loss mitigation

2001 2004 2007 2010 2013 2016 2019 2022
Source: Federal Reserve Bank of New York Consumer
Credit Panel/Equifax.

2
0

June

2012

2014

2016

2018

2020

Source: CoreLogic, Inc., Real Estate Data.

2022

Borrowing by Businesses and Households

Figure 2.13. A model-based estimate of housing leverage has remained fairly steady over the past
10 years
1999:Q1 = 100
Quarterly

Relative to model-implied values
Relative to market value

180
160
140
120

100
80

2001

2004

2007

2010

2013

2016

2019

2022

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

2009. Moreover, available data suggest that the nonqualified mortgage share of purchase originations edged up, albeit from extremely low levels.6
The remaining one-third of household debt was consumer credit, which consisted primarily of student loans, auto loans, and credit card debt (as shown in table 2.1). Inflation-adjusted consumer
credit edged down with respect to the same time last year, as the increase in credit card debt was
more than compensated for by the declines in student loan debt and auto debt (figure 2.14). The
contraction in real auto loan balances was driven by declines among near-prime and prime borrowers, while balances for subprime borrowers remained about unchanged on net (figure 2.15). The
Figure 2.14. Real consumer credit edged down
on lower student loan balances

Figure 2.15. Real auto loans outstanding fell
Billions of dollars (real)

Billions of dollars (real)
Quarterly

Student loans

Q2
Credit cards
Auto loans

2001 2004 2007 2010 2013 2016 2019 2022

2000
1800
1600
1400
1200
1000
800
600
400
200

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

Quarterly

700
Q2

Prime

800

Near prime

600
500
400
300

Subprime

2001 2004 2007 2010 2013 2016 2019 2022

200
100

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

Nonqualified mortgages are mortgages that do not satisfy the Ability-to-Repay/Qualified Mortgage Rule, which requires a
creditor to make a reasonable, good faith determination of a consumer’s ability to repay a residential mortgage according to its terms. For more details, see Consumer Financial Protection Bureau (2022), “What Is a Qualified Mortgage?”
webpage, https://www.consumerfinance.gov/ask-cfpb/what-is-a-qualified-mortgage-en-1789.

Financial Stability Report

Figure 2.16. Auto loan delinquencies moved up
but remained at modest levels

share of auto loan balances in loss mitigation
continued to decline and stood at a low level,
but those in delinquent status have increased

Percent

Quarterly
Delinquent
Delinquent/loss mitigation
Q2

those increases were to levels similar to the

modest rates observed during most of the

2001 2004 2007 2010 2013 2016 2019 2022

significantly in the past several quarters. Still,

previous decade (figure 2.16).

Aggregate real credit card balances increased

across the credit score distribution from a

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

year earlier, driven by double-digit nominal
credit card debt growth (figure 2.17). This
rapid increase was driven not only by a higher
level of credit card spending among con-

sumers who pay their balances in full each month, but also by an increase in revolving balances,
especially during the first half of the year. Revolving balances remained about 10 percent below
pre-pandemic levels. With the rise in balances, delinquency rates started to increase from a year
earlier, especially among subprime borrowers, although from historically low levels (figure 2.18).7

Figure 2.17. Real credit card balances have
increased this year, partially reversing earlier
declines

Figure 2.18. Credit card delinquencies
increased but remained at low levels
Percent

Billions of dollars (real)
Quarterly

Subprime

2001 2004 2007 2010 2013 2016 2019 2022

350

10
Near prime

250
150
50

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

450
Q2

30
25

Subprime

Prime

Near prime

550

Quarterly

Prime

5
0

2001 2004 2007 2010 2013 2016 2019 2022
Source: Federal Reserve Bank of New York Consumer
Credit Panel/Equifax.

Securitized credit card outstanding balances amounted to $50 billion in the second quarter of 2022, compared with
$330 billion reached during the 2007–09 financial crisis, which likely limits the effects of consumer credit delinquencies
on financial stability. In addition, delinquency rates in securitized credit card pools remained lower than in the aggregate.
For auto loans, securitized outstanding balances stood around $250 billion in the second quarter of 2022, above the
$200 billion peak reached right before the 2007–09 financial crisis. That said, the current amount represents less than
20 percent of total outstanding balances, whereas it represented 25 percent before the 2007–09 financial crisis. Additionally, only $70 billion are classified as subprime auto asset-backed securities.

Borrowing by Businesses and Households

After rising rapidly for over a decade, nominal student loan debt edged down in the first half of
2022 and declined significantly in inflation-adjusted terms over the same period. The decline was
driven by a combination of factors, including lower loan originations; a pause on interest accumulation for most student loans; repayment; and loan discharges due to disability, school closure or
misconduct, and other factors.

Leverage in the Financial Sector

Leverage at banks and broker-dealers remained relatively low, while
leverage at some types of nonbank financial firms appeared elevated
Overall, vulnerabilities related to financial sector leverage appeared to remain moderate. Some
types of nonbank financial firms operate with high leverage, and their exposures can be difficult
to monitor because of limitations in existing data; these challenges raise the risk that hidden
pockets of leverage could amplify adverse shocks. At the same time, the higher levels of loss-
absorbing capacity in the banking sector and among broker-dealers that have prevailed since the
structural reforms introduced following the 2007–09 financial crisis signal resilience in those institutions. 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,
2021:Q2–2022:Q2
(percent)

Average annual growth,
1997–2022:Q2
(percent)

Banks and credit unions

25,486

4.5

6.1

Mutual funds

17,760

−17.2

8.7

Insurance companies

11,772

−7.2

5.4

Life

8,846

−8.4

5.4

Property and casualty

2,926

−3.2

5.3

Hedge funds*

9,966

16.5

9.9

Broker-dealers**

5,066

2.5

4.9

12,614

8.4

5.5

11,176

7.6

6.0

1,438

14.9

3.6

Item

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

Note: The data extend through 2022:Q2. Outstanding amounts are in nominal terms. Growth rates are measured from Q2 of the year immediately
preceding the period through Q2 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 2022:Q1. Growth rates for the hedge fund data are measured from Q1 of the year
immediately preceding the period through Q1 of 2022.
** 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

Bank capital remained within the range established over the
past decade
The aggregate common equity tier 1 ratio (CET1)—a regulatory risk-based measure of bank capital
adequacy—declined slightly in the second quarter of 2022 and stood close to the average that
has prevailed since the end of the 2007–09 financial crisis. Regarding the largest banks, global
systemically important banks’ (G-SIBs) risk-based capital measures slightly reversed earlier
declines in the second quarter of 2022 (figure 3.1). The results of the 2022 stress test indicate
that large banks would maintain capital ratios well above the minimum risk-based requirements
even during a substantial economic downturn. Moreover, the features of this year’s severely
adverse scenario resulted in larger required capital buffers for several large U.S. banks that took
effect at the start of the fourth quarter of 2022. Three G-SIBs have seen an increase in their G-SIB
surcharges for 2023—that is, the amount of capital G-SIBs must hold in excess of their minimum
capital requirements and stress capital buffers. To meet these higher regulatory capital requirements, G-SIBs have started to reduce their risk-weighted assets, and some have also announced
pauses in their respective stock repurchase programs to bolster retained earnings. Relatedly, bank
profitability continued to be healthy in the second quarter of 2022, in line with pre-pandemic levels
and broadly unchanged from the previous quarter. Strong profitability bolsters banks’ resiliency, as
retained earnings are the most straightforward way for banks to boost their capital position.

Figure 3.1. Banks’ risk-based capital ratio remained near the median level since the 2007–09
financial crisis
Percent of risk-weighted assets
Q2

Quarterly

14
12
10
8

G-SIBs
Large non–G-SIBs
Other BHCs

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.

The ratio of tangible common equity to tangible assets—a measure of bank capital adequacy that
treats all assets as equally risky and excludes intangible items such as goodwill from both capital
and total assets—is lower compared with the beginning of the year, and the industry-wide average
now stands just below the median of its historical distribution (figure 3.2). This decline was driven
in part by a mix of robust balance sheet expansion earlier in the year and a substantial drop in
tangible equity from unrealized losses on securities in the available-for-sale (AFS) portfolio as a

Leverage in the Financial Sector

result of increases in interest rates.8 Some large banks, including all G-SIBs, also must reflect
the decline in market value on their AFS portfolio in their CET1 regulatory capital ratio, however
smaller banks are not obligated to do so.9

Figure 3.2. The ratio of common equity to tangible assets has decreased this year
Percent of tangible assets
Quarterly

12
10

8
6

G-SIBs
Large non–G-SIBs
Other BHCs

1986

1992

1998

2004

2010

2016

4
2
2022

Source: For data through 1996, Federal Financial Institutions Examination Council, Call Report Form FFIEC 031,
Con-solidated Reports of Condition and Income (Call Report); for data from 1997 onward, Federal Reserve Board,
Form FR Y-9C, Consolidated Financial Statements for Holding Companies, and Federal Financial Institutions
Examination Council, Call Report Form FFIEC 031, Consolidated Reports of Condition and Income (Call Report).

Banks’ vulnerability to future credit losses
appears to be moderate. As noted in
Section 2, aggregate credit quality in the

Figure 3.3. Borrower leverage for bank
commercial and industrial loans continued to
trend down

nonfinancial sector remained strong. Borrower
leverage for bank commercial and industrial

Debt as percent of assets
Quarterly

(C&I) loans continued to trend downward

relative to the start of the year (figure 3.3).

Moreover, according to data from the July 2022
SLOOS, banks indicated a recent tightening of

Non-publicly-traded ﬁrms
Publicly traded ﬁrms

lending standards for C&I (figure 3.4) and CRE
(as shown in figure 1.14) loans.

2013

2016

2019

2022

30
28
26
24

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

In contrast to securities held in AFS portfolios, banks have the option to book securities that they intend to own until
their maturity in hold-to-maturity portfolios. These portfolio holdings do not get marked to market, and thus changes in
their valuations do not alter their capital ratios. However, in a rising rate environment, the value of banks’ deposit franchise increases and provides a buffer against these unrealized losses that is also not captured by Generally Accepted
Accounting Principles.

Category 1 and category 2 banks are not allowed to opt out of including accumulated other comprehensive income for
capital calculation and therefore have to include changes in value of AFS securities in CET1. In contrast, category 3
and category 4 banks are not obligated to include changes in the value of their securities portfolio in CET1; as such,
changes in securities prices do not affect their CET1 capital ratios. See a visual representation of the Federal Reserve’s
tailoring rules at https://www.federalreserve.gov/aboutthefed/boardmeetings/files/tailoring-rule-visual-20191010.pdf.

Financial Stability Report

Figure 3.4. Lending standards for bank commercial and industrial loans have tightened

Tightening

Net percentage of banks reporting
Quarterly

Easing

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

1997
2002
2007
2012
2017
2022
Source: Federal Reserve Board, Senior Loan Officer Opinion Survey on Bank Lending Practices; Federal Reserve Board
staff calculations.

Leverage at broker-dealers stayed at historically low levels
Broker-dealer leverage ratios remained near their recent historically low levels (figure 3.5). Dealers’ equity growth has generally kept up with the growth of their assets, boosted in part by strong
trading profits since March 2020 amid heighted market volatility (figures 3.6 and 3.7). Net
secured borrowing of primary dealers edged higher since the May 2022 Financial Stability Report
but remained near the bottom of its range, while gross financing and borrowing has changed little.
Primary dealer Treasury market activities, including market making and repo, remained largely flat
over the year, even as the amount of outstanding Treasury securities available to investors continued to increase. As the gap between dealer market activity and the total amount of Treasury
securities held by investors continues to grow, there may be increased vulnerabilities associated
with dealers’ reduced willingness or ability to accommodate a surge in intermediation demand
during market stress.

Figure 3.5. Leverage at broker-dealers remained historically low
Ratio of assets to equity
Quarterly

50
40
30
20

1997

2002

2007

2012

2017

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

2022

10
0

Leverage in the Financial Sector

Figure 3.6. Profitability of trading operations
has been elevated amid post-pandemic
volatility

Figure 3.7. Share of trading profits by
trading desks
Percent

Millions of dollars
Monthly average

June

2018

2019

2020

2021

2022

Monthly average

1000
900
800
700
600
500
400
300
200
100
0

Source: Federal Reserve Board, Reporting,
Recordkeeping, and Disclosure Requirements
Associated with Proprietary Trading and Certain
Interests in and Relationships with Covered Funds
(FR VV).

Equity
Fixed income, rates, and credit
Other

2018

2019

2020

2021

June

2022

100
80
60
40
20
0

Source: Federal Reserve Board, Reporting,
Recordkeeping, and Disclosure Requirements
Associated with Proprietary Trading and Certain
Interests in and Relationships with Covered Funds
(FR VV).

Dealer respondents from the June and September Senior Credit Officer Opinion Survey on Dealer
Financing Terms (SCOOS) indicated that they had, on net, tightened the terms associated with
securities financing and over-the-counter derivatives transactions, particularly for hedge funds
and trading real estate investment trusts.10 In response to a set of special questions about client
trading activity and terms offered to their clients for cleared and uncleared commodity derivatives,
respondents indicated that price and nonprice terms have tightened since the beginning of the
year for both financial and nonfinancial clients that engage in commodity derivatives trading, consistent with heightened commodity price volatility.

Leverage in parts of the nonbank financial sector appears to be
above average and can be difficult to assess
Vulnerability to leverage among the various categories of nonbank financial firms varies considerably. Leverage at property and casualty (P&C) insurers remained at historically low levels but
declined to near the middle of its historical distribution at life insurance companies. While comprehensive measures of hedge fund leverage remained somewhat above their historical averages,
these measures are only available with a considerable lag. More generally, leverage at many types
of NBFIs can be difficult to measure or monitor in a timely way with available data. These gaps
raise the risk that such firms are using leveraged positions, which could amplify adverse shocks,
especially if they are financed with short-term funding.
10

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

Financial Stability Report

Leverage at life insurance companies decreased this year to the
middle of its historical distribution
Leverage at life insurers has decreased since

Figure 3.8. Leverage at life insurance
companies decreased this year to the middle
of its historical distribution
Ratio of assets to equity
Quarterly

Life
Property and casualty

the previous Financial Stability Report to the
middle of its historical distribution (figure 3.8).
15
12

increase the share of assets allocated to
risky instruments—in particular, to high-yield

corporate bonds, investment-grade privately

placed corporate bonds, and alternative

investments—which leaves insurers’ capital

2001 2004 2007 2010 2013 2016 2019 2022

However, these insurers continued to

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

positions vulnerable to sudden increases in
default risk. The upward trend in the proportion of risky assets became steeper after
the beginning of the pandemic. Rising interest rates likely have a positive effect on the
profitability of life insurers, as their liabilities

generally have had longer effective durations than their assets. However, an unexpected and
sharp surge in interest rates may induce policyholders to surrender their contracts at a higherthan-expected rate, potentially causing some funding strains. Meanwhile, leverage at P&C insurers
remained low relative to h
istorical levels.

Hedge fund leverage continued to be somewhat elevated
Comprehensive measures of hedge fund

Figure 3.9. Leverage at hedge funds
remained elevated

leverage, based on confidential data collected
Ratio

Quarterly

Mean
Median

2013

2016

2019

2022

by the Securities and Exchange Commission,
10
9
8
7
6
5
4
3
2
1
0

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

suggest that, in the first quarter of 2022, both
on-balance-sheet leverage and gross leverage,
which includes off-balance-sheet derivatives
exposures, remained above their historical
averages (figure 3.9). However, moderate net
fractions of primary dealer survey respondents
in the June and September 2022 SCOOS
indicated that the use of hedge fund leverage
had decreased between mid-February and
mid-August amid tighter price and nonprice
borrowing terms (figure 3.10).

Leverage in the Financial Sector

Figure 3.10. But leverage at some hedge funds reportedly decreased recently
Net percentage

Quarterly

20
0
Q3
Hedge funds
Trading REITs

2012

2014

2016

−40

Insurance companies
Mutual funds

2018

−20

−60
2020

2022

−80

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

Issuance of non-agency securities by securitization vehicles
has slowed
After robust issuance in 2021 and in the first few months of 2022, non-agency securitization
issuance—which contributes to the amount of leverage in the financial system—slowed significantly (figure 3.11).11 Reportedly, overall investor demand for non-agency securitized products has
declined somewhat this year, driven in part by a pullback by U.S. banks and open-end bond funds

Figure 3.11. Issuance of non-agency securitized products slowed significantly this year
Billions of dollars (real)
Annual

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

3000
2500
2000
1500
1000
500

2002

2006

2010

2014

2018

2022

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

Securitization allows financial institutions to bundle loans or other financial assets and sell claims on the cash flows
generated by these assets as tradable securities, much like bonds. By funding assets with debt issued by 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. Examples of the resulting securities include collateralized loan obligations (CLOs) (predominantly backed by leveraged loans), asset-backed securities (often backed by credit card and auto debt), commercial
mortgage-backed securities, and residential mortgage-backed securities.

Financial Stability Report

as well as regulatory capital considerations affecting demand from insurance companies.12 Most
securitization sectors exhibit relatively stable credit performance, indicated by low loan delinquency or default rates compared with historical long-term averages.

Bank lending to nonbank financial institutions continued to
grow rapidly
Bank lending to NBFIs, which can be informative about the amount of leverage used by NBFIs and
shed light on their interconnectedness with the rest of the financial system, continued to increase
notably. Banks’ credit commitments to NBFIs have grown rapidly in recent years, having reached a
new high of almost $2 trillion in the second quarter of 2022 (figure 3.12). This increase was broad
based and most pronounced in the category of private equity, business development companies,
and credit funds. The size of unused credit lines provided by banks has proven manageable even
as utilized amounts of revolving credit lines have grown notably over the past year (figure 3.13).
Delinquency rates on banks’ exposure to NBFIs have been lower than rates for the nonfinancial
business sector since the data became available in 2013. However, the limited information we
have on NBFIs’ alternative funding sources, and the extent to which these sources may be fragile,
could contribute to increased vulnerabilities in the financial sector.

Figure 3.12. Bank credit commitments to nonbank financial firms grew to new highs
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

3
4
6
7

Q2 1
2
5

8
9
10

2018

2019

2020

2021

2022

2250
2000
1750
1500
1250
1000
750
500
250
0

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

In 2021, a regulatory capital rule change implemented in the National Association of Insurance Commissioners (NAIC)
capital treatment for insurance company investments divides the existing capital treatment framework into more granular
categories. The new capital rules changed requirements minimally for triple-A-rated tranches but increased capital
requirements notably for more junior tranches.

Leverage in the Financial Sector

Figure 3.13. Loan commitments grew and utilization rates increased in many sectors over the past year
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

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

60
50
40
30
20
10
0
−10
−20
−30

Funding Risks

Funding risks at domestic banks are low, but structural
vulnerabilities persist in other sectors that engage in liquidity
transformation
Over the past year, the total dollar amount of aggregate financial system liabilities that are vulnerable to runs increased 2.9 percent to $19.1 trillion, equivalent to about 77 percent of nominal
GDP (table 4.1 and figure 4.1).13 The large banks that are subject to the liquidity coverage ratio
(LCR) continued to maintain levels of high-quality liquid assets (HQLA) that suggest that their liquid
resources would be sufficient to meet redemptions during periods of stress, and their reliance on
short-term wholesale funding remains low.
Table 4.1. Size of selected instruments and institutions
Item

Outstanding/total assets
(billions of dollars)

Growth,
2021:Q2–2022:Q2
(percent)

Average annual growth,
1997–2022:Q2
(percent)

Total runnable money-like liabilities*

19,080

2.9

4.9

Uninsured deposits

7,887

7.0

12.3

Domestic money market funds**

4,522

−.3

5.5

4,007

1.5

15.9

419

−15.6

−1.2

2.3

−2.8

Repurchase agreements

3,525

−.9

5.0

Commercial paper

1,091

2.4

800

16.6

7.1

4,565

−12.9

9.0

Government
Prime
Tax exempt

Securities lending***
Bond mutual funds

Note: The data extend through 2022:Q2. Outstanding amounts are in nominal terms. Growth rates are measured from Q2 of the year immediately preceding the period through Q2 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 2022:Q2.
** Average annual growth is from 2001:Q1 to 2022:Q2.
*** Data through 2022:Q1. Average annual growth is from 2000:Q1 to 2022:Q1.
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 edged down a touch but remained above
its historical median
Percent of GDP
Quarterly

1. Other
2. Securities lending
3. Commercial paper

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

100
Q2
4

2002

2006

2010

2014

2018

120

1
2
3

80
60

2022

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.

Prime and tax-exempt MMFs as well as other cash-investment vehicles remain vulnerable to runs,
and some of these vehicles maintain stable net asset values (NAVs) that make them particularly
susceptible to sharp increases in interest rates. Some open-end bond mutual funds continued
to be susceptible to large redemptions because they hold assets that can become illiquid amid
stress while promising shareholders the right to redeem their shares every day. The market capitalization of the stablecoin sector continued to decline after falling sharply earlier in the year, and
the sector remains vulnerable to liquidity risks similar to those of cash-like vehicles. As market
volatility persists, CCPs have maintained prefunded resources at high levels. Although CCPs’
variation margin requirements have remained elevated, particularly for interest rate swaps, to date
participants have continued to meet their margin calls.

Banks maintained high levels of liquid assets and stable funding
The amount of HQLA held by banks has declined, and its composition has shifted away from central bank reserves (figure 4.2). However, banks’ LCRs—the requirement whereby large banks must
hold an amount of HQLA to fund cash outflows for 30 days—continue to suggest that banks have
the liquidity resources to meet potential redemptions during periods of stress. These LCRs have
been stable despite the declines in HQLA, in part because larger banks have seen a slight decline
in institutional deposits, which are part of the denominator of the ratio and may be more sensitive
to the significant widening in the spread between deposit rates and short-term market rates in
recent months. Banks’ reliance on short-term wholesale funding, another factor in the LCR denominator, also has remained low (figure 4.3).

Funding Risks

Figure 4.2. The amount of high-quality liquid
assets held by banks has declined but
remained high

Figure 4.3. Reliance on short-term wholesale
funding remained low
Percent of assets

Percent of assets
Quarterly

Quarterly

28
Q2

G-SIBs
Large non–G-SIBs
Other BHCs

16
12

4
2002

2006

2010

2014

2018

2022

2002

2006

2010

2014

2018

2022

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

Structural vulnerabilities remained at some money market funds and
other cash-management vehicles
Prime and tax-exempt MMFs remain a prominent systemic vulnerability because of their susceptibility to runs and the significant role they continue to play in short-term funding markets. Since the
May report, prime MMF assets under management (AUM) have grown 23 percent to approximately
$510 billion, with growth concentrated in retail prime funds, which offer investors a stable NAV
(figure 4.4). Growth in prime MMFs likely reflects faster increases in their yields relative to the
yields of other MMFs and deposit rates, as short-term interest rates have risen. However, the AUM
in this category remained well below its pre-pandemic level. Government MMFs’ AUM were little
changed over the period.

Figure 4.4. Growth in money market funds was concentrated in retail prime funds
Billions of dollars (real)
Monthly

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

4500
3750
3000

2250
2
3
4

2002

2006

2010

2014

6000
5250

Aug.

2018

2022

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

1500
750
0

Financial Stability Report

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. Since the
May report, the aggregate AUM of these cash-management vehicles has held steady at about
$1.3 trillion. Currently, between $500 billion and $1.3 trillion of these vehicles’ AUM are in port
folios similar to those of U.S. prime MMFs, and large redemptions from these vehicles also have
the potential to destabilize short-term funding markets.
In addition, many cash-management vehicles—including retail and government MMFs, offshore
MMFs, and short-term investment funds—seek to maintain stable NAVs that are typically rounded
to $1.00. When short-term interest rates rise sharply or portfolio assets lose value for other reasons, the market values of these funds may fall below their rounded share prices, which can put
the funds under strain, particularly if they also have large redemptions.

Stablecoins remained vulnerable to runs
The market capitalization of stablecoins—digital assets that are designed to maintain a stable
value relative to a national currency or other reference assets—has fallen 7 percent to $143 billion since the previous Financial Stability Report, after exhibiting a much larger decline earlier in
the year following the collapse of TerraUSD, which led to investor outflows and declines in coin
value (see the box “Digital Assets and Financial Stability”).
Although the market capitalization of stablecoins is still relatively small and stablecoins are
currently not widely used as a cash-management vehicle by institutional or retail investors, they
are an important vehicle for digital assets investors. Some stablecoins have structural vulnerabilities that mirror those of cash-like vehicles that engage in liquidity transformation and hold risky
assets, like certain MMFs. Specifically, stablecoins are susceptible to runs if there are widespread
redemption demands by coin holders, and are vulnerable to risks from liquidity and maturity transformation due to holdings of reserve assets that may become illiquid or lose value amid stress or
increases in interest rates. Stablecoins’ holdings of riskier reserve assets, such as commercial
paper and other short-term instruments, have reportedly diminished. Notably, however, the lack of
transparency regarding their asset holdings could exacerbate the effects of their vulnerabilities on
financial stability through spillovers to other cash-management vehicles that participate in these
markets.

Bond mutual funds experienced 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.

Funding Risks

Box 4.1. Digital Assets and Financial Stability
Activities in the digital assets ecosystem can pose challenges to financial stability .1 Digital assets may
offer a host of useful innovations and products . The events of the past few months, however, suggest
that the ecosystem faces similar vulnerabilities and risks to those that can occur in traditional finance,
including runs, excessive leverage, operational risk, opacity, and fraud . Acting now to promote an appropriate regulatory environment for the digital assets ecosystem will help support responsible innovation
while preserving financial stability .
Speculation and risk appetite appear to be the primary driving forces of crypto-asset prices, which have
recorded big swings in recent years . Figure A shows the market capitalization of selected crypto-assets
(excluding stablecoins), which is currently about 69 percent below its November 2021 peak .

Figure A. Market capitalization of selected crypto-assets
Billions of dollars
Daily
Other
XRP
Cardano
BNB
Ether
Bitcoin

Jan.

Apr.

Oct.
19

July
2020

Oct.

Jan.

Apr.

July
2021

Oct.

Jan.

Apr.

July

Oct.

3000
2750
2500
2250
2000
1750
1500
1250
1000
750
500
250
0

2022

Source: Coin Metrics, Inc .

Stablecoins have also experienced significant volatility over the past year, including, in certain cases,
runs . TerraUSD was a stablecoin with market capitalization of about $18 billion before its collapse in
May 2022 . TerraUSD largely lacked assets to back its value, and, as with many other stablecoins, its
demand was mainly driven by the return that investors could earn . Amid a reduction in lending rates
earned by TerraUSD holders in the months before May and temporary liquidity shortages, concerns
about the stability of TerraUSD precipitated a run and a complete collapse within days . Both the market
capitalization of TerraUSD and of the whole Terra blockchain, including its governance token Luna, were
wiped out .2 The collapse of the Terra blockchain was followed by strains throughout the digital assets
ecosystem, highlighting vulnerabilities and interconnections in the space . Several entities that had
direct exposures to TerraUSD or were engaged in speculative bets on other crypto-assets found themselves in financial distress, sometimes leading to bankruptcy . The events surrounding TerraUSD may
(continued)
1

Digital assets, such as crypto-assets and stablecoins, are an electronic representation of value and operate as part of a complex
and interconnected digital ecosystem . Crypto-assets are digital assets that use cryptographic techniques to prove ownership . The
crypto-assets with the largest market capitalization, like Bitcoin or Ether, are not designed to maintain a stable value . Stablecoins
are digital assets that also aim to maintain a stable value relative to a reference asset—typically the U .S . dollar . For a thorough
review, see Pablo D . Azar, Garth Baughman, Francesca Carapella, Jacob Gerszten, Arazi Lubis, JP Perez-Sangimino, David E . Rappoport, Chiara Scotti, Nathan Swem, Alexandros Vardoulakis, and Aurite Werman (2022), “The Financial Stability Implications of
Digital Assets,” Finance and Economics Discussion Series 2022-058 (Washington: Board of Governors of the Federal Reserve
System, August), https://doi .org/10 .17016/FEDS .2022 .058 .

A governance token acts as a decentralized governance body to vote on the direction of a blockchain project or for resetting specific parameters .

Financial Stability Report

Box 4.1—continued
have also triggered a temporary loss of confidence in another stablecoin, Tether, which brieﬂy traded
significantly below its peg . The market capitalization of stablecoins has declined about 22 percent
since its peak in April 2022, with almost half of the decline corresponding to the collapse of TerraUSD .
The aftermath of the turmoil that started in May has also severely curtailed the activity in decentralized
finance (DeFi) protocols .3 As shown in figure B, the total value locked in various DeFi protocols has substantially declined, having dropped about 72 percent from its November 2021 peak .4

Figure B. Total value locked, by category
Billions of dollars
Daily

300
250

Other
Payments
Derivatives
Asset management
Lending
Exchanges

200
Oct.
19

150
100
50

Oct.
2020

Jan.

Apr.

July
2021

Oct.

Jan.

Apr.

July

Oct.

2022

Source: DeFiLlama .

The turmoil in the digital assets ecosystem did not have notable effects on the traditional financial
system because the digital assets ecosystem does not provide significant financial services and its interconnections with the broader financial system are limited . The digital assets ecosystem, however, could
grow rapidly and increase its connections to the traditional financial system . Spillovers from runs on
stablecoins represent the most salient financial stability risk, particularly for those stablecoins backed by
traditional money market instruments . Enforcing existing regulation, expanding the regulatory perimeter,
and addressing regulatory gaps are essential . The FSOC’s Report on Digital Asset Financial Stability Risks
and Regulation, published in October 2022, has several recommendations along these lines .5

DeFi protocols generally refers to open-source code running on open-access blockchains that aim to provide financial products
without traditional financial intermediaries .

Total value locked is the overall value of assets committed to a DeFi protocol . This metric includes governance tokens staked in
the protocol, staked tokens where one of the coins in the pair is the governance token, and borrowed coins in lending protocols .
Certain tokens are double counted across protocols .

See Financial Stability Oversight Council (2022), Report on Digital Asset Financial Stability Risks and Regulation (Washington:
FSOC, October), https://home .treasury .gov/system/files/261/FSOC-Digital-Assets-Report-2022 .pdf .

Funding Risks

Total outstanding amounts of U.S. corporate bonds held by mutual funds fell to its lowest level
since 2013 on an inflation-adjusted basis, primarily driven by a drop in valuations (figure 4.5). The
fraction of mutual fund holdings of corporate bonds was approximately 13 percent of all U.S. corporate bonds outstanding. Total AUM at high-yield and bank-loan mutual funds, which primarily hold
riskier and less liquid assets, also has decreased sharply in real terms so far in 2022 (figure 4.6).

Figure 4.6. Assets held by high-yield and
bank-loan mutual funds also experienced sharp
declines

Figure 4.5. Corporate bonds held by bond
mutual funds fell sharply
Billions of dollars (real)
Quarterly

2100
1800
1500

2002

2006

2010

2014

2018

2022

1200

Billions of dollars (real)
Monthly
July

Bank-loan mutual funds
High-yield
bond mutual funds

600
525
450
375

900

300

600

225

300

150

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.

In general, fixed-income mutual funds typically sustain losses when interest rates rise, and they
have experienced negative returns and sizable outflows most of this year (figure 4.7). These funds
remain susceptible to sharp increases in rates because their interest rate risk, as measured by
the duration of their bond holdings, has reached its highest level since at least 2005.

Figure 4.7. Fixed-income mutual funds experienced sizable outflows this year
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. May Aug.
2017
2018
2019
2020
2021
2022
Source: Investment Company Institute.

−150

Financial Stability Report

Central counterparties’ prefunded resources remained elevated amid
high market volatility
CCPs continue to effectively manage increased risks and have maintained prefunded resources
at elevated levels after increasing their resource requirements in the first quarter of 2022, following the general increase in market volatility.14 Variation margin calls on clearing members have
remained high amid persistent broad market volatility, but the driver of the largest liquidity needs
has shifted toward rate-related exposures and away from commodity-related ones. Clearing members have been able to meet their margin calls; however, looking ahead, some clients—particularly
clients with directional exposure to rates—may need to increase their access to liquidity resources
to avoid having to unwind positions. In addition, concerns remain around the concentration of clients at the largest clearing members even as some clients reduce their hedging activity because
of increased funding costs.

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. Life insurers increased the share of illiquid assets—including CRE
loans, less liquid corporate debt, and alternative investments—on their balance sheets
(figure 4.8). In addition, they continued to rely on nontraditional liabilities, such as fundingagreement-backed securities, Federal Home Loan Bank advances, and cash received through
repurchase agreements and securities lending transactions (figure 4.9).

Figure 4.8. Life insurers held more risky, illiquid assets on their balance sheets
Percent share
50
40

Billions of dollars

1. Other asset-backed securities
2. Commercial real estate
3. Commercial real estate,
securitized

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

2009

2012

2015

2018

2021

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.

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 4.9. Life insurers’ reliance on nontraditional liabilities trended higher
Billions of dollars (real)
Repurchase agreements
Securities lending cash collateral
FHLB advances
Funding-agreement-backed securities

2006

2008

2010

2012

2014

2016

2018

2020

2022

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.

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 greatest concern
to these groups. As noted in the box “Survey of Salient Risks to Financial Stability,” in one recent
outreach, contacts were particularly focused on persistent inflation and monetary tightening by
central banks around the world, energy prices, and geopolitical tensions.
The following discussion considers possible interactions of existing vulnerabilities with several
potential near-term risks. The box “International Risks and U.S. Financial Stability” describes several international risks that could spill over to the U.S. financial system.

Unexpectedly and persistently high inflation and higher interest
rates could pose risks to the economy and the financial system
Rising inflation and higher interest rates worldwide have been a significant drag on the global
economy this year. In the United States, interest rates could increase beyond levels currently
expected and U.S. economic activity could slow substantially if inflationary pressures prove to be
more stubborn than anticipated. These developments would weaken the debt service capacity of
households and businesses and lead to an increase in delinquencies, bankruptcies, and other
forms of financial distress. Household purchasing power would be eroded by higher prices, and a
steep rise in rates would also increase businesses’ borrowing costs. Moreover, higher-thanexpected interest rates could lead to increased volatility in financial markets, stresses to market
liquidity, and declines in asset prices, including prices of both commercial and residential real
estate properties. Such effects could cause losses at a range of financial intermediaries, reducing their access to capital and raising their funding costs, with further adverse consequences for
asset prices, credit availability, and the economy.

Shocks caused by cyber events, especially cyberattacks, could
impair the U.S. financial system
Cyber risk in the financial system, defined as the risk of loss or operational disruptions relating to
dependence on computer systems and digital technologies, has increased over time. Some market commentators have suggested that a disruptive cyberattack on the United States and its allies
could come as retaliation for sanctions imposed on Russia. In addition to cyberattacks, cyber
shocks can also arise from nonmalicious events, such as when hardware malfunctions. Shocks
caused by cyber events, especially cyberattacks, may spread through the financial system through

Financial Stability Report

complex and potentially unrecognized interdependencies across financial firms and market participants, including a lack of substitutes for critical services. When these channels are sufficiently
systemic, cyber shocks—particularly if transmission is amplified by vulnerabilities discussed elsewhere in this report—can disrupt payments or other operational features of the financial system,
obstruct access to funding, trigger funding runs or asset fire sales, and impair price discovery.15
Traditional mitigants such as capital and liquidity may need to be supplemented by other interventions to limit the systemic effects of cyber shocks. Various U.S. government agencies, including
financial regulators, are taking steps to further protect the financial system and financial infrastructures from cyber risks and their effects.

See Danny Brando, Antonis Kotidis, Anna Kovner, Michael Lee, and Stacey L. Schreft (2022). “Implications of Cyber Risk
for Financial Stability,” FEDS Notes. (Washington: Board of Governors of the Federal Reserve System, May 12),
https://doi.org/10.17016/2380-7172.3077.

Near-Term Risks to the Financial System

Box 5.1. International Risks and U.S. Financial Stability
Global growth has slowed and financial conditions abroad have generally tightened since the May
Financial Stability Report, as economies continue to wrestle with the consequences of Russia’s invasion of Ukraine, spillovers from China’s containment of COVID-19 and its struggling property market,
and stubbornly high inﬂation . Lower growth trajectories and rapidly rising interest rates as central
banks respond to inﬂation have led to bouts of market volatility, and the dollar has appreciated significantly against most foreign currencies (figures A and B) . This discussion describes several foreign risks
that, if realized, could spill over into the United States, potentially affecting U .S . financial stability .
Figure A. 10–year government bond yields
Colombia
Poland
United Kingdom
United States
Euro area
Mexico
Canada
South Korea
Sweden
South Africa
Switzerland
Brazil
India
Japan
China

Figure B. U.S. dollar versus currencies of
selected economies
Japan
Sweden
Colombia
Poland
United Kingdom
South Korea
Euro area
South Africa
China
India
Switzerland

Percentage point change
since December 31, 2021

Canada
Percent change since
December 31, 2021

Mexico
Brazil

−1 0

Source: Staff calculations based on data from
Bloomberg Finance L .P .

−10

Source: Staff calculations based on data from
Bloomberg Finance L .P .

Continued or more extreme market volatility could contribute to liquidity strains that play out in unexpected ways .1 Some financial institutions increased their use of leverage and derivatives during the
long period of low and stable interest rates . With the recent sharp rise in the level and volatility of
rates, these institutions can face strains . For example, beginning in late September, a sharp rise in
U .K . government yields forced pension funds that had taken on leveraged interest-rate positions to
liquidate assets to meet margin calls, pushing yields up further . This adverse feedback loop prompted
the Bank of England to introduce a temporary bond purchase program to improve market functioning .
More broadly, periods of market volatility may raise concerns about funding pressures for some financial institutions .
Russia’s invasion of Ukraine continues to deliver a large adverse supply shock to the European economy that may pose challenges to the financial resilience of households, businesses, financial institutions, and governments across the region .2 In late summer, Russia sharply reduced the ﬂow of natural
(continued)
1

A recent study documents that when the dollar appreciated sharply in the context of volatile market conditions and a
liquidity crunch in March 2020, insurance companies and pension funds based in the United Kingdom sold their most
liquid assets (mostly U .K . government bonds) to meet collateral calls on unrelated currency hedging positions . See Robert Czech, Shiyang Huang, Dong Lou, and Tianyu Wang (2021), “An Unintended Consequence of Holding Dollar Assets,”
Staff Working Paper 953 (London: Bank of England, December), https://www .bankofengland .co .uk/working-paper/2021/
an-unintended-consequence-of-holding-dollar-assets .

In addition, the volatility in commodity markets has strained such markets, as discussed in the previous report . See the box
“Commodity Market Stresses following Russia’s Invasion of Ukraine” in the May 2022 Financial Stability Report for a summary
of the effect of the first months of the invasion . Russia’s invasion of Ukraine has affected U .S . commodity markets to a lesser

Financial Stability Report

Box 5.1—continued
gas to Europe, further straining European energy markets and raising the possibility of some form of
energy rationing to manage the supply shock . Higher energy costs could squeeze household budgets
and could lead energy-intensive firms to cut production significantly . Additionally, many borrowers face
rising interest payments . Taken together, these stresses could adversely affect European financial institutions .3 In addition, some European governments’ fiscal positions could be stretched by a combination
of weak revenues, higher refinancing rates, and the cost of support measures .
As U .S . monetary policy has tightened and concerns about global growth have risen, the broad real
U .S . dollar index has strengthened to its highest level in over 30 years . Sharp movements in exchange
rates may pose risks for institutions that are hedging dollar positions and to market functioning . The
higher value of the dollar can increase stresses for any EMEs that have significant amounts of U .S .
dollar debt that is neither hedged nor offset by dollar assets or revenues . This is because dollar appreciation increases the home-currency value of dollar debt, and the consequent increase in leverage may
complicate the refinancing of maturing debt .
Global growth concerns amid rising interest rates in advanced economies have also led to significant
portfolio outﬂows from EMEs . Additionally, trade disruptions and higher commodity prices have caused
stress in some EMEs that are commodity importers . In some countries, droughts or ﬂoods have limited
food supplies or hydroelectric production this year . Combined with higher commodity prices, this has
increased concerns about food and energy security, creating new social and political tensions . These
strains could further weaken the global outlook, and the financial transmission of these effects could
be amplified by existing vulnerabilities in emerging markets, including levels of private-sector and government debt that have increased for many EMEs since the onset of the pandemic .
In China, stresses have persisted in the real estate sector, where activity and prices have been softening since last year .4 Along with disruptions to activity from the ongoing containment of COVID-19, the
slowdown in property markets has contributed to exceptionally weak growth in China this year, prompting increased unemployment, capital outﬂows, and depreciation of the renminbi against the dollar . Very
high levels of corporate debt, particularly in the real estate sector, may further amplify the strains that
these developments could place on the Chinese economy and financial sector . Given China’s size and
its extensive trade linkages, a worsening of the current stresses in China could further depress activity
and trade worldwide . Reduced Chinese import demand has already weighed on some other EMEs .
Disruptions to economic activity or financial markets abroad can affect the United States through
several channels . A pullback in risk-taking worldwide may cause further declines in asset prices and
tighter credit conditions abroad and in the United States . Some U .S . investors would incur losses on
foreign exposures, and foreign financial institutions would likely reduce lending to U .S . businesses . Foreign investors could sell Treasury securities and other safe U .S . assets, potentially adversely affecting
financial-market functioning and the transmission of monetary policy . Foreign official holders might sell
reserves to defend home currencies, and private holders might sell Treasury securities in the context
of a widespread surge in demand for dollar cash buffers .5 Broader pressure on large internationally
active foreign banks could—if sufficiently severe—result in material spillover to U .S . financial stability
through strains on dollar funding markets (in which foreign banks are large participants) and interconnectedness with U .S . banks, although the effects would be mitigated by the resilience and sound capitalization of the U .S . banking system .6 More generally, modern financial markets are interconnected, so
stresses abroad could lead to strains in U .S . markets and challenges for U .S . financial institutions .
extent . Bid-ask spreads—a measure of market liquidity—remain above their historical-average levels for a number of commodities, although they have narrowed in recent months (see the box “Liquidity Conditions in Treasury and Other Core Financial
Markets”) .
3

This possibility was noted in the most recent Financial Stability Reports by the Bank of England (July 2022) and the European
Central Bank (ECB) (May 2022) . The ECB’s report also noted the possibility of a house price correction .

See the box “Stresses in China’s Real Estate Sector” in the May 2022 Financial Stability Report .

See the box “The Role of Foreign Investors in the March 2020 Turmoil in the U .S . Treasury Market” in the November 2021
Financial Stability Report .

See the box “Vulnerabilities in Global U .S . Dollar Funding Markets” in the May 2021 Financial Stability Report .

Near-Term Risks to the Financial System

Box 5.2. Climate Scenario Analysis: An Explainer
As highlighted in the November 2020 Financial Stability Report, the Federal Reserve is developing
ways to monitor and assess financial risks that may arise from climate change . The Federal Reserve’s
responsibilities with respect to climate change are important but narrow . The Federal Reserve is
committed to working within its existing mandates and authorities to promote a safe and stable financial system . The primary responsibility for addressing climate change itself rests with elected officials .
The unprecedented nature of climate change means that anticipating its potential effects on the safety
and soundness of financial institutions and on financial stability requires forward-looking analyses .
One such approach is climate scenario analysis . A climate scenario posits a potential future path of
important climate-related factors, allowing analysts to explore the resulting effects on the economy
and financial system . Different climate scenarios can embody different assumptions about how the
future unfolds, thus helping illustrate how different risks may evolve and allowing an exploration of their
potential implications . For example, in 2021, the European Central Bank conducted an exercise that
assessed risks for companies and banks under three scenarios that varied in their levels of climate
damages and in their transition paths to an economy that produces fewer greenhouse gas emissions .
To construct scenarios, analysts sometimes use economic models that can generate projected values
for variables of interest—such as output, prices, and employment—that, in turn, affect the financial
sector . Analysts can use climate scenarios to explore a wide range of implications in the financial
sector for individual assets, companies, or industries, as well as for the overall macroeconomy . Some
scenario analyses explore longer-run outcomes, such as how sea level rise might affect coastal property values over the life of a mortgage . Other analyses focus on shorter-run effects, such as the immediate effect of a change in climate policy on affected assets . Importantly, climate scenarios, as they
are often used by financial regulators, are neither forecasts nor policy prescriptions in that they do not
necessarily represent the most likely or desirable futures . Indeed, climate scenarios that are useful
for risk analyses include ones that are relatively unlikely but could reveal potentially extreme downside
outcomes that warrant thoughtful risk management .
For some risks, scenario analysis can offer advantages over simple risk metrics . For example, the
economic and financial outcomes of greenhouse gas emissions abatement policies depend critically on
the cost of reducing those emissions, which varies widely across different fuels, sectors, and sources
and across different degrees of abatement . Policy outcomes also depend on how costs to regulated
firms propagate through the economy to affect other firms, households, and the macroeconomy . Economic projections that incorporate these factors can highlight potential effects that might not otherwise be evident .
The Federal Reserve’s climate scenario work includes assessing risks both to individual financial institutions and to the financial system more broadly . Next year, the Federal Reserve plans to engage with a
small set of the largest bank holding companies to conduct a pilot supervisory climate scenario analysis
exercise . This is distinct and separate from the Board’s bank stress tests, which are designed to assess
whether large banks have enough capital to continue lending to households and businesses during a
severe recession . The Board’s climate scenario analysis exercise is exploratory in nature and does not
have capital consequences .
As part of its efforts to understand climate-related financial risks, the Federal Reserve is engaging with
other central banks and authorities bilaterally and through participation in multilateral forums such
as the Financial Stability Board and the Network of Central Banks and Supervisors for Greening the
Financial System . The Federal Reserve is also learning from its counterparts around the world as they
undertake exploratory climate-related supervisory exercises . The Federal Reserve is working closely
with other U .S . financial regulators through the FSOC’s Climate-related Financial Risk Committee . As its
understanding about how to monitor and manage climate-related risks to the financial sector advances,
the Federal Reserve will incorporate new findings into its financial stability work .

Financial Stability Report

Box 5.3. 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 August to mid-October,
the staff surveyed 26 contacts, including professionals at broker-dealers, investment funds, research
and advisory organizations, and universities (figure A) . Risks related to persistent inﬂation and tighter
monetary policy, which were frequently cited in both the spring 2022 and fall 2021 surveys, remained
top of mind (figure B) . Respondents also continued to focus on a potential further escalation of Russia’s invasion of Ukraine, especially as it relates to higher energy and other commodity prices and the
economic outlook in Europe . A number of risks that ranked highly last spring fell in prominence, including concerns over risk asset valuations and the effects of COVID-19 . This discussion summarizes the
most cited risks in this round of outreach .

Persistent inflation and monetary tightening
Respondents remained concerned about the prospect of inﬂationary pressures being more persistent
than anticipated, requiring a more restrictive monetary policy stance than reﬂected in market prices .
Several contacts highlighted the global nature of monetary policy tightening and the potential for
larger-than-anticipated effects on financial conditions as central banks adjust policy synchronously,
especially given long and variable policy lags . Some contacts noted the risk that shrinking central bank
balance sheets could prompt disruptions in funding markets or strains in market functioning . Meanwhile, a number of contacts expressed concern that central banks could pause tightening cycles or
ease policy before inﬂation pressures are fully attenuated, leading to subsequent rounds of tightening
that create volatile market conditions .

Geopolitical risks
Market participants continued to call attention to geopolitical risks, especially the possibility of a
further escalation in Russia’s invasion of Ukraine . In particular, many were attentive to the negative
effects of the energy supply shock on net importers of natural gas—including higher inﬂation, lower
growth, and weaker public finances . Some highlighted the deteriorating economic outlook in Europe as
a result of the ongoing conﬂict, which could exacerbate fiscal deficits, create political instability, and
spill over to the U .S . through trade, institutional, and financial market channels . Respondents also
noted the risk of military or political conﬂict between China and Taiwan as well as any subsequent intervention by the United States, which would further disrupt global supply chains and weigh heavily on
investor sentiment .

Market fragilities
Respondents highlighted a number of financial market developments that could pose risks to financial
stability . Some pointed out that market liquidity, particularly in sovereign bond markets, remains challenged, noting that increases in net supply of debt securities from larger fiscal deficits and shrinking
central bank balance sheets could lead to greater volatility . Several contacts saw potential spillovers
from the scale and speed of the strengthening in the U .S . dollar, including the prospect of disorderly
moves and potential actions by foreign authorities to manage exchange rates, either through intervention or unanticipated shifts in monetary policy .
(continued)

Near-Term Risks to the Financial System

Box 5.3—continued
Figure A. Fall 2022: Most-cited potential risks over the next 12 to 18 months
Persistent inflation; monetary tightening
Russia’s invasion of Ukraine
Market liquidity strains/volatility
Higher energy prices
China–Taiwan conflict
Under-regulated nonbanks
Europe recession
Supply chain disruptions
Value of U.S. dollar
Emerging market economy risks

Percentage of respondents

0
10
20
30
40
50
60
Source: Federal Reserve Bank of New York survey of 26 market contacts from August to October .

Figure B. Spring 2022: Most-cited potential risks over the next 12 to 18 months
Russia’s 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 market contacts from January to April .

Appendix

Figure Notes

Figure 1.1. Nominal Treasury yields increased to levels seen before 2008
The 2- and 10-year Treasury rates are the constant-maturity yields based on the most actively
traded securities.
Figure 1.2. An estimate of the nominal Treasury term premium was low relative to its longrun history
The data extend through October 21, 2022. Term premiums are estimated from a 3-factor term
structure model using Treasury yields and Blue Chip interest rate forecasts.
Figure 1.3. Interest rate volatility increased amid heightened uncertainty
The data extend through October 20, 2022. Implied volatility on the 10-year swap rate, 1 month
ahead, is derived from swaptions. The median value is 80.37 basis points.
Figure 1.4. Treasury market depth suggests liquidity remained below historical norms
Market depth is defined as the average top 3 bid and ask quote sizes for on-the-run Treasury
securities.
Figure 1.5. Corporate bond yields rose to their highest levels in more than a decade
The data extend through October 20, 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. As risk appetite declined, spreads to similar-maturity Treasury securities widened
The data extend through October 20, 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 high-yield series reflects the option-adjusted spread of the ICE BofAML U.S. High Yield
Index (H0A0).
Figure 1.7. The excess bond premium returned to a level consistent with its historical norm
The excess bond premium (EBP) is a measure of bond market investors’ risk sentiment. It is
derived as the residual of a regression that models corporate bond spreads after controlling for
expected default losses. By construction, its historical mean is zero. Positive (negative) EBP values indicate that investors’ risk appetite is below (above) its historical mean.
Figure 1.8. Spreads in the leveraged loan market also increased
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.

Financial Stability Report

Figure 1.9. The price-to-earnings ratio of S&P 500 firms declined but remained a bit above its
historical median
The figure shows the aggregate forward price-to-earnings ratio of S&P 500 firms, based on
expected earnings for 12 months ahead. The median value is 15.45.
Figure 1.10. An estimate of the equity premium declined to about its historical median
The figure shows the difference between the aggregate forward earnings-to-price ratio of S&P 500
firms and the expected real Treasury yields, based on expected earnings for 12 months ahead.
Expected real Treasury yields are calculated from the 10-year consumer price index inflation forecast, and the smoothed nominal yield curve is estimated from off-the-run securities. The median
value is 4.8 percentage points.
Figure 1.11. Volatility in equity markets remained elevated
The data extend through October 20, 2022. Realized volatility is computed from an exponentially
weighted moving average of 5-minute daily realized variances with 75 percent of weight distributed
over the past 20 business days.
Figure 1.12. Commercial real estate prices, adjusted for inflation, remained at high levels
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. Income of commercial properties relative to prices continued declining to historically
low levels
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. Banks reported tightening lending standards in commercial real estate loans
Banks’ responses are weighted by their commercial real estate loan market shares. The
shaded bars with top caps indicate periods of business recession as defined by the National
Bureau of Economic Research: March 2001–November 2001, December 2007–June 2009, and
February 2020–April 2020. Survey respondents to the Senior Loan Officer Opinion Survey on Bank
Lending Practices are asked about the changes over the quarter.
Figure 1.15. Farmland prices were at high levels
The data for the United States start in 1997 and extend through 2022. 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 are annual as of July. The median value is $3,063.58.
Figure 1.16. Farmland prices rose more than rents
The data for the United States start in 1998 and extend through 2022. Midwest index is the
weighted average of Corn Belt and Great Plains states derived from staff calculations. The data
are annual as of July. The median value is 18.1.

Figure Notes

Figure 1.17. After rising rapidly in recent years, house prices decelerated
The Zillow data extends through September 2022, the CoreLogic data extends through
August 2022, and the Case-Shiller data extends through July 2022.
Figure 1.18. A model-based measure pointed to stretched house price valuations
Valuation is measured as the deviation from the long-run relationship between the price-to-rent
ratio and the real 10-year Treasury yield.
Figure 1.19. House price-to-rent ratios remained elevated across geographic areas
The data are seasonally adjusted. Percentiles are based on 19 large metropolitan
statistical areas.
Box 1.1. Liquidity Conditions in Treasury and Other Core Financial Markets
Figure A. Top-of-book average market depth for 2- and 10-year on-the-run Treasury notes
The data show the 5-day moving average of time-weighted average market depth at the best
quoted prices to buy and sell, for 2- and 10-year Treasury notes. OTR is on-the-run; FSR is
Financial Stability Report.
Figure B. Average bid-ask spreads for 2- and 10-year on-the-run Treasury notes
The data show the 5-day moving average of time-weighted average bid-ask spreads, for 2- and
10- year Treasury notes. OTR is on-the-run; FSR is Financial Stability Report.
Figure C. Bid-ask spreads for E-mini S&P 500, crude oil, and wheat futures
The 5-day moving average of bid-ask spreads is deﬁned as (best ask price − best bid price)/
minimum tick size. Days with limit hits are excluded. FSR is Financial Stability Report.
Figure 2.1. The debt of households and businesses relative to GDP was flat in the first half
of 2022
The shaded bars with top caps indicate periods of business recession as defined by the National
Bureau of Economic Research: January 1980–July 1980, July 1981–November 1982, July 1990–
March 1991, March 2001–November 2001, December 2007–June 2009, and February 2020–
April 2020. GDP is gross domestic product.
Figure 2.2. Both business and household debt-to-GDP ratios moved sideways in the first half
of 2022
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. Business debt adjusted for inflation grew modestly in the first half of 2022
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.

Financial Stability Report

Figure 2.4. Net issuance of risky debt was subdued so far this year
Institutional leveraged loans generally exclude loan commitments held by banks. The key identifies
bars in order from top to bottom (except for some bars with at least one negative value).
Figure 2.5. Gross leverage of large businesses remained at high levels
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. Firms’ ability to service their debt, as measured by the interest coverage ratio,
remained high
The interest coverage ratio is earnings before interest and taxes divided by interest payments.
Firms with leverage less than 5 percent and interest payments less than $500,000 are excluded.
Figure 2.7. Default rates on leveraged loans inched up from historically low levels
The data begin in December 1998. The default rate is calculated as the amount in default over the
past 12 months divided by the total outstanding volume at the beginning of the 12-month period.
The shaded bars with top caps indicate periods of business recession as defined by the National
Bureau of Economic Research: March 2001–November 2001, December 2007–June 2009, and
February 2020–April 2020.
Figure 2.8. Majority of new leveraged loans this year have debt multiples above 5
Volumes are for large corporations with earnings before interest, taxes, depreciation, and amortization greater than $50 million and exclude existing tranches of add-ons and amendments as well
as restatements with no new money. The key identifies bars in order from top to bottom.
Figure 2.9. Real household debt shrank in the first half of 2022
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 2022 dollars using the consumer price index.
Figure 2.10. New mortgage extensions in real terms to near-prime and subprime borrowers have
been subdued
Year-over-year change in balances for the second quarter of each year among those households
whose balance increased over this window. Subprime are those with an Equifax Risk Score
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 2022 dollars using the consumer price index. The
key identifies bars in order from left to right.

Figure Notes

Figure 2.11. Mortgage delinquency rates remained at historically low levels
Loss mitigation includes tradelines that have a narrative code of forbearance, natural disaster,
payment deferral (including partial), loan modification (including federal government plans), or
loans with no scheduled payment and a nonzero balance. Delinquent includes loans reported to
the credit bureau at least 30 days past due.
Figure 2.13. A model-based estimate of housing leverage has remained fairly steady over the past
10 years
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. Real consumer credit edged down on lower student loan balances
The data are converted to constant 2022 dollars using the consumer price index. Student loan
data begin in 2005.
Figure 2.15. Real auto loans outstanding fell
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 2022 dollars using the consumer price index.
Figure 2.16. Auto loan delinquencies moved up but remained at modest levels
Loss mitigation includes tradelines that have a narrative code of forbearance, natural disaster, payment deferral (including partial), loan modification (including federal government plans), or loans
with no scheduled payment and a nonzero balance. Delinquent includes loans reported to the
credit bureau as at least 30 days past due. The data for auto loans are reported semiannually by
RADAR until 2017, after which they are reported quarterly. The data for delinquent/loss mitigation
begin in the first quarter of 2001.
Figure 2.17. Real credit card balances have increased this year, partially reversing earlier declines
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 2022 dollars using the consumer price index.
Figure 2.18. Credit card delinquencies increased but remained at low levels
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. Banks’ risk-based capital ratio remained near the median level since the 2007–09
financial crisis
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

Financial Stability Report

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 economic 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. The ratio of common equity to tangible assets has decreased this year
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. Bank assets are total assets net of intangible assets. The shaded bars with top caps
indicate periods of business recession as defined by the National Bureau of Economic Research:
July 1990–March 1991, March 2001–November 2001, December 2007–June 2009, and
February 2020–April 2020.
Figure 3.3. Borrower leverage for bank commercial and industrial loans continued to trend down
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. Lending standards for bank commercial and industrial loans have tightened
Banks’ responses are weighted by their commercial and industrial loan market shares. Survey
respondents to the Senior Loan Officer Opinion Survey on Bank Lending Practices are asked about
the changes over the quarter. Results are shown for loans to large and medium-sized firms. The
shaded bars with top caps indicate periods of business recession as defined by the National
Bureau of Economic Research: March 2001–November 2001, December 2007–June 2009, and
February 2020–April 2020.
Figure 3.5. Leverage at broker-dealers remained historically low
Leverage is calculated by dividing total assets by equity.
Figure 3.6. Profitability of trading operations has been elevated amid post-pandemic volatility
The sample includes all trading desks of bank holding companies subject to the Volcker rule
reporting requirement.

Figure Notes

Figure 3.7. Share of trading profits by trading desks
The sample includes all trading desks of bank holding companies subject to the Volcker rule
reporting requirement. The “other” category comprises desks trading in municipal securities,
foreign exchange, and commodities, as well as any unclassified desks. The key identifies bars in
order from top to bottom.
Figure 3.8. Leverage at life insurance companies decreased this year to the middle of its historical
distribution
Ratio is calculated as (total assets − separate account assets)/(total capital − accumulated other
comprehensive income) using generally accepted accounting principles. The largest 10 publicly
traded life and property and casualty insurers are represented.
Figure 3.9. Leverage at hedge funds remained elevated
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 both
on-balance-sheet and off-balance-sheet 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 3.10. But leverage at some hedge funds reportedly decreased recently
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 3.11. Issuance of non-agency securitized products slowed significantly this year
The data from the first, second, and third quarters 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 3.12. Bank credit commitments to nonbank financial firms grew to new highs
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). BDC is busi-

Financial Stability Report

ness development company. REITs incorporate both mortgage (trading) REITs and equity REITs.
Broker-dealers also include commodity contracts dealers and brokerages and other securities and
commodity exchanges. Other financial vehicles include closed-end investment and mutual funds.
Figure 3.13. Loan commitments grew and utilization rates increased in many sectors over the
past year
2022:Q2-over-2021:Q2 growth rates as of the end of the second quarter of 2022. 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 edged down a touch but remained
above its historical median
The black striped area denotes the period from 2008:Q4 to 2012:Q4, when insured d
eposits
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/feds-notes/2015/
the-runnables-20150903.html.
Figure 4.2. The amount of high-quality liquid assets held by banks has declined but remained high
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. Reliance on short-term wholesale funding remained low
Short-term wholesale funding is defined as the sum of large time deposits with maturity less
than one 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. Growth in money market funds was concentrated in retail prime funds
The data are converted to constant 2022 dollars using the consumer price index.

Figure Notes

Figure 4.5. Corporate bonds held by bond mutual funds fell sharply
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 2022 dollars using the consumer
price index.
Figure 4.6. Assets held by high-yield and bank-loan mutual funds also experienced sharp declines
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. Fixed-income mutual funds experienced sizable outflows this year
Mutual fund assets under management as of August 2022 included $2,249 billion in
investment-grade bond mutual funds, $234 billion in high-yield bond mutual funds, and
$107 billion in bank-loan mutual funds. Bank-loan mutual funds, also known as floating-rate bond
funds, are excluded from high-yield bond mutual funds.
Figure 4.8 Life insurers held more risky, illiquid assets on their balance sheets
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. Life insurers’ reliance on nontraditional liabilities trended higher
The data are converted to constant 2022 dollars using the consumer price index. FHLB is Federal
Home Loan Bank. Data are annual from 2006 to 2010 and quarterly thereafter. The key identifies
series in order from top to bottom.
Box 4.1. Digital Assets and Financial Stability
Figure A. Market capitalization of selected crypto-assets
The “other” category consists of 345 additional tokens. The key identifies bars in order from top
to bottom.
Figure B. Total value locked, by category
The “other” category consists of Algo-Stables, Bridge, CDP, Cross Chain, Farm, Gaming, Launchpad,
Liquid Staking, Oracle, Prediction Market, Privacy, Reserve Currency, RWA, Services, and Staking.
The key identifies bars in order from top to bottom.
Box 5.1. International Risks and U.S. Financial Stability
Figure A. 10-year government bond yields
The German yield is used for the euro area. The data extend through market close on October 20, 2022.

Financial Stability Report

Figure B. U.S. dollar versus currencies of selected economies
The data extend through market close on October 20, 2022.
Box 5.3. Survey of Salient Risks to Financial Stability
Figure A. Fall 2022: Most-cited potential risks over the next 12 to 18 months
Responses are to the following question: “Over the next 12–18 months, which shocks, if realized,
do you think would have the greatest negative effect on the functioning of the U.S. financial
system?”
Figure B. Spring 2022: Most-cited potential risks over the next 12 to 18 months
Responses are to the following question: “Over the next 12–18 months, which shocks, if realized,
do you think would have the greatest negative effect on the functioning of the U.S. financial
system?”

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