Financial Stability Report Highlights Strength of U.S Banking System

6 Dec 2018
Read Time 3 mins
Categories :
Resiliency

Last week, the Federal Reserve issued its inaugural report on financial stability.  The report provides a clear assessment that the nation’s banking system is strong, resilient, and positioned to support the economy, even in the event of an economic downturn.  In addition, the report highlights the tremendous progress that has been made by institutions, policymakers, and regulators during the past decade to promote financial stability.

Reforms undertaken since the financial crisis have made the U.S. financial system far more resilient than it was before the crisis,” the report said. “Banking institutions have built stronger capital and liquidity buffers that, together with reforms to the rules governing money market funds, strengthen the ability of institutions to withstand adverse shocks and reduce their susceptibility to destabilizing runs.” 

—Federal Reserve’s Financial Stability Report

Here are three key takeaways related to the resiliency of large financial institutions from the Financial Stability Report from the Federal Reserve (Fed) that are worth a more thorough review:

 

1. Strong Capital Means Banks Can Continue to Lend, Even in a Severe Downturn

The Fed stressed the increase in capital at the nation’s largest banks and said these banks are positioned to maintain those gains.

A greater amount and a higher quality of capital improve the ability of banks to bear losses while continuing to lend and support the economy,” the Fed said. “Capital levels at broker-dealers have also increased substantially relative to pre-crisis levels.”

—Federal Reserve’s Financial Stability Report

The Forum’s eight member institutions have substantially increased the amount and quality of their capital.  Since 2010, these institutions have increased their Tier 1 capital nearly 42 percent to $920 billion.

Source: FR Y-9C data, available at https://www.ffiec.gov/nicpubweb/nicweb/HCSGreaterThan10B.aspx

 

The Fed also emphasized that this year’s stress test showed that, accounting for a severe global recession, the nation’s largest banks would be able to continue to lend to households and businesses even during such a severe scenario.”

 

2. Liquidity is Also High

The Fed also noted that banks have greatly improved their liquidity positions.

Large banks in particular hold substantial amounts of liquid assets, far exceeding pre-crisis levels and well above regulatory requirements.”

—Federal Reserve’s Financial Stability Report

As the Fed noted, increased liquidity complements increased capital and improves resiliency to adverse shocks.  The eight Forum member institutions now hold more than $2.5 trillion in high-quality liquid assets, double the amount held eight years ago.

Source: FR Y-9C data, available at https://www.ffiec.gov/nicpubweb/nicweb/HCSGreaterThan10B.aspx

 

3. Banks Have Stable Funding Sources, Reducing Risks of Runs

In addition to high levels of capital and liquidity, the Fed underscored the improvements in stable funding sources at the largest banks, which maintain core deposits that are “near historic highs” as a share of total liabilities, the agency said.  They have also significantly decreased reliance on funding sources that are more susceptible to runs.  For example, short-term wholesale funding is “near historical lows” as a share of total liabilities.

Funding risks in the financial system are low relative to the period leading up to the crisis.” 

—Federal Reserve’s Financial Stability Report

 

Forum members’ deposits as a fraction of all liabilities have increased steadily to 58 percent of all liabilities from 37 percent in 2007.

Source: Federal Reserve FR Y-9C data, available at https://www.ffiec.gov/nicpubweb/nicweb/HCSGreaterThan10B.aspx
Note: We define short-term funding as debt maturing in one year or less, commercial paper, federal funds, and trading liabilities.

 

Conclusion

The nation’s largest financial institutions play a crucial role in our economy.  They employ more than one million people, provide almost half of all consumer loans, and underwrite nearly three-quarters of debt and equity transactions, such as IPOs.

The Federal Reserve last week underscored the strength of the U.S. banking sector, pointing toward the significant improvements that have been made by the industry during the past decade.  It is crucial that policymakers promote a system of regulation and oversight that is efficient and effective and does not unduly hinder the ability of the nation’s largest banks to serve customers, communities, and businesses throughout our country.  The nation’s largest banks are positioned to continue to support the economy throughout the economic cycle and will be vigilant to ensure they are safe and sound in the years ahead.

Forum Updates