financial stability · November 21, 2024
Financial Stability Report
Financial Stability Report
November 2024
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
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 policyto promote maximum employment
and stable prices in the U.S. economy;
■ promotes the stability of the financial systemand 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 efficiencythrough
services to the banking industry and U.S. government that facilitate
U.S.-dollar transactions and payments; and
■ promotes consumer protection and community developmentthrough
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.
iii
Contents
Purpose and Framework .............. .. ...... .. ...... .. ...... .. ..... .... v
Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1 Asset Valuations .............. .. ...... .. ...... .. ...... .. ..... .... .... 5
2 Borrowing by Businesses and Households .................. .. ...... .. .. 15
3 Leverage in the Financial Sector ................. ... ...... ... ...... .. .. 25
4 Funding Risks ................ ..... .. ....... . ....... . ........ ........ 37
5 Near-Term Risks to the Financial System .................. .. ...... .. ... 45
box 5.1. Survey of Salient risks to Financial Stability .................. .. ...... . 47
Appendix: Figure Notes ............... ..... .. ........ . ....... . ....... ... 49
Revisions .............. .. .. .. ...... .. ...... .. ...... ... .... ............ 59
Note: This report generally reflects information that was available as of November 4, 2024.
v
Purpose and Framework
This report presents the Federal reserve board’s current assessment of the stability of the u.S.
financial system. by publishing this report, the board intends to promote public understand-
ing by increasing transparency around, and creating accountability for, the Federal reserve’s
views on this topic. Financial stability supports the objectives assigned to the Federal reserve,
including full employment and stable prices, a safe and sound banking system, and an efficient
payments system.
a financial system is considered stable when
banks, other lenders, and financial markets More on the Federal
are able to provide households, communities, Reserve’s Monitoring Efforts
and businesses with the financing they need
See the Financial Stability section of the
to invest, grow, and participate in a well-
Federal reserve board’s website for more
functioning economy—and can do so even information on how the Federal reserve
when hit by adverse events, or “shocks.” monitors the stability of the u.S. and world
financial systems.
Consistent with this view of financial stabil- The website includes:
ity, the Federal reserve board’s monitoring
• a more detailed look at our monitoring
framework distinguishes between shocks to,
framework for assessing risk in each
and vulnerabilities of, the financial system. category;
Shocks are inherently difficult to predict,
• more data and research on related topics;
while vulnerabilities, which are the aspects
• information on how we coordinate, cooper-
of the financial system that would exacerbate ate, and otherwise take action on financial
system issues; and
stress, can be monitored as they build up or
• public education resources describing the
recede over time. as a result, the framework
importance of our efforts.
focuses primarily on assessing vulnerabilities,
with an emphasis on four broad categories
and how those categories might interact to
amplify stress in the financial system.1
1. 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).
1 For a review of the research literature in this area, see Tobias adrian, Daniel Covitz, and Nellie Liang (2015), “Finan-
cial Stability Monitoring,” Annual Review of Financial Economics, vol. 7 (December), pp. 357–95.
vi Financial Stability report
2. Excessive borrowing by businesses and households exposes the borrowers to distress if
their incomes decline or the assets they own fall in value. In these cases, businesses and
households with high debt burdens may need to cut back spending, affecting economic activity
and causing losses for investors (see Section 2, borrowing by businesses and Households).
3. Excessive leverage within the financial sector increases the risk that financial institutions will
not have the ability to absorb losses without disruptions to their normal business operations
when hit by adverse shocks. In those situations, institutions will be forced to cut back lending,
sell their assets, or even shut down. Such responses can impair credit access for households
and businesses, further weakening economic activity (see Section 3, Leverage in the
Financial Sector).
4. Funding risks expose the financial system to the possibility that investors will rapidly
withdraw their funds from a particular institution or sector, creating strains across markets
or institutions. Many financial institutions raise funds from the public with a commitment
to return their investors’ money on short notice, but those institutions then invest much of
those funds in assets that are hard to sell quickly or have a long maturity. This liquidity and
maturity transformation can create an incentive for investors to withdraw funds quickly in
adverse situations. Facing such withdrawals, financial institutions may need to sell assets
quickly at “fire sale” prices, thereby incurring losses and potentially becoming insolvent, as
well as causing additional price declines that can create stress across markets and at other
institutions (see Section 4, Funding risks).
The Federal reserve’s monitoring framework also tracks domestic and international develop-
ments to identify near-term risks—that is, plausible adverse developments or shocks that could
stress the u.S. financial system. The analysis of these risks focuses on assessing how such
potential shocks may spread through the u.S. financial system, given our current assessment of
vulnerabilities.
While this framework provides a systematic way to assess financial stability, some potential
risks may be novel or difficult to quantify and therefore are not captured by the current approach.
Given these complications, we rely on ongoing research by the Federal reserve staff, academ-
ics, and other experts to improve our measurement of existing vulnerabilities and to keep pace
with changes in the financial system that could create new forms of vulnerabilities or add to
existing ones.
Purpose and Framework vii
Federal Reserve actions to promote the resilience of the
financial system
The assessment of financial vulnerabilities informs Federal reserve actions to promote the resil-
ience of the financial system. The Federal reserve works with other domestic agencies directly
and through the Financial Stability Oversight Council to monitor risks to financial stability and to
undertake supervisory and regulatory efforts to mitigate the risks and consequences of financial
instability.
actions taken by the Federal reserve to promote the resilience of the financial system include
its supervision and regulation of financial institutions. In the aftermath of the 2007–09 financial
crisis, these actions have included requirements for more and higher-quality capital, an inno-
vative 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.
1
Overview
This report reviews vulnerabilities affecting the stability of the u.S. financial system related to
valuation pressures, borrowing by businesses and households, financial-sector leverage, and
funding risks. It also highlights several near-term risks that, if realized, could interact with these
vulnerabilities.
a summary of the developments in the four broad categories of vulnerabilities since the
april 2024 Financial Stability Report is as follows:
Overview of financial system vulnerabilities
Borrowing by businesses Leverage in the
Asset valuations Funding risks
and households financial sector
• Valuation pressures • Vulnerabilities • The banking system • Most domestic banks
remained elevated in from business and remained sound maintained high levels
a range of markets, household debt and resilient, with of liquid assets and
including those for remained moderate. regulatory capital stable funding.
equity, corporate debt, ratios approaching
and residential • Business leverage or exceeding • Uninsured deposits
real estate. remained elevated by historical highs. have decreased, but
historical standards. some banks have
• Liquidity in financial • Banks’ market-adjusted increased brokered
markets was generally • Household debt was at capital levels improved and reciprocal deposits
low and can become modest levels relative modestly, on net, or short-term wholesale
strained during periods to gross domestic and remain sensitive funding.
of volatility. product and mostly to changes in
owed by prime-rated interest rates. • Reforms implemented
• Transaction-based borrowers. by the Securities and
prices for commercial • Broker-dealer leverage Exchange Commission
properties changed • Auto and credit card continued to be low. have mitigated some
little but fundamentals loan delinquencies vulnerabilities arising
deteriorated across remained above from institutional
• Hedge fund leverage
multiple sectors. pre-pandemic levels, prime money market
was at or near the
in part reflecting funds, but other
highest level
extension of credit to short-term investment
since 2013.
riskier borrowers. vehicles with structural
vulnerabilities
continued to grow.
• Nontraditional
liabilities at life
insurers continued to
be higher than average.
2 Financial Stability report
1. Asset valuations. Valuation pressures remained elevated. The ratio of equity prices to
earnings moved up toward the high end of its historical range, and an estimate of the equity
premium—the compensation for risk in equity markets—remained well below average.
Spreads between yields on corporate bonds and those on comparable-maturity Treasury
securities were low compared to their history. Liquidity across many financial markets
remained low, contributing to volatility during periods of high uncertainty. In u.S. property
markets, home prices rose further, and the ratio of house prices to rents was near the highest
levels on record. Transaction-based price indexes (adjusted for inflation) for commercial real
estate (CrE) properties were little changed, while rent growth slowed and vacancy rates rose
(see Section 1, asset Valuations).
2. Borrowing by businesses and households. Vulnerabilities from business and household
debt remained moderate. Total debt of households and businesses as a fraction of gross
domestic product (GDP) continued to trend down to a level that is very low relative to the past
two decades. Household debt relative to GDP is especially subdued relative to recent history,
and most household debt is owed by prime-rated borrowers who are well positioned to meet
their payment obligations. That said, delinquency rates on credit cards and auto loans among
borrowers with nonprime credit ratings are above pre-pandemic levels. Indicators of business
leverage remained elevated relative to historical levels, and private credit arrangements have
been growing rapidly. Nonetheless, measures of the ability of businesses to service their
debt have been stable within typical ranges, in part reflecting robust corporate earnings (see
Section 2, borrowing by businesses and Households).
3. Leverage in the financial sector. Vulnerabilities associated with financial leverage remained
notable. The banking sector remained sound and resilient overall, and most banks continued
to report capital levels well above regulatory requirements. Fair value losses on fixed-rate
assets were still sizable for some banks and remained sensitive to changes in interest rates.
Further, some banks, insurers, and securitization vehicles continued to have concentrated
exposures to CrE. Indicators suggest that hedge fund leverage was at or near the highest
level in the past decade. broker-dealer leverage stayed near historical lows (see Section 3,
Leverage in the Financial Sector).
4. Funding risks. Funding risks have decreased some but overall remained notable. Liquidity at
most domestic banks remained sound. Many banks have significantly reduced the fraction of
assets funded with uninsured deposits, but use of short-term wholesale funding and brokered
and reciprocal deposits has increased. The u.S. Securities and Exchange Commission (SEC)
implemented reforms that reduced structural vulnerabilities among institutional prime and
tax-exempt funds. However, other types of money funds and alternatives to money funds with
similar vulnerabilities have grown and bond and loan funds that hold assets that can become
illiquid during periods of stress remained susceptible to large redemptions. In addition, life
insurers continued to rely on a higher-than-average share of nontraditional liabilities (see
Section 4, Funding risks).
Overview 3
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, academ-
ics, and market contacts conducted from late august through late October (discussed in the box
“Survey of Salient risks to Financial Stability”). In the fall survey, there were declines relative to
spring in the share of respondents citing persistent inflation pressures and monetary tightening
or generalized policy uncertainty as among the most notable risks to financial stability. at the
same time, there were sizable increases in the share of respondents who noted among their top
risks to financial stability fiscal debt sustainability, Middle East tensions, or a u.S. recession.
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.”
Fiscal debt Middle East Policy U.S. recession Persistent inflation;
sustainability tensions uncertainty monetary tightening
54% 46% 46% 38% 33%
October
of contacts of contacts of contacts of contacts of contacts
2024
surveyed surveyed surveyed surveyed surveyed
40% 32% 60% 28% 72%
April
2024 of contacts of contacts of contacts of contacts of contacts
surveyed surveyed surveyed surveyed surveyed
5
1 Asset Valuations
Asset valuations remained elevated relative to fundamentals
Since the april report, valuations continued to rise in u.S. equity markets from already high levels
and remained stretched in corporate debt markets. across equity and some debt markets, liquid-
ity remained low, which can amplify the impact of shocks on financial asset valuations. Indeed,
there is some evidence that investors seeking to exit a trading strategy known as the yen-carry
trade contributed to a temporary spike in market volatility at the start of august. The yen-carry
trade is a leveraged trade relying on a large amount of borrowing in Japanese yen. Investors then
use the borrowed funds to invest in other currencies to take advantage of interest rate differen-
tials. Following the bank of Japan’s interest rate increase and weaker-than-expected labor market
indicators in the u.S., investors sought to deleverage their yen-carry trades, leading to heightened
volatility across many markets.
In u.S. property markets, residential real estate valuations remained near the peak levels seen
in the mid-2000s. CrE market conditions continued to deteriorate, especially for the office and
multifamily sectors. Farmland prices were historically elevated relative to rents, reflecting limited
inventories of land.
Table 1.1 shows the sizes of the asset markets discussed in this section. The two largest asset
markets are those for equities and residential real estate, which are substantially larger than the
next two biggest markets, Treasury securities and CrE. The table also shows recent and histori-
cal growth rates for each asset class, because assets experiencing strong growth can be a sign
of high risk appetite with respect to that sector.
Treasury yields fell but remained high relative to the past 15 years
Since the april report, the Treasury yield curve steepened, with the 2-year Treasury yield falling
below the 10-year yield, owing in part to expectations that monetary policy would become less
restrictive. However, yields remained well above their average levels over the past 15 years
(figure 1.1). a model-based estimate of the nominal Treasury term premium—a measure of
the compensation that investors require to hold longer-term Treasury securities rather than
shorter-term ones—was near the top of its range since 2010 (figure 1.2). Interest rate vola-
tility implied by options remained elevated by historical norms (figure 1.3), reflecting, in part,
high uncertainty about the economic outlook and the associated path of monetary policy
as well as heightened sensitivity to news about output growth, inflation, and the supply of
Treasury securities.
6 Financial Stability report
Table 1.1. Size of selected asset markets
Growth, Average annual growth,
Outstanding
Item 2023:Q2–2024:Q2 1998–2024:Q2
(billions of dollars)
(percent) (percent)
Equities 64,379 20.5 8.7
Residential real estate 59,774 6.0 6.4
Treasury securities 26,903 8.6 8.4
Commercial real estate 21,828 −10.8 5.8
Investment-grade corporate bonds 7,820 6.2 7.9
Farmland 3,515 6.6 5.8
High-yield and unrated corporate bonds 1,627 −1.6 6.1
Leveraged loans1 1,392 −.1 12.4
Price growth (real)
Commercial real estate2 −2.0 3.0
Residential real estate3 1.7 2.7
Note: The data extend through 2024:Q2. Outstanding amounts are in nominal terms. Growth rates are nominal and
are measured from Q2 of the year immediately preceding the period through Q2 of the final year of the period. Equi-
ties, real estate, and farmland are at nominal market value; bonds and loans are at nominal book value.
1 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 2001 to 2024:Q2, as this market was fairly small before then.
2 One-year growth of commercial real estate prices is from June 2023 to June 2024, and average annual growth is
from June 1999 to June 2024. Both growth rates are calculated from equal-weighted nominal prices deflated using
the consumer price index (CPI).
3 One-year growth of residential real estate prices is from June 2023 to June 2024, and average annual growth is
from June 1998 to June 2024. Nominal prices are deflated using the CPI.
Source: For leveraged loans, PitchBook Data, Leveraged Commentary & Data; for corporate bonds, Mergent, Inc.,
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 fell but remained high
Percent, annual rate
8
Monthly average
7
2-year 6
10-year
5
Nov.
4
3
2
1
0
1999 2004 2009 2014 2019 2024
Source: Federal reserve board, Statistical release H.15, “Selected Interest rates.”
asset Valuations 7
Figure 1.2. An estimate of the nominal Figure 1.3. Interest rate volatility remained
Treasury term premium was near the top of its well above its median since 2005
range since 2010
Basis points
300
Percentage points Monthly average
2.5
Monthly average 250
2.0
1.5 200
1.0 150
Nov.
0.5 Oct.
100
0.0
−0.5 Median = 81.62 50
−1.0 0
−1.5 2006 2009 2012 2015 2018 2021 2024
1999 2004 2009 2014 2019 2024
Source: For data through July 13, 2022, barclays
Source: Department of the Treasury; Wolters Kluwer, and S&P Global; for data from July 14, 2022,
blue Chip Financial Forecasts; Federal reserve bank onward, ICaP, Swaptions and Interest rate Caps and
of New york; Federal reserve board staff estimates. Floors Data.
Equity market valuations are elevated
The ratio of equity prices to expected
Figure 1.4. The price-to-earnings ratio of
12-month earnings, or the price-to-earnings S&P 500 firms climbed to the upper end of
its historical range
ratio, which at the time of the april report was
already in the upper end of its range since Ratio
30
Monthly
1989, continued to climb (figure 1.4). The dif-
27
ference between the forward earnings-to-price 24
Oct.
21
ratio and the real 10-year Treasury yield—a
18
measure of the additional return that inves-
15
Median = 15.72
tors require for holding stocks relative to risk- 12
free bonds (the equity premium)—remained 9
6
well below its historical median (figure 1.5).2 1989 1996 2003 2010 2017 2024
Option-implied equity market volatility rose, Source: refinitiv, Institutional brokers’ Estimate
System, North american Summary & Detail
on net, after briefly spiking in early august
Estimates, Level 2, Current & History Data, adjusted
and unadjusted, https://www.lseg.com/en/
(figure 1.6, black line).3 That said, it remains
data-analytics/financial-data/company-data/ibes-
near the median of its historical distribution. estimates.
2 This estimate is constructed based on expected corporate earnings for 12 months ahead.
3 realized volatility also briefly spiked in august (figure 1.6, blue line), and market-based perceptions of downside risk,
which are measured as the cost of insurance against a 10 percent price decline in equities over a monthly horizon,
rose, on net, since the april report.
8 Financial Stability report
Figure 1.5. An estimate of the equity premium Figure 1.6. Volatility in equity markets
remained well below its long-run median remained near its historical median
Percentage points Percent
10 80
Monthly Monthly average
Option-implied volatility 70
8 Realized volatility
60
6
50
Median = 19.02
Median = 4.68 4 40
Oct. 2 Oct. 30
20
0
10
−2 0
1994 2000 2006 2012 2018 2024 1996 2000 2004 2008 2012 2016 2020 2024
Source: refinitiv, Institutional brokers’ Estimate Source: Cboe Volatility Index® (VIX®) accessed via
System, North american Summary & Detail bloomberg Finance L.P.; Federal reserve board staff
Estimates, Level 2, Current & History Data, adjusted estimates.
and unadjusted, https://www.lseg.com/en/
data-analytics/financial-data/company-data/ibes-
estimates.
Spreads in corporate debt markets remained low
yields for investment- and speculative-grade bonds fell moderately since the april report
(figure 1.7) and more than comparable-maturity Treasury securities, resulting in slightly
lower spreads. Corporate bond spreads remained low relative to their historical distributions
(figure 1.8). However, the excess bond premium for all nonfinancial corporate bonds—a measure
of the risk premium required by bond investors after controlling for bond characteristics and credit
quality—stayed around its long-run mean (figure 1.9). In addition, nonprice indicators did not
Figure 1.7. Corporate bond yields fell Figure 1.8. Corporate bond spreads went
somewhat and were near their median for the down a little and were at low levels
past 30 years
Percentage points Percentage points
12 24
Percent 24 11 Month end Triple-B (left scale) 22
Month end 22 10 High-yield (right scale) 20
20 9 18
Triple-B 18 8 16
High-yield 16 7 14
14 6 12
12 5 10
10 4 8
Oct. 8 3 Oct. 6
6 2 4
4 1 2
2 0 0
0 1999 2004 2009 2014 2019 2024
1999 2004 2009 2014 2019 2024
Source: ICE Data Indices, LLC, used with permission.
Source: ICE Data Indices, LLC, used with permission.
asset Valuations 9
Figure 1.9. The excess bond premium remained just below its long-run average
Percentage points
4
Monthly
3
2
1
0
Sept.
−1
−2
1999 2004 2009 2014 2019 2024
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.
suggest elevated risk appetite. For example, the share of deep junk corporate bond issuance—
the fraction of bonds rated b- or lower relative to total non-investment-grade issuance—hovered
around low levels in the second quarter of 2024. Market-based forecasts of one-year-ahead
default probabilities (a forward-looking indicator of credit quality) of nonfinancial firms remained
somewhat elevated by historical standards.
Since the last report, the average spread on leveraged loans in the secondary market stayed
moderately below its average over the past decade (figure 1.10), and the year-ahead expected
default rate remained somewhat elevated relative to its historical average level.
Figure 1.10. Spreads on leveraged loans stayed moderately below their averages over the past decade
Percentage points
30
B 25
BB
Frequency change 20
15
10
Nov.
1 5
0
1999 2004 2009 2014 2019 2024
Source: Pitchbook Data, Leveraged Commentary & Data.
10 Financial Stability report
Market liquidity remained low by historical standards
Market liquidity refers to the ease of buying and selling an asset. Low liquidity can amplify the
volatility of asset prices and result in larger price moves in response to shocks. In extreme cases,
low liquidity can threaten continued market functioning, leading to a situation in which partici-
pants are unable to trade without incurring a significant cost.
Treasury market liquidity is important because of the key role these securities play in the finan-
cial system. Various measures of market liquidity, such as market depth, suggested that liquidity
in the Treasury cash market remained low by historical standards, especially in the on-the-run
segment (figures 1.11 and 1.12). However, liquidity is affected by volatility, and recent levels
of liquidity partly reflected elevated measures of interest rate volatility. The effect of low levels
Figure 1.11. Treasury market depth remained below historical norms
Millions of dollars Millions of dollars
35 350
5-day moving average
30 5-year (right scale) 300
10-year (right scale)
25 250
30-year (left scale)
20 200
15 Nov. 150
4
10 100
5 50
0 0
Feb.MayAug.Nov.Feb.MayAug.Nov.Feb.MayAug.Nov.Feb.MayAug.Nov.Feb.MayAug.Nov.Feb.MayAug.Nov.
2019 2020 2021 2022 2023 2024
Source: Inter Dealer broker Community.
Figure 1.12. On-the-run market depth continued to be below historical norms
Millions of dollars Millions of dollars
60 300
5-day moving average
50 2-year OTR market depth (right scale) 250
10-year OTR market depth (left scale)
40 200
30 150
20 Oct. 100
31
10 50
0 0
Oct. Jan. Apr. July Oct. Jan. Apr. July Oct. Jan. Apr. July Oct. Jan. Apr. July Oct. Jan. Apr. July Oct.
2019 2020 2021 2022 2023 2024
Source: brokerTec; Federal reserve board staff calculations.
asset Valuations 11
of market depth on price impact has been limited because market participants split trades into
smaller quantities, and liquidity providers have responded to orders quickly enough to prevent
trades from exhausting best-price quotes and amplifying volatility in Treasury markets. Overall,
liquidity conditions in the Treasury cash market appear challenged and could amplify shocks.
In other markets, liquidity conditions present a mixed picture. Liquidity in corporate bond markets
remained in line with the average level observed in recent years, and bid-ask spreads stayed
close to their lowest levels since the 2007–09 financial crisis. In contrast, liquidity conditions in
equity markets remained low relative to their longer-term distribution since the financial crisis and
deteriorated somewhat further after the early august spike in equity volatility (figure 1.13).
Figure 1.13. A measure of liquidity in equity markets remained below its average
Market depth (number of contracts)
1400
5-day moving average
1200
1000
800
600
Average = 281 400
Nov. 200
1
0
1999 2004 2009 2014 2019 2024
Source: refinitiv, DataScope Tick History; Federal reserve board staff calculations.
Commercial real estate prices were little changed
aggregate CrE prices measured in inflation-
adjusted terms were little changed since Figure 1.14. Commercial real estate prices
adjusted for inflation were little changed
the april report, with the previous pace of
declines appearing to have slowed over Jan. 2001 = 100
180
the past six months broadly across CrE Monthly
160
sectors (figure 1.14). However, these
140
transaction-based prices still may not fully
120
reflect the deterioration in CrE market prices Sept.
100
because, rather than realizing losses, many
80
owners wait for more favorable conditions
60
to put their properties on the market. The
2004 2008 2012 2016 2020 2024
strains on the office sector resulting from
Source: real Capital analytics; consumer price index,
bureau of Labor Statistics via Haver analytics.
an ongoing post-pandemic adjustment have
12 Financial Stability report
continued to mount. Vacancy rates for offices
located in central business districts increased
further, albeit at a slower pace, and nominal
rents were about flat since the april report.
Vacancy rates also have risen for multifamily
and industrial properties, and rent growth has
weakened for these types of properties. Capi-
talization rates at the time of property pur-
chase, which measure the annual income of
commercial properties relative to their prices,
remained near the low end of the historical
distribution, but the high uncertainty about
lags in the declines registered by CrE price
indexes and fundamentals across CrE mar-
kets makes them less reliable in assessing
CrE valuation pressures (figure 1.15). In the
July 2024 Senior Loan Officer Opinion Survey
on bank Lending Practices (SLOOS), banks reported having tightened standards for all CrE loan
categories again in the second quarter of 2024 (figure 1.16).4 Most banks indicated that the cur-
rent levels of standards for CrE loans were at least somewhat tighter than the midpoint of their
historical distribution over the past 20 years.
Figure 1.16. Banks reported having tightened lending standards for commercial real estate loans
Net percentage of banks reporting
100
Quarterly
80
60
40
20
Q2
0
−20
−40
−60
−80
−100
1999 2004 2009 2014 2019 2024
4 The SLOOS results reported in the this report are based on banks’ responses weighted by each bank’s outstanding
loans in the respective loan category and might therefore differ from the results reported in the published SLOOS,
which are based on banks’ unweighted responses.
gninethgiT
gnisaE
Figure 1.15. Income of commercial properties
relative to prices increased but remained
below its historical average
Percent
10.0
Monthly 9.5
9.0
8.5
8.0
7.5
7.0
Sept.
6.5
6.0
5.5
5.0
2004 2008 2012 2016 2020 2024
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.
Source: Federal reserve board, Senior Loan Officer Opinion Survey on bank Lending Practices; Federal reserve
board staff calculations.
asset Valuations 13
Residential real estate prices remained high relative to fundamentals
Valuations in the residential real estate sector continued to increase since the april report from
levels that were already elevated relative to historical standards. The growth of house prices con-
tinued through august of this year (figure 1.17). a model of house price valuation based on prices
relative to market rents and the real 10-year Treasury yield suggests that valuations in housing
markets remained stretched. Moreover, an alternative measure of valuation pressures (which
uses owners’ equivalent rent instead of market rents and has a longer history) also suggested
elevated valuations (figure 1.18). The median price-to-rent ratio measured across a wide distribu-
tion of geographic areas was little changed over the first half of 2024, around its previous peak
in the mid-2000s (figure 1.19). In contrast to the early-to-mid 2000s, lenders have not shown
Figure 1.17. Nominal house prices continued Figure 1.18. Model-based measures of
to increase in recent months house price valuations climbed to historically
high levels
12-month percent change
25
Monthly Percent
20 40
Quarterly
15
30
10
Owners’ equivalent rent
5 Market-based rents 20
0 Q3 10
−5
Zillow −10 0
CoreLogic
Case-Shiller −15 −10
−20
−20
−25
2003 2006 2009 2012 2015 2018 2021 2024 −30
1982 1989 1996 2003 2010 2017 2024
Source: Zillow, Inc., real Estate Data; CoreLogic,
Inc., real Estate Data; S&P Case-Shiller Home Source: For house prices, Zillow, Inc., real Estate
Price Indices. Data; for rent data, bureau of Labor Statistics.
Figure 1.19. House price-to-rent ratios remained elevated across geographic areas
Jan. 2010 = 100
220
Monthly
Median
Middle 80 percent of markets 180
140
100
Aug.
60
1996 2000 2004 2008 2012 2016 2020 2024
Source: For house prices, Zillow, Inc., real Estate Data; for rent data, bureau of Labor Statistics.
14 Financial Stability report
the high risk appetite that fueled excessive borrowing in that earlier period, suggesting that weak
credit standards are not driving recent house price growth. For example, banks reported in the
SLOOS that standards for residential real estate loans were on the tighter end of their historical
range since 2005.
Farmland valuations remained high relative to farm income
Farmland valuations remained elevated, as in 2024 u.S. farmland prices continued to rise past
the previous peak of the historical distribution (figure 1.20). Farmland price-to-rent ratios hovered
around a level roughly twice the median of their historical distribution (figure 1.21). Prices contin-
ued to be sustained in the short run by limited farmland inventory despite declining farm income,
elevated interest rates, and higher operating costs.
Figure 1.20. Inflation-adjusted farmland prices rose further from already-elevated levels
2023 dollars per acre
8000
Annual
Midwest index 7000
U.S.
6000
5000
Median = $3,596.66 4000
3000
2000
1000
1968 1976 1984 1992 2000 2008 2016 2024
Source: Department of agriculture; Federal reserve bank of Minneapolis staff calculations.
Figure 1.21. Farmland prices relative to rents increased to historical highs
Ratio
40
Annual
35
Midwest index
30
U.S.
25
Median = 18.19 20
15
10
5
1968 1976 1984 1992 2000 2008 2016 2024
Source: Department of agriculture; Federal reserve bank of Minneapolis staff calculations.
15
2 Borrowing by Businesses and
Households
Vulnerabilities from business and household debt remained moderate
The balance sheet conditions of households and businesses continued to improve on net. Growth
in nominal GDP has outpaced the modest growth in total private nonfinancial-sector debt in
recent years. as a result, the debt-to-GDP ratio has declined to the lowest level in two decades
(figure 2.1). Trends in both the household and business sectors contributed to the decline in the
overall debt-to-GDP ratio.
business debt-to-GDP (figure 2.2, blue line) and gross leverage of publicly traded corporations
remained at levels near the top of their respective historical ranges. Interest coverage ratios
(ICrs)—defined as the ratio of earnings before interest and tax to interest expense—remained
flat at moderate levels, partly reflecting resilient earnings.
Figure 2.1. The total debt of businesses and households relative to GDP declined to its lowest level in
20 years
Ratio
2.0
Quarterly
1.7
Q2 1.4
1.1
0.8
1982 1988 1994 2000 2006 2012 2018 2024
Source: Federal reserve board staff calculations based on bureau of Economic analysis, national income and
product accounts, and Federal reserve board, Statistical release Z.1, “Financial accounts of the united States.”
Figure 2.2. Both business and household debt-to-GDP ratios continued to edge down
Ratio Ratio
1.1 1.0
Quarterly
1.0
0.9
0.9
0.8
0.8
0.7 0.7
Q2
0.6
Nonfinancial business 0.6
0.5 (right scale)
0.4 Household (left scale) 0.5
0.3 0.4
1982 1988 1994 2000 2006 2012 2018 2024
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.”
16 Financial Stability report
The household debt-to-GDP ratio continued to edge down to near 20-year lows (figure 2.2, black
line). Homeowners have solid equity cushions, and many households have been benefiting from
lower interest rate payments associated with refinancing or home purchases several years ago.
That said, delinquency rates for credit cards and auto loans to nonprime borrowers were above
their pre-pandemic levels.
While balance sheets in the nonfinancial business and household sectors remained sound, a
sharp downturn in economic activity would depress business earnings and household incomes
and reduce the debt-servicing capacity of smaller, riskier businesses with already low ICrs as well
as particularly financially stretched households.
For additional context, table 2.1 shows the amounts outstanding and recent historical growth
rates of different forms of debt owed by nonfinancial businesses and households as of the
second quarter of 2024.
Table 2.1. Outstanding amounts of nonfinancial business and household credit
Growth, Average annual growth,
Outstanding
Item 2023:Q2–2024:Q2 1998–2024:Q2
(billions of dollars)
(percent) (percent)
Total private nonfinancial credit 41,542 2.6 5.4
Total nonfinancial business credit 21,407 2.3 5.8
Corporate business credit 13,835 2.5 5.4
Bonds and commercial paper 8,420 2.8 5.6
Bank lending 2,207 2.1 4.2
Leveraged loans1 1,354 −.3 12.6
Noncorporate business credit 7,571 2.0 6.8
Commercial real estate credit 3,196 1.3 6.0
Total household credit 20,136 2.8 5.1
Mortgages 13,140 2.6 5.0
Consumer credit 5,023 1.7 5.2
Student loans 1,745 −.9 7.4
Auto loans 1,563 1.8 5.3
Credit cards 1,307 6.7 3.7
Nominal GDP 28,652 5.9 4.7
Note: The data extend through 2024:Q2. Outstanding amounts are in nominal terms. Growth rates are nominal and
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 nonfinan-
cial corporate and noncorporate businesses as defined in Table L.220: Commercial Mortgages in the “Financial
Accounts of the United States.” Total household-sector credit includes debt owed by other entities, such as nonprofit
organizations. GDP is gross domestic product.
1 Leveraged loans included in this table are an estimate of the leveraged loans that are made to nonfinancial busi-
nesses 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. Average annual growth of leveraged loans is
from 2001 to 2024:Q2, as this market was fairly small before then.
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.”
borrowing by businesses and Households 17
Business debt vulnerabilities remained moderate
Nonfinancial business debt adjusted for infla-
Figure 2.3. Business debt adjusted for
tion grew modestly in the first half of this year inflation grew modestly
after declining in 2023 (figure 2.3). Traditional
Percent change, annual rate
20
sources of business debt, such as corpo- Quarterly
rate bonds and bank-intermediated loans, 15
have grown slowly in recent quarters. Net 10
issuance of risky debt—defined as issuance 5
Q2
of speculative-grade bonds, unrated bonds, 0
and leveraged loans minus retirements and −5
repayments—edged up in the second and −10
1999 2004 2009 2014 2019 2024
third quarters of 2024, partially reversing
Source: Federal reserve board, Statistical release Z.1,
declines in previous quarters (figure 2.4). The “Financial accounts of the united States.”
net issuance of institutional leveraged loans,
which has been particularly weak since late
2022, was moderately positive in the third quarter. In contrast to traditional forms of business
credit, private credit has grown quickly recently and constitutes about 7 percent of total outstand-
ing nonfinancial corporate debt.
Figure 2.4. Net issuance of risky debt remained subdued
Billions of dollars
120
Quarterly
Institutional leveraged loans 100
High-yield and unrated bonds 80
60
40
Q3 20
0
−20
−40
−60
2004 2008 2012 2016 2020 2024
Source: Mergent, Inc., Fixed Income Securities Database; Pitchbook Data, Leveraged Commentary & Data.
Gross leverage—the ratio of debt to assets—of all publicly traded nonfinancial firms remained
high by historical standards in the second quarter of 2024 (figure 2.5), though significantly
lower than record highs seen at the onset of the pandemic. Net leverage—the ratio of debt less
cash to total assets—also stayed elevated among large publicly traded businesses. Overall,
corporate profits remained robust, and firms continued to be well placed to service their debt,
despite some emerging signs of weakness among riskier firms. The median ICr for all publicly
traded firms and for publicly traded firms rated below-investment-grade was flat in the first half
18 Financial Stability report
Figure 2.5. Gross leverage of large businesses Figure 2.6. Interest coverage ratios, which
stayed high by historical standards indicate firms’ ability to service their debt,
have changed little
Percent
55
Quarterly Ratio
6
75th percentile 50 Quarterly
All firms
45 5
Median for all firms
Q2 40 Median for all non-investment-grade firms 4
35 3
30
Q2 2
25
1
20
2000 2004 2008 2012 2016 2020 2024 0
2000 2004 2008 2012 2016 2020 2024
Source: Federal reserve board staff calculations
based on S&P Global, Compustat. Source: Federal reserve board staff calculations
based on S&P Global, Compustat.
of 2024, around levels that were well below post-pandemic peaks and somewhat below the level
that prevailed from 2011 to 2020 (figure 2.6). The pass-through of higher interest rates to firms’
borrowing costs remained moderate, reflecting record fixed-rate debt issuance by firms during the
pandemic when interest rates were low.5 The 12-month trailing corporate bond default rate was
little changed, on net, around the median of its historical distribution. Expectations of year-ahead
defaults remained somewhat elevated relative to their history.
Credit quality of leveraged loans remained below historical norms. The share of newly issued
loans to large corporations with debt multiples—defined as the ratio of debt to earnings before
interest, taxes, depreciation, and amortization—greater than 4 fell in 2023 to its lowest level in
the past decade and it hovered around that level through the third quarter of 2024 (figure 2.7).
ICrs on outstanding leveraged loans remained in the low end of their historical distribution for the
past decade, and ICrs on newly issued leveraged loans were also near their historical lows since
2006. The volume-weighted default rate on leveraged loans stayed well below previous peaks.
However, the number of defaults and distressed loans that have been worked out (that is, renego-
tiated between the borrower and the lender) has been elevated relative to history (figure 2.8).
Small and middle-market firms that are privately held—which have less access to capital markets
and primarily borrow from banks, private credit funds, and other sophisticated investors (such as
insurance companies)—account for roughly 60 percent of the total outstanding debt of u.S. non-
financial firms. While data for these firms are not as comprehensive as those for larger firms, vul-
nerabilities for these firms continued to edge up throughout the second quarter of 2024. Median
5 Only about 8 percent of outstanding bonds rated triple-b and 4 percent of outstanding high-yield bonds are due within
a year. That said, about 16 percent of outstanding bonds rated triple-b and 20 percent of outstanding high-yield
bonds are due within one to three years, indicating that pass-through may be higher if borrowing costs stay elevated
for longer.
borrowing by businesses and Households 19
Figure 2.7. New leveraged loans with debt multiples greater than 4 have been near their lowest levels
in a decade
Percent
Debt multiples ≥ 6x
Debt multiples 5x–5.99x
Debt multiples 4x–4.99x
Debt multiples < 4x Q3
100
80
60
40
20
0
2003 2006 2009 2012 2015 2018 2021 2024
Source: Mergent, Inc., Fixed Income Securities Database; Pitchbook Data, Leveraged Commentary & Data.
Figure 2.8. The default rate on leveraged loans remained well below its previous peaks
Percent
14
Monthly
12
Realized default rate
Realized default rate (including 10
distressed exchanges) 8
6
4
Sept.
2
0
−2
1999 2004 2009 2014 2019 2024
Source: Pitchbook Data, Leveraged Commentary & Data.
gross and net leverage of private firms continued to inch up in the second quarter of 2024 but
remained a bit below their historical medians. The ICr for the median firm in this category kept
its downward trend from its peak in 2022 and currently stands only slightly above pre-pandemic
levels, as higher interest rates started to reduce earnings and raise the cost of debt servicing.
The average ICr at issuance for private credit is below 2, indicating debt-servicing capacity in the
range of below-investment-grade public firms.
Delinquencies at small businesses were above pre-pandemic levels,
and credit availability tightened
Interest rates on small business loans have been largely stable in recent months and remained
near the top of the range observed since 2008. according to the National Federation of Inde-
pendent business’s Small business Economic Trends Survey, the share of firms that borrow
regularly has fallen in recent months and sits in the lower range of its historical distribution in
20 Financial Stability report
September 2024.6 Credit availability appeared to tighten for small firms in recent months. Data
from the Small business Lending Survey showed that banks continued to tighten standards
on loans to small businesses.7 Further, measures of small business loan originations declined
through September 2024. Small business credit quality has deteriorated in recent quarters, as
both short-term (up to 90 days) and long-term (more than 90 days) delinquency rates rose from
the historically low levels reached in spring 2022 to above their pre-pandemic levels.
Vulnerabilities from household debt remained moderate
Outstanding household debt adjusted for inflation has been little changed since the april report
(figure 2.9). The ratio of total required household debt payments to total disposable income
(the household debt-service ratio) was little changed at modest levels. as most household debt
carries fixed interest rates, the increase in interest rates over 2022 and 2023 has only partially
passed through to household interest expenses.
Figure 2.9. Inflation-adjusted household debt has been little changed
Trillions of dollars (real)
16
Quarterly
14
Prime 12
Near prime
10
Subprime
Q3 8
6
4
2
0
1999 2004 2009 2014 2019 2024
Source: Federal reserve bank of New york Consumer Credit Panel/Equifax; consumer price index, bureau of Labor
Statistics via Haver analytics.
Mortgage credit risk remained low
Mortgage debt accounts for roughly three-fourths of total household debt. Since the april report,
estimates of housing leverage, which measure outstanding mortgage loan balances relative to
home values, stayed significantly below their previous peaks (figure 2.10). The model-based
6 This survey’s data are available on the National Federation of Independent business’s website at https://www.nfib.
com/surveys/small-business-economic-trends.
7 This survey’s data are available on the Federal reserve bank of Kansas City’s website at https://www.kansascityfed.
org/surveys/small-business-lending-survey/.
borrowing by businesses and Households 21
Figure 2.10. A model-based estimate of housing leverage stayed significantly below its peak levels
1999:Q1 = 100
180
Quarterly
Relative to model-implied values
160
Relative to market value
140
120
100
Q3
80
60
1999 2004 2009 2014 2019 2024
Source: Federal reserve bank of New york Consumer Credit Panel/Equifax; Zillow, Inc., real Estate Data; bureau of
Labor Statistics via Haver analytics.
measure (black line), which measures home values as a function of rents and other market fun-
damentals, indicated higher leverage than the market-based measure (blue line), suggesting that
homeowners’ current large equity cushions are vulnerable to a future price correction. However,
the model-based measure was only modestly elevated relative to its history. The overall mortgage
delinquency rate and the share of mortgage balances in loss-mitigation programs in the third
quarter remained close to the lower end of their historical distribution (figure 2.11). Delinquency
rates have been held in check by large home equity cushions (figure 2.12) and strong underwrit-
ing standards.
Figure 2.11. Mortgage delinquency rates Figure 2.12. Very few homeowners had
remained close to the low end of their negative equity in their homes
historical distribution
Percent of mortgages
30
Percent of mortgages Monthly
10
Quarterly 25
8 20
15
6
10
4
5
Q3 June
Mortgages in loss mitigation 2 0
All mortgages
0 2012 2014 2016 2018 2020 2022 2024
2004 2009 2014 2019 2024
Source: CoreLogic, Inc., real Estate Data.
Source: Federal reserve bank of New york Consumer
Credit Panel/Equifax.
22 Financial Stability report
New mortgage extensions, which have been skewed heavily toward prime borrowers over the
past decade, continued to decline in the second quarter of 2024 amid elevated mortgage rates
and high house prices (figure 2.13). In the fourth quarter of 2023, the early payment delinquency
rate—the share of balances becoming delinquent within one year of mortgage origination—
remained somewhat above the median of its historical distribution, possibly reflecting higher
house prices and interest rates and the corresponding financial strains on newly originated
mortgages.
Figure 2.13. New mortgage extensions declined across all borrower categories
Billions of dollars (real)
1800
Annual
Subprime 1600
Near prime 1400
Prime 1200
1000
800
600
400
200
0
2000 2004 2008 2012 2016 2020 2024
Source: Federal reserve bank of New york Consumer Credit Panel/Equifax; consumer price index, bureau of Labor
Statistics via Haver analytics.
Credit risk of consumer debt edged up, with some signs of stress
among borrowers with lower credit scores
Consumer debt—which accounts for the remaining one-fourth of household debt and consists
primarily of student, auto, and credit card loans—was about flat in inflation-adjusted terms since
the last report (figure 2.14). However, delinquency rates for auto loans and credit cards remained
Figure 2.14. Inflation-adjusted consumer credit has been about flat since late last year
Billions of dollars (real)
2000
Quarterly
Student loans 1800
Auto loans 1600
Credit cards
Q3 1400
1200
1000
800
600
400
200
1999 2004 2009 2014 2019 2024
Source: Federal reserve bank of New york Consumer Credit Panel/Equifax; consumer price index, bureau of Labor
Statistics via Haver analytics.
borrowing by businesses and Households 23
above average, particularly among borrowers with lower credit scores. These borrowers hold a rel-
atively small share of aggregate debt, and their high delinquency rates reportedly reflect, in part,
increased borrowing by some households during and after the pandemic, rather than an abrupt
broad-based weakening in households’ ability to repay. Partly in response, lenders have tightened
credit standards on those types of loans.
Inflation-adjusted auto loan balances were about flat since the last report at levels below their
recent highs. Continued growth for subprime borrowers offset small declines for near-prime bor-
rowers. The average maturity of auto loans at origination remained elevated in recent quarters,
particularly for lower-credit score borrowers (figure 2.15). On balance, long-maturity loans tend to
have higher default risks, partly because such loans have higher risk of falling deep into a nega-
tive equity position, which can be a factor that influences consumer defaults. The share of auto
loans in delinquent status stayed at a level somewhat above its historical median (figure 2.16)
after having increased moderately in recent years, largely owing to a more significant rise in
auto loan delinquencies for subprime borrowers throughout 2023. The rise in delinquencies for
Figure 2.15. Average maturity of auto loans at origination for used cars remained elevated
Months
70
Monthly
68
July
66
Prime
64
Near prime
Subprime
62
60
2018 2019 2020 2021 2022 2023 2024
Source: Experian Velocity.
Figure 2.16. Auto loan delinquencies have been somewhat above normal levels
Percent
6
Quarterly
5
Q3 4
3
2
1
0
2000 2004 2008 2012 2016 2020 2024
Source: Federal reserve bank of New york Consumer Credit Panel/Equifax.
24 Financial Stability report
subprime borrowers likely owes to a combination of factors, such as high car prices, loosened
underwriting, higher interest rates, and elevated loan maturities.
aggregate inflation-adjusted credit card balances were little changed for prime and near-prime
borrowers through the third quarter of 2024 but continued to inch up for subprime borrowers
(figure 2.17). Credit card delinquency rates moved up further in the third quarter and have
reached their highest level since 2010 (figure 2.18), which largely owes to elevated delinquencies
among nonprime borrowers.
Figure 2.17. Inflation-adjusted credit card balances for subprime borrowers trended higher but
remained well below previous peaks
Billions of dollars (real)
700
Quarterly
600
500
Q3
400
300
Prime
200
Near prime
Subprime 100
0
1999 2004 2009 2014 2019 2024
Source: Federal reserve bank of New york Consumer Credit Panel/Equifax; consumer price index, bureau of Labor
Statistics via Haver analytics.
Figure 2.18. Credit card delinquencies rose further to somewhat above their pre-pandemic levels
Percent
8
Quarterly
6
Q3
4
2
0
2000 2004 2008 2012 2016 2020 2024
Source: Federal reserve bank of New york Consumer Credit Panel/Equifax.
25
3 Leverage in the Financial Sector
Vulnerabilities associated with financial leverage remained notable
The banking system, overall, remained sound and resilient. Measures of regulatory capital for
banks increased further over the first half of 2024, and indicators of profitability were near aver-
age levels. However, fair value losses on banks’ fixed-rate assets as of the start of November
remained sizable, the fair value of banks’ assets continued to be sensitive to movements in long-
term interest rates, and some banks still had concentrated exposures to loans backed by CrE.
Outside the banking sector, leverage at broker-dealers was stable near historically low levels, but
uncertainties around dealers’ intermediation capacity during periods of market stress remained a
vulnerability to Treasury markets. Life insurers’ leverage was little changed and continued to hold
a significant share of illiquid and risky assets. In the first quarter of 2024, measures of hedge
fund leverage that account for hedge fund size were at or near the highest level observed since
the data became available in 2013.
Table 3.1 shows the sizes and growth rates of the assets of financial institutions discussed in
this section.
Bank profitability remained solid
Measures of bank profitability over the first half of 2024 were within typical ranges, and third-
quarter earnings reports showed that overall profitability remained robust. banks’ average rate
on interest-earning assets continued to sit well above the average interest rate paid on liabilities
as of the second quarter of 2024 (figure 3.1). The gap between the two rates, known as the
net interest margin, narrowed slightly in the first half of 2024 relative to its levels in 2023. The
narrowing reflected some further pass-through to bank funding rates of higher rates on short-term
instruments that outpaced the pass-through to interest rates on assets.
Measures of banks’ regulatory capital increased further
The common equity Tier 1 (CET1) ratio—a regulatory risk-based measure of bank capital
adequacy—increased further during the first half of 2024 across all bank-size categories
(figure 3.2). CET1 ratios for global systemically important banks (G-SIbs) and for the other bank
holding companies group (those not considered G-SIbs or large non–G-SIbs) reached the high-
est levels recorded in the past decade, while the average CET1 ratio for large non–G-SIbs has
surpassed pre-pandemic levels. Third-quarter earnings reports suggest that most banks further
increased their regulatory capital positions.
26 Financial Stability report
Table 3.1. Size of selected sectors of the financial system, by types of institutions and vehicles
Growth, Average annual growth,
Total assets
Item 2023:Q2–2024:Q2 1998–2024:Q2
(billions of dollars)
(percent) (percent)
Banks and credit unions 27,717 1.7 5.6
Mutual funds 20,995 11.4 8.3
Insurance companies 13,337 5.8 5.4
Life 9,963 5.5 5.4
Property and casualty 3,373 6.7 5.6
Hedge funds1 10,938 16.3 8.3
Broker-dealers2 5,952 8.8 4.8
Outstanding
(billions of dollars)
Securitization 13,579 1.0 5.4
Agency 12,037 .7 5.8
Non-agency3 1,542 3.7 3.6
Note: The data extend through 2024:Q2 unless otherwise noted. Outstanding amounts are in nominal terms. Growth
rates are nominal and 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.
1 Hedge fund data start in 2012:Q4 and are updated through 2024:Q1. Growth rates for the hedge fund data are
measured from Q1 of the year immediately preceding the period through Q1 of the final year of the period.
2 Broker-dealer assets are calculated as unnetted values.
3 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.”
Figure 3.1. Banks maintained sound net interest margins
Percent
7
Quarterly
Average interest rate on interest-earning assets 6
Average interest expense rate on liabilities
5
Q2
4
3
2
1
0
2014 2016 2018 2020 2022 2024
Source: Federal reserve board, Form Fr y-9C, Consolidated Financial Statements for Holding Companies.
Leverage in the Financial Sector 27
Figure 3.2. Banks’ average risk-based capital ratios were above pre-pandemic levels
Percent of risk-weighted assets
14
Quarterly
12
Q2
10
8
G-SIBs 6
Large non–G-SIBs
Other BHCs 4
2
0
2003 2006 2009 2012 2015 2018 2021 2024
Source: Federal reserve board, Form Fr y-9C, Consolidated Financial Statements for Holding Companies.
Fair value losses in fixed-rate assets remained sizable, and
the sensitivity of the values of those assets to interest rates
remained high
as interest rates rose from pandemic lows over 2022 and the first part of 2023, the fair value of
banks’ fixed-rate assets declined substantially. However, with interest rates leveling off in recent
quarters, these declines started to moderate, and fair values were basically flat, on net, during
the first half of 2024. at the end of the second quarter of 2024, the fair value of banks’ available-
for-sale (aFS) and held-to-maturity (HTM) portfolios were below their book values by $203 billion
and $308 billion, respectively (figure 3.3).
The tangible common equity (TCE) ratio, which corresponds to the ratio of TCE to total tangible
assets, is an alternative measure of bank capital. The TCE ratio has similarities to the CET1 ratio
in that both exclude intangible items such as goodwill from the measurement of capital, but there
Figure 3.3. The fair value losses of banks’ securities portfolios remained sizable
Billions of dollars
200
Quarterly
100
Q2
0
−100
−200
−300
Available-for-sale securities −400
Held-to-maturity securities −500
−600
−700
−800
2017 2018 2019 2020 2021 2022 2023 2024
Source: Federal Financial Institutions Examination Council, Call report Form FFIEC 031, Consolidated reports of
Condition and Income (Call report); Federal reserve board, Form Fr y-9C, Consolidated Financial Statements for
Holding Companies.
28 Financial Stability report
are also important differences between the two. In contrast with the CET1 ratio, the TCE ratio
does not account for the riskiness of assets but does include fair value declines on aFS securi-
ties for all banks. The TCE ratio moved up across all bank-size categories in the second quarter
of 2024, reflecting increased bank capital from retained earnings during this period and a slight
improvement in the fair value of the aFS securities portfolio (figure 3.4).
Figure 3.4. The ratio of tangible common equity to tangible assets increased for banks of all
categories
Percent of tangible assets
12
Quarterly
10
8
Q2
6
G-SIBs 4
Large non–G-SIBs
Other BHCs 2
0
1988 1994 2000 2006 2012 2018 2024
Source: For data through 1996, Federal Financial Institutions Examination Council, Call report Form FFIEC 031,
Consolidated reports of Condition and Income (Call report). For data from 1997 onward, Federal reserve board,
Form Fr y-9C, Consolidated Financial Statements for Holding Companies; Federal Financial Institutions Examination
Council, Call report Form FFIEC 031, Consolidated reports of Condition and Income (Call report).
While most banks have reduced their exposure to interest rate risk over the past year, primarily
by shortening the average maturity of their securities portfolios, some banks’ vulnerability to
changes in interest rates remained higher than normal. Interest rates declined significantly in the
third quarter but reversed much of that decline in October. as a result, reflecting the continued
elevated sensitivity of fixed-rate asset values to interest rates, fair value losses by the beginning
of November likely were only modestly below their levels at the end of the second quarter.
Credit quality at banks remained sound overall despite some
pockets of concern
by the end of the second quarter of 2024, banks’ overall credit quality was sound. Third-quarter
earnings showed that credit quality was little changed but that some segments of CrE continued
to be a watchpoint. The aggregate bank-loan delinquency rate remained at historically low levels,
despite being a notch higher than the record lows observed at the end of 2022. Contributing to
the low aggregate delinquency rate are the low delinquency rates on residential real estate and
commercial and industrial (C&I) loans. In the case of C&I loans, the quality of the loans is solid,
Leverage in the Financial Sector 29
as borrower leverage for all outstanding bank
C&I loans is relatively low (figure 3.5) and
recent SLOOS responses indicate that, after
tightening over most of 2022 and 2023,
credit standards for C&I loans have been little
changed this year (figure 3.6). However, the
delinquency rates for credit card and auto
loans are somewhat elevated and increased
further in the first half of 2024. Of note, expo-
sures in credit card loans remained concen-
trated in a few large banks that are subject
to regular stress testing and are therefore
expected to be better prepared to manage
losses in their loan portfolios.
Figure 3.6. Credit standards for commercial and industrial loans were little changed in the first half
of 2024
Net percentage of banks reporting
100
Quarterly
80
60
40
20
0
Q2
−20
−40
−60
−80
−100
1999 2004 2009 2014 2019 2024
In the aggregate, the delinquency rate on CrE loans held on banks’ books was still at historically
low levels at the end of the second quarter, especially among regional and community banks.
Over the past several quarters, however, delinquency rates at larger banks have been showing
a modest upward trend. These increases reflect significant deterioration in the credit quality
of certain components of some banks’ CrE portfolios. Most notably, delinquency rates in CrE
loans backed by office properties increased further at large banks in the first half of 2024, as the
adjustment to new patterns of work continued to put downward pressure on prices and operating
income of office buildings. The delinquency rate on CrE loans backed by multifamily properties
gninethgiT
gnisaE
Figure 3.5. The financial condition of firms
with commercial and industrial bank loans
remained sound
Debt as percentage of assets
36
Quarterly
34
32
Q2
30
28
Non-publicly-traded firms
Publicly traded firms 26
24
2014 2016 2018 2020 2022 2024
Source: Federal reserve board, Form Fr y-14Q
(Schedule H.1), Capital assessments and
Stress Testing.
Source: Federal reserve board, Senior Loan Officer Opinion Survey on bank Lending Practices; Federal reserve
board staff calculations.
30 Financial Stability report
has remained low, reflecting the conservative CrE bank lending standards of recent years, but
developments in this sector also pose some concern, as rental market fundamentals, such as
vacancy rates and rent growth, have been deteriorating. The Supervision and Regulation Report
discusses ways that supervisors are monitoring and addressing these risks with banks.8
Leverage at broker-dealers remained low
risks posed to the financial system by broker-dealer leverage remained low on balance. Despite
ticking up in recent quarters, the ratio of assets to equity stood near historically low levels by the
end of the first half of 2024, as dealers increased equity to keep up with an expansion in assets
(figure 3.7). Dealers’ profits were up year-over-year and were slightly above pre-pandemic levels
(figure 3.8). The most recent data on broker-dealers’ trading profits continued to show a relatively
even distribution of the shares of profits coming from equity; fixed income, rates, and credit;
and other lines of business (figure 3.9). Dealers’ intermediation activity increased to record
highs, driven mainly by higher Treasury positions and secured financing amid rising volumes of
outstanding Treasury securities and elevated Treasury issuance. Nonetheless, during periods of
market stress, broker-dealers may not be able to meet increased intermediation demand, as their
capacity to intermediate may become reduced due to internal risk limits, a factor that has been a
structural vulnerability for the Treasury market.
Figure 3.7. Leverage at broker-dealers Figure 3.8. Trading profits in the first half
remained near historical lows of 2024 were within the range of the past
5 years
Ratio of assets to equity
50 Millions of dollars
Quarterly 1000
Monthly
40 900
800
30 700
600
20 500
June
Q2 400
10 300
200
0 100
1996 2000 2004 2008 2012 2016 2020 2024 0
2018 2019 2020 2021 2022 2023 2024
Source: Federal reserve board, Statistical release Z.1,
“Financial accounts of the united States.” Source: Federal reserve board, reporting,
recordkeeping, and Disclosure requirements
associated with regulation VV (Proprietary Trading
and Certain Interests in and relationships with
Covered Funds, 12 C.F.r. pt. 248).
8 The most recent Supervision and Regulation Report is available on the Federal reserve board’s website at
https://www.federalreserve.gov/publications/supervision-and-regulation-report.htm.
Leverage in the Financial Sector 31
Figure 3.9. The current distribution of the sources of broker-dealer trading profits was in line with
recent averages
Percent
Monthly
Equity
Fixed income, rates, and credit
Other June
100
80
60
40
20
0
2018 2019 2020 2021 2022 2023 2024
Source: Federal reserve board, reporting, recordkeeping, and Disclosure requirements associated with regulation VV
(Proprietary Trading and Certain Interests in and relationships with Covered Funds, 12 C.F.r. pt. 248).
In both the June and September 2024 Senior Credit Officer Opinion Survey on Dealer Financing
Terms (SCOOS), dealers reported that use of financial leverage and terms on securities financing
transactions and over-the-counter derivatives remained approximately unchanged.9 responses to
special questions in the June survey indicated that most dealers increased capacity to provide
financing collateralized by Treasury securities in the past two years. Those moves responded to
increased demand for Treasury financing from customers, and dealers expect those demands to
increase further in the near future. For those dealers offering the enhanced service of immediate
execution in Treasury securities markets, about half responded that they increased their capacity
during the same period, while the other half kept their capacity unchanged. For the September
SCOOS special questions, respondents indicated significant use of volatility strategies and prod-
ucts across most client classes, most notably by hedge funds. In terms of net positions, hedge
funds tended to have a net-long volatility exposure, whereas mutual funds and exchange-traded
funds tended to have net-short volatility positions.10 The use of net-short volatility strategies has
the potential to make volatility artificially lower during calmer times and amplify large volatility
shocks due to funds quickly unwinding their positions to limit their losses.
Insurance company leverage was little changed
relative to the previous report, leverage at life insurers moved sideways and continued to be
above average relative to the values that prevailed in the previous 15 years, while leverage at
property and casualty (P&C) insurers remained at historically low levels (figure 3.10).11 Life insur-
ers continued to allocate a substantial percentage of assets to risky and less liquid instruments,
9 The SCOOS is available on the Federal reserve board’s website at https://www.federalreserve.gov/data/scoos.htm.
10 buying volatility, or taking long positions in volatility, refers to taking positions that increase in value when volatility
increases. Selling volatility, or taking short positions in volatility, refers to taking positions that decrease in value
when volatility increases.
11 The steep decline of P&C insurers’ leverage in the second quarter results from aIG, which is considered a P&C insurer
in our sample, having spun off its life insurance business in June.
32 Financial Stability report
Figure 3.10. Leverage at life insurers remained above the average observed in the previous 15 years
Ratio of assets to equity
18
Quarterly
Life 15
Property and casualty
12
9
Q2 6
3
0
2003 2006 2009 2012 2015 2018 2021 2024
Source: Generally accepted accounting principles data from 10-Q and 10-K filings accessed via S&P Global,
Capital IQ Pro.
such as leveraged loans, collateralized loan obligations (CLOs), high-yield corporate bonds, pri-
vately placed corporate bonds, and alternative investments. Moreover, life insurance companies
have material direct exposures to commercial mortgages and are large holders of commercial
mortgage-backed securities (CMbS). This exposure to illiquid and risky assets makes life insurers
vulnerable to an array of adverse shocks, including that of an economic downturn or of a signifi-
cant further deterioration of the CrE market.
Hedge funds’ leverage was at or near its highest level in
available data
Comprehensive data collected through SEC Form PF indicated that measures of leverage aver-
aged across all hedge funds were at or near the highest level observed since these data became
available in 2013. relative to the previous report, leverage increased when measured using either
average on-balance-sheet leverage (blue line in figure 3.11)—which captures financial leverage
from secured financing transactions, such as repurchase agreements and margin loans, but does
not capture leverage embedded through derivatives—or average gross leverage of hedge funds
(black line in figure 3.11), a broader measure that also incorporates off-balance-sheet derivatives
exposures, but which does not account for netting of offsetting exposures. On-balance-sheet
leverage at the largest funds remained elevated at about 15-to-1 in the first quarter of 2024,
despite having declined in the most recent reading (figure 3.12). Leverage for the group of hedge
funds ranked 15 to 50 increased notably in the first quarter of 2024, with their ratio reaching
around 10-to-1, a level that is at the high end of the range since 2013. Small haircuts on Treasury
collateral in some markets where many funds obtain short-term financing contributed to these
high levels of leverage.12 More recent data from the September SCOOS suggested that hedge
12 See ayelen banegas and Phillip Monin (2023), “Hedge Fund Treasury Exposures, repo, and Margining,” FEDS Notes
(Washington: board of Governors of the Federal reserve System, September 8), https://doi.org/10.17016/2380-
7172.3377, or Samuel Hempel, r. Jay Kahn, robert Mann, and Mark Paddrik (2023), “Why Is So Much repo Not Cen-
trally Cleared?” OFr brief 23-01 (Washington: Office of Financial research, uS Department of the Treasury, May 12),
https://www.financialresearch.gov/the-ofr-blog/2023/05/12/why-is-so-much-repo-not-centrally-cleared/.
Leverage in the Financial Sector 33
Figure 3.11. Hedge funds’ leverage was at Figure 3.12. Balance sheet leverage at the
or near its highest level since data became 15 largest hedge funds declined
available
Ratio
30
Ratio Quarterly
10
Quarterly 9 Top 15, by GAV 25
8 16–50, by GAV 20
51+, by GAV
7
15
6
Q1 Q1
5 10
Mean gross leverage
4
Mean balance sheet leverage 5
3
2 0
1
0 2014 2016 2018 2020 2022 2024
2014 2016 2018 2020 2022 2024
Source: Securities and Exchange Commission,
Source: Securities and Exchange Commission, Form PF, reporting Form for Investment advisers to
Form PF, reporting Form for Investment advisers to Private Funds and Certain Commodity Pool Operators
Private Funds and Certain Commodity Pool Operators and Commodity Trading advisors.
and Commodity Trading advisors.
fund leverage was stable, on net, as dealers reported the use of financial leverage by their hedge
fund clients remained largely unchanged between May and august 2024.
Of note, about one-fourth of dealers reported in the SCOOS that leverage at trading real estate
investment trusts (rEITs) had increased somewhat between May and august (figure 3.13).13 While
this development warrants monitoring, the relatively small size of the trading rEIT sector should
limit spillovers from this sector to broader financial markets.
Figure 3.13. Dealers indicated that the use of leverage by hedge funds remained largely unchanged
for most clients
Net percentage
40
Quarterly
20
0
Q3
−20
Hedge funds
Trading REITs −40
Insurance companies
Mutual funds −60
−80
2012 2014 2016 2018 2020 2022 2024
Source: Federal reserve board, Senior Credit Officer Opinion Survey on Dealer Financing Terms.
13 a trading rEIT, also known as a mortgage rEIT, is a company that invests in mortgage-related assets such as
mortgages, mortgage-backed securities, and mortgage servicing rights. a company that elects to be taxed as a rEIT
receives favorable tax treatment in exchange for concentrating its investments in real estate–related assets and
distributing most of its taxable income to shareholders.
34 Financial Stability report
The high level of leverage of hedge funds partly reflects elevated
U.S. Treasury cash-futures basis trading activity
as of the first quarter of 2024, data from Form PF showed that net repurchase agreement bor-
rowing, one measure of the Treasury cash-futures basis trade, edged down but still stood near
historical highs. Two other indicators, the leveraged funds’ short Treasury futures positions and a
basis trade proxy from Treasury TraCE, also declined in the first quarter but then showed lever-
age increasing again between april and September.14 This highly leveraged trade involves shorting
a Treasury futures contract and purchasing a Treasury note deliverable into that contract, with the
note typically financed in bilateral repurchase agreement markets. This trade was popular among
hedge funds between mid-2018 and February 2020, and its subsequent unwinding contributed to
the Treasury market turmoil in March 2020.
The volatility spike in early august, discussed earlier in the report, did not appear to have led to a
significant unwinding of the basis trade. Instead, that spike appeared to be related to some highly
leveraged hedge funds having to quickly deleverage other positions, largely to meet internal vola-
tility targets rather than because of margin or funding pressures from creditors. During this event,
liquidity in the Treasury market, as well as in other markets, deteriorated markedly, but market
conditions improved rapidly following favorable data releases the following week. Nevertheless,
this episode showed once again how high leverage can amplify adverse shocks.
Issuance of non-agency securities was strong
Non-agency securitization issuance—which increases the amount of leverage in the financial
system—was strong in the first three quarters of 2024 and was on pace to reach the sec-
ond-highest level observed in the past 15 years (figure 3.14).15 Credit spreads on most major
securitized products generally decreased since the april report. The declines in the spreads were
most pronounced for lower-rated tranches of CMbS deals, which suggested some improvement
in investor sentiment regarding CrE. However, credit performance across securitized products
backed by riskier loan collateral generally showed signs of further deterioration. For instance, the
loan delinquency rate in CMbS deals continued to increase, standing at close to 4.5 percent at
14 For a discussion of the net repurchase agreement, Treasury futures, and TraCE proxy measure of the Treasury
cash-futures basis trade, see Jonathan Glicoes, benjamin Iorio, Phillip Monin, and Lubomir Petrasek (2024), “Quan-
tifying Treasury Cash-Futures basis Trades,” FEDS Notes (Washington: board of Governors of the Federal reserve
System, March 8), https://www.federalreserve.gov/econres/notes/feds-notes/quantifying-treasury-cash-futures-
basis-trades-20240308.html. Data and reports on Treasury futures positions are available on the Commodity Futures
Trading Commission’s website at https://www.cftc.gov/Marketreports/CommitmentsofTraders/index.htm.
15 Securitization allows financial institutions to bundle loans or other financial assets and sell claims on the cash flows
generated by these assets as tradable securities, much like bonds. by funding assets with debt issued by invest-
ment funds known as special purpose entities (SPEs), securitization can add leverage to the financial system, in part
because SPEs are generally subject to regulatory regimes, such as risk retention rules, that are less stringent than
banks’ regulatory capital requirements. Examples of the resulting securities include CLOs (predominantly backed
by leveraged loans), asset-backed securities (often backed by credit card and auto debt), CMbS, and residential
mortgage-backed securities.
Leverage in the Financial Sector 35
Figure 3.14. The pace of issuance of securitized products in 2024 has been strong
Billions of dollars (real)
3200
Annual
2800
Other
Private-label RMBS 2400
Non-agency CMBS 2000
Auto loan/lease ABS
CDOs (including CLOs and ABS CDOs) 1600
1200
800
400
0
2003 2006 2009 2012 2015 2018 2021 2024
Source: Green Street, Commercial Mortgage alert’s CMbS Database and asset-backed alert’s abS Database;
consumer price index, bureau of Labor Statistics via Haver analytics.
the end of august. For consumer asset-backed securities (abS) deals, the delinquency rate for
auto abS deals continued to trend up for both prime and subprime borrowers. Similarly, the loan
delinquency rate on credit card abS deals increased, on balance, since the april report, standing
at the end of august at just over 1.5 percent.
Bank lending to nonbank financial institutions increased slightly
bank lending to nonbank financial institutions (NbFIs) can be informative about the amount of
leverage used by NbFIs and shed light on the interconnectedness of these financial institutions
with the banking system. after the strong growth of 2021 and 2022, the four-quarter growth
rate of bank credit commitments to NbFIs stepped down substantially in 2023, and a similar
lower pace of growth was observed through the end of the second quarter of 2024 (figure 3.15).
The four-quarter growth in committed amounts was largely due to loans to structured finance
Figure 3.15. Growth of bank credit commitments to nonbank financial institutions slowed in
recent quarters
Billions of dollars
Quarterly Q2 1 2250
1. Financial transactions processing 3 2 2000
2. Private equity, BDCs, and credit funds 4 1750
3. Broker-dealers 6 5 1500
4. Insurance companies
7 1250
5. REITs
1000
6. Open-end investment funds
7. Special purpose entities, CLOs, and ABS 8 750
8. Other financial vehicles 500
9
9. Real estate lenders and lessors
250
10. Consumer lenders, other lenders, and lessors 10
0
2018 2020 2022 2024
Source: Federal reserve board, Form Fr y-14Q (Schedule H.1), Capital assessments and Stress Testing.
36 Financial Stability report
vehicles—such as SPEs, CLOs, and abS—and to open-end investment funds (figure 3.16). This
growth was partially offset by declines in commitments to financial transactions processing and
in commitments to rEITs. Delinquency rates on banks’ lending to NbFIs continued to be very low,
but they have increased for real estate lenders and lessors in the second quarter of 2024 relative
to 2023.
Figure 3.16. Aggregate credit commitments to special purpose entities, collateralized loan
obligations, and asset-backed securities grew rapidly as commitments to real estate investment
trusts shrank between 2023:Q2 and 2024:Q2
Percent
30
Committed amounts
Utilized amounts 20
10
0
−10
−20
−30
−40
REITs Financial Consumer, Insurance PE, Broker- Open-end SPEs, Real Other Total
transactions leasing, companies BDCs, dealers investment CLOs, estate financial
processing & other & credit funds & ABS lenders vehicles
lenders funds & lessors
Source: Federal reserve board, Form Fr y-14Q (Schedule H.1), Capital assessments and Stress Testing.
37
4 Funding Risks
Vulnerabilities from funding risks remained notable
Funding risks for most banks remained low, but some banks’ reliance on less-stable forms of
funding remained a concern. On the asset side, large banks that are subject to the liquidity cover-
age ratio (LCr) continued to maintain sound levels of high-quality liquid assets (HQLa).
Money market funds (MMFs) and other cash-management vehicles remained susceptible to runs
owing to structural vulnerabilities. The recent SEC MMF reforms made prime and tax-exempt
MMFs more resilient, but government MMFs and other short-term investment funds that were not
covered by the SEC reforms have continued to grow.
Some open-end bond mutual funds remained vulnerable to significant withdrawals, as they are
required to permit daily redemptions despite holding assets that can suffer losses and become
illiquid under stress. Meanwhile, life insurers continued to be exposed to funding risks due to
their reliance on funding from nontraditional liabilities.
In total, estimated runnable money-like financial liabilities increased about 7.5 percent over the
past year, surpassing $22 trillion. This growth was mostly driven by an increase in assets under
management (auM) at domestic MMFs and in repurchase agreements. as a percentage of GDP,
runnable liabilities have been relatively stable at 76 percent, a level around the historical median
(see table 4.1 and figure 4.1).
Reliance on funding from uninsured deposits decreased for most
banks, but reliance on other types of funding—less stable than core
insured deposits—increased
aggregate liquidity in the banking system remained sound, as HQLa measured relative to total
assets was still at or above pre-pandemic levels at most banks (figure 4.2). Moreover, u.S.
G-SIbs held, on average, 18 percent more HQLa than required by their LCr—the requirement
that ensures banks hold sufficient HQLa to fund estimated cash outflows for 30 days during a
hypothetical stress event—an amount that is a little below that of a year ago. Other banks that
are required to meet minimum LCr requirements, those in Categories II and III, also continued
to maintain a reasonable amount of HQLa above requirements, despite their HQLa levels being
somewhat lower than a year ago. as of the end of the third quarter, banks in Categories I, II,
and III had about 20 percent of HQLa booked in HTM accounts. Securities held in HTM accounts
are accounted at book value when used in the calculation of regulatory capital and book equity,
but they are valued for LCr purposes at fair value, and therefore fluctuations in the value of these
38 Financial Stability report
Table 4.1. Size of selected instruments and institutions
Growth, Average annual growth,
Outstanding/total assets
Item 2023:Q2–2024:Q2 1997–2024:Q2
(billions of dollars)
(percent) (percent)
Total runnable money-like liabilities1 22,078 7.6 4.9
Uninsured deposits 6,716 .9 10.8
Domestic money market funds2 6,053 12.7 6.2
Government 4,893 9.7 15.2
Prime 1,032 29.4 3.1
Tax exempt 128 14.4 −1.1
Repurchase agreements 4,963 9.8 5.9
Commercial paper 1,295 8.7 2.8
Securities lending3 995 5.1 7.3
Bond mutual funds 4,525 6.2 8.0
Note: The data extend through 2024:Q2 unless otherwise noted. Outstanding amounts are in nominal terms. Growth
rates are nominal and 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. Unlisted components of run-
nable money-like liabilities include variable-rate demand obligations, federal funds, funding-agreement-backed securi-
ties, private liquidity funds, offshore money market funds, short-term investment funds, local government investment
pools, and stablecoins.
1 Average annual growth is from 2003:Q1 to 2024:Q2.
2 Average annual growth is from 2001:Q1 to 2024:Q2.
3 Average annual growth is from 2000:Q1 to 2024:Q1. Securities lending includes only lending collateralized by cash.
Source: Securities and Exchange Commission, Private Funds Statistics; iMoneyNet, Inc., Offshore Money Fund Ana-
lyzer; Bloomberg Finance L.P.; Securities Industry and Financial Markets Association: U.S. Municipal Variable-Rate
Demand Obligation Update; DTCC Solutions LLC, an affiliate of the Depository Trust & Clearing Corporation: commer-
cial paper data; Federal Reserve Board staff calculations based on Risk Management Association, Securities Lending
Report; Markit Securities Finance; Investment Company Institute; 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; Llama Corp, DeFiLlama.
Figure 4.1. Ratio of runnable money-like liabilities to GDP remained around its historical median
Percent of GDP
120
Quarterly 1. Other 4. Domestic money market funds
2. Securities lending 5. Repurchase agreements 100
3. Commercial paper 6. Uninsured deposits
Q2 80
1
2
60
4 3
40
5
20
6
0
2003 2006 2009 2012 2015 2018 2021 2024
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; DTCC Solutions LLC, an affiliate of the Depository Trust & Clearing Corporation:
commercial paper data; Federal reserve board staff calculations based on risk Management association,
Securities Lending report; Markit Securities Finance; Investment Company Institute; Federal reserve board,
Statistical release Z.1, “Financial accounts of the united States”; Federal Financial Institutions Examination Council,
Consolidated reports of Condition and Income (Call report); gross domestic product, bureau of Economic analysis
via Haver analytics; Llama Corp, DeFiLlama.
Funding risks 39
Figure 4.2. The share of high-quality liquid assets to total assets remained above pre-pandemic levels
Percent of assets
32
Quarterly
28
G-SIBs 24
Large non–G-SIBs
20
Other BHCs
Q2 16
12
8
4
0
2003 2006 2009 2012 2015 2018 2021 2024
Source: Federal reserve board, Form Fr y-9C, Consolidated Financial Statements for Holding Companies.
securities will affect banks’ LCr levels. HTM securities can be pledged at the Federal reserve
discount window or in repurchase agreements at their market value, but banks cannot sell any
of those assets outright without allowing losses (or gains) on the whole HTM portfolio to flow
through to equity.
During the March 2023 banking-sector stresses, high reliance on funding from uninsured depos-
its was a key vulnerability among some of the most affected banks, including those that failed.
Since then, the share of uninsured deposits relative to total bank funding has decreased for
most banks, especially at those that previously relied heavily on uninsured deposits. However, a
significant portion of the decrease in funding from uninsured deposits was replaced by short-term
nondeposit funding at large banks and by brokered and reciprocal deposits at regional and com-
munity banks. Most brokered and reciprocal
deposits in the banking system are insured,
but the stability of this type of funding during Figure 4.3. Banks’ reliance on short-term
wholesale funding stayed low but increased
periods of stress may be lower than that of further since 2023:Q4
traditional core insured deposits. banks’
Percent of assets
reliance on short-term wholesale funding 40
Quarterly
increased further over the first half of the year 35
30
and is concentrated at some of the very larg-
25
est banks (figure 4.3). although such funding
20
Q2
can become expensive or unreliable during
15
periods of market stress, the levels remain
10
much lower than they were before the 2007– 5
2000 2004 2008 2012 2016 2020 2024
09 financial crisis, and post-crisis reforms,
Source: Federal reserve board, Form Fr y-9C,
such as the LCr requirement, are intended to Consolidated Financial Statements for Holding
Companies.
limit the spillovers from such an event.
40 Financial Stability report
Money market funds and other cash-management vehicles remained
susceptible to runs owing to structural vulnerabilities
assets managed by MMFs increased since the april report to more than $6.25 trillion by the end
of august, as MMFs continued to provide more attractive yields relative to most bank deposits,
but at a slower pace than in 2023 (figure 4.4). More than 80 percent of those assets are in funds
that only hold securities that are guaranteed by the u.S. government.
Figure 4.4. Assets under management at money market funds increased to an all-time high in August
Billions of dollars (real)
7000
Monthly 1. Government Aug.
2. Tax exempt 6000
3. Retail prime
4. Institutional prime 5000
4000
1
3000
2000
2
3 1000
4
0
2000 2004 2008 2012 2016 2020 2024
Source: Federal reserve board staff calculations based on Investment Company Institute data; consumer price
index, bureau of Labor Statistics via Haver analytics.
reforms for MMFs adopted last year by the SEC went fully into effect in October 2024. These
reforms represent significant progress in making institutional prime and tax-exempt MMFs more
resilient, although these funds remain vulnerable to runs in periods of significant stress. auM in
prime MMFs rose 7 percent year-to-date through august, as retail prime funds grew while auM at
their institutional counterparts declined significantly.
Other cash-management vehicles, such as dollar-denominated offshore MMFs and short-term
investment funds, also invest in money market instruments and engage in liquidity transforma-
tion.16 Since the april report, estimated aggregate auM of these cash-management vehicles
increased further to $2.1 trillion, with between $0.75 trillion and $1.8 trillion of these vehicles’
auM being currently invested in assets that are similar to those in portfolios of u.S. prime MMFs.
Many of these cash-management vehicles—including retail and government MMFs, offshore
MMFs, and short-term investment funds—seek to maintain stable net asset values that are
typically rounded to $1.00. If 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 and
trigger large, concurrent redemptions, which can put the funds under strain and destabilize short-
term funding markets.
16 Cash-management vehicles included in this total are dollar-denominated offshore MMFs, short-term investment funds,
private liquidity funds, ultrashort bond mutual funds, and local government investment pools.
Funding risks 41
Stablecoins grew substantially and remained vulnerable to runs
Stablecoin assets—digital assets designed to maintain a stable value relative to a national
currency or another reference asset—grew substantially since the april report.17 The total mar-
ket capitalization of stablecoins was more than $170 billion by the beginning of November, just
a notch below the record high observed in april 2022 before Terra’s collapse (figure 4.5). These
digital assets are structurally vulnerable to runs and lack a comprehensive federal prudential reg-
ulatory framework. Stablecoins still have a relatively small footprint in the u.S. economy, but have
experienced strong growth in recent years and have the potential to scale rapidly.
Figure 4.5. Market capitalization of major stablecoins grew significantly this year to near its previous peak
Billions of dollars
200
Daily 1 3 Nov.
3
1. Other 2
2. TerraUSD 4 150
3. Dai
4. Binance USD 5
100
5. USD Coin
6. Tether
50
6
0
Feb. May Aug. Nov. Feb. May Aug. Nov. Feb. May Aug. Nov. Feb. May Aug. Nov.
2021 2022 2023 2024
Source: Llama Corp, DeFiLlama.
Bond mutual funds’ asset holdings increased in 2024
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 daily redemptions. Mutual funds held approximately
$1.3 trillion of corporate bonds as of the second quarter of 2024, which represents a sizable
share—about 13 percent—of corporate bonds outstanding (figure 4.6). Total auM of the subcat-
egories of mutual funds holding high-yield bonds and bank loans, which primarily hold riskier and
less liquid assets, edged up in recent months (figure 4.7). as significant investors in the bond and
loan markets, substantial outflows from these funds or other disruptions in their ability to support
the functioning of underlying markets can in turn lead to strains among the firms that borrow in
these markets. In recent quarters, net inflows—which represent the net new funds available to
borrowers—have been subdued (figure 4.8).
17 To back the coins, stablecoins hold a pool of assets that, among other assets, contain a large amount of
u.S. Treasury bills.
42 Financial Stability report
Figure 4.6. Corporate bonds held by bond mutual funds remained stable in the first half of 2024
Billions of dollars (real)
2100
Quarterly
1800
1500
Q2
1200
900
600
300
0
2000 2004 2008 2012 2016 2020 2024
Source: Federal reserve board staff estimates based on Federal reserve board, Statistical release Z.1, “Financial
accounts of the united States”; consumer price index, bureau of Labor Statistics via Haver analytics.
Figure 4.7. Assets held by bank loan and high-yield mutual funds moved up in the first half of 2024
Billions of dollars (real)
600
Monthly
525
Bank loan mutual funds 450
High-yield bond mutual funds
July 375
300
225
150
75
0
2000 2004 2008 2012 2016 2020 2024
Source: Investment Company Institute; consumer price index, bureau of Labor Statistics via Haver analytics.
Figure 4.8. Mutual fund flows were solid in early 2024 but have dissipated
Billions of dollars
150
Monthly
Investment-grade bond mutual funds 100
Bank loan mutual funds
High-yield bond mutual funds 50
0
−50
−100
−150
Mar. Sept. Mar. Sept. Mar. Sept. Mar. Sept. Mar. Sept. Mar. Sept. Mar. Sept. Mar. Sept.
2017 2018 2019 2020 2021 2022 2023 2024
Source: Investment Company Institute.
Funding risks 43
Central counterparties’ initial margin levels and prefunded
mutualized resources remained high and stable
Central counterparties’ (CCPs) initial margin levels remained high and stable during the first half
of 2024. CCPs also maintained high levels of prefunded mutualized resources. Elevated initial
margins and ample overall prefunded resources work together to create a relatively low vulnerabil-
ity at CCPs to a potential default by a clearing member or market participant.18 These two factors
also reduce the possibility of large liquidity demands from a CCP to its credit providers (usually
banks). Consistent with the high levels of initial margin and prefunded resources that they main-
tain, CCPs operated normally during the volatility spike in early august. Nevertheless, the concen-
tration of clients at the largest clearing members is a vulnerability, because this concentration
could make transferring client positions to other clearing members challenging if such a transfer
were ever necessary.
Life insurers’ reliance on funding from nontraditional liabilities
remained higher than average
Over the past decade, life insurers have increased their reliance on funding from nontraditional
liabilities, including funding-agreement-backed securities and cash received through repurchase
agreements and securities lending transactions (figure 4.9). These liabilities can create liquidity
Figure 4.9. Life insurers’ reliance on nontraditional liabilities for funding increased further in the first
half of 2024
Billions of dollars (real)
550
Repurchase agreements 500
Securities lending cash collateral Q2 450
FHLB advances 400
Funding-agreement-backed securities 350
300
250
200
150
100
50
0
2006 2008 2010 2012 2014 2016 2018 2020 2022 2024
Source: Consumer price index, bureau of Labor Statistics via Haver analytics; Moody’s analytics, Inc., CreditView,
asset-backed Commercial Paper Program Index; Securities and Exchange Commission, Forms 10-Q and 10-K;
National association of Insurance Commissioners, quarterly and annual statutory filings accessed via S&P Global,
Capital IQ Pro; bloomberg Finance L.P.
18 Prefunded resources represent financial assets, including cash and securities, transferred by the clearing members
to the CCP to cover that CCP’s potential credit exposure in case of default by one or more clearing members. These
prefunded resources are held as initial margin and prefunded mutualized resources, which builds the resilience of
CCPs to the possible default of a clearing member or market participant.
44 Financial Stability report
risk through withdrawals or the inability to roll over funding if invested proceeds are not appropri-
ately matched. The steady decline in the liquidity of life insurers’ assets (figure 4.10), in con-
junction with a greater use of nontraditional liabilities, makes it potentially more difficult for life
insurers to be able to meet a sudden rise in withdrawals and other claims.
Figure 4.10. Life insurers continued to hold a significant share of risky and illiquid assets on their
balance sheets
Percent share Billions of dollars
60 3000
1. Other ABS 4. Alternative investments Share of life insurer assets (left scale)
50 2. CRE loans 5. Illiquid corporate debt Share of P&C insurer 2500
3. CRE loans, securitized 6. Illiquid corporate debt, assets (left scale)
40 securitized 2000
30 1500
20 1000
10 500
0 0
2007 2009 2011 2013 2015 2017 2019 2021 2023
Source: Consumer price index, bureau of Labor Statistics via Haver analytics; Federal reserve board staff
estimates based on data from bloomberg Finance L.P. and National association of Insurance Commissioners annual
Statutory Filings.
45
5 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 recent
outreach, significantly fewer respondents noted risks associated with a resurgence in inflation
and further monetary tightening than had done so in the spring survey. Instead, contacts focused
on risks associated with u.S. fiscal debt sustainability, Middle East tensions, and generalized
policy uncertainty.
The following discussion considers possible interactions of existing domestic vulnerabilities with
several potential near-term risks, including international risks.
A worsening of global geopolitical tensions could lead to broad
adverse spillovers
Conflict in the Middle East and russia’s ongoing war against ukraine pose risks to global
economic activity, including the possibility of sustained disruptions to energy and commodity
markets and global value chains. Further escalation of geopolitical tensions could reduce eco-
nomic activity, boost inflation, and heighten volatility in global financial markets. The current
combination of relatively high asset valuation pressures and heightened geopolitical and policy
uncertainty increases the risk of a sudden pullback from risk-taking. These developments could
lead to declines in asset prices and losses for exposed businesses and investors, including those
in the u.S.
A marked slowdown in economic growth, domestically or abroad,
could pose risks for U.S. markets and financial institutions
In the u.S., unexpectedly weak economic activity could trigger sharp corrections in asset prices,
especially in equities and real estate, where valuations are elevated. Financial stress could be
amplified by high leverage within certain NbFIs, as the rapid unwinding of positions could create
liquidity imbalances and increase market volatility. If CrE fundamentals deteriorated further, it
could lead to significant losses for exposed financial intermediaries, reducing their ability to
supply credit to the economy and further weigh on economic activity.
In addition, a sharp economic downturn in advanced foreign economies or China could prompt
a pullback of investors from riskier assets, leading to heightened volatility and broader stress
46 Financial Stability report
across global financial markets. Elevated public debt levels in many advanced economies, includ-
ing the u.S., may limit governments’ ability to respond to weaker growth. Concerns about fiscal
deterioration could, in turn, put upward pressure on long-term interest rates that could further
damp growth and strain sovereign and private-sector borrowers. In China, residential real estate
prices continue to fall, potentially putting further pressure on the highly indebted property sector.
Fiscal stimulus measures have been announced there, but uncertainty remains about their effec-
tiveness in meaningfully strengthening domestic demand.
Shocks caused by cyber events could impair the U.S. financial system
The risk of cyberattacks has grown amid increased geopolitical tensions and rapid advance-
ments in artificial intelligence. In addition to malicious attacks, nonmalicious cyber events, such
as software malfunctions at key third-party service providers, have demonstrated the potential
to cause significant disruptions. Shocks caused by cyber events, especially cyberattacks, may
propagate through the financial system through complex interdependencies among financial
institutions, market infrastructure, and service providers. When these channels are sufficiently
systemic, cyber shocks can disrupt payments or other operational components of the financial
system. The propagation of more severe cyber shocks could also be amplified by existing vulnera-
bilities in the financial system—for example, by triggering funding runs or asset fire sales. 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.
Near-Term risks to the Financial System 47
Box 5.1. Survey of Salient Risks to Financial Stability
as part of its market intelligence gathering, staff from the Federal reserve bank of New york solic-
ited views from a wide range of contacts on risks to u.S. fi nancial stability. From late august to
late October, the staff surveyed 24 contacts, including professionals at broker-dealers, investment
funds, research and advisory fi rms, and academics (fi gure a). This section is a summary of the views
provided by survey respondents and should not be interpreted as representing the views of the
Federal reserve bank of New york or the Federal reserve board.
Concerns surrounding u.S. fi scal debt sustainability were atop the list this survey, followed by esca-
lating tensions in the Middle East and policy uncertainty, which was also frequently cited in the last
survey (fi gure b). Contacts also fl agged the risk of a u.S. recession near the top of the list. The risk of
persistent infl ationary pressures and the implications of a restrictive monetary policy stance, which
had been the top-cited risk in fi ve out of the previous six surveys, including the last cycle, was less
frequently cited this round. respondents noted risks surrounding global trade more frequently this
cycle than in the previous survey. a correction in risky asset prices as well as renewed stress in the
banking sector, which were noted in the spring survey, continued to be cited but not as prominently.
While not as frequently cited as other risks, further weakness in the Chinese economy and the poten-
tial for a cyberattack on a fi nancial institution were seen as carrying some of the most severe conse-
quences should either of them materialize.
U.S. fiscal debt sustainability
Concerns over u.S. fi scal debt sustainability was the top-cited risk. It was noted that increased Trea-
sury issuance could begin to crowd out private investment or constrain policy responses in an eco-
nomic downturn.
Middle East tensions
respondents noted the most immediate risk in Middle East tensions would be a widening of the con-
fl ict within the region, with some highlighting a tail risk that it could become a global confl ict. Disrup-
tions to energy supplies, and potentially broader commodity markets, are seen as the main channels
impacting fi nancial stability.
Policy uncertainty
respondents continued to see policy uncertainty as a risk, though it was cited less often relative to
the last survey. Contacts noted elevated policy uncertainty can depress sentiment. The need to raise
the federal debt limit next year was specifi cally cited by respondents as a potential watchpoint.
U.S. recession
Contacts cited the potential for a u.S. economic downturn more often than in the previous survey.
It was noted by some respondents that there may be more underlying weakness in the labor market
than currently believed.
Persistent inflation and monetary tightening
Elevated infl ation and the implications of tighter monetary policy, which had been the top-cited risk
recently, was less cited this round. The respondents who continued to fl ag it as a risk noted that
while the infl ation data had improved, there continued to be some chance that it would take longer
than expected to return to a dual-mandate-consistent level.
(continued)
48 Financial Stability report
Box 5.1—continued
Risks to global trade
risks to global trade were specifi cally cited in this survey, with some respondents noting the poten-
tial for tariff barriers to prompt retaliatory protectionist policies that would negatively affect global
trade fl ows and put renewed upward pressure on infl ation. Others noted that a deterioration in global
trade could depress economic activity and raise the risk of a downturn. respondents noted this risk
was global in nature, highlighting that Chinese policy decisions could spur more protectionist mea-
sures elsewhere and that developments like the French elections earlier this year could increase
isolationism.
Figure A. Fall 2024: Most cited potential shocks over the next 12 to 18 months
U.S. fiscal debt sustainability
Middle East tensions
Policy uncertainty
U.S. recession
Risks to global trade
Persistent inflation; monetary tightening
Risk asset/valuations correction
Cyberattacks
Russia–Ukraine war
Banking-sector stress
Chinese economic weakness
Market liquidity strains and volatility
Commercial and residential real estate Percentage of respondents
0 10 20 30 40 50 60 70
Source: Federal reserve bank of New york survey of 24 market contacts from august to October.
Figure B. Spring 2024: Most cited potential shocks over the next 12 to 18 months
Persistent inflation; monetary tightening
Policy uncertainty
Commercial and residential real estate
Banking-sector stress
Fiscal debt sustainability
Market liquidity strains and volatility
Treasury market dysfunction/basis trade
U.S.–China tensions
Middle East tensions
Cyberattacks
Severe U.S./global recession Percentage of respondents
0 10 20 30 40 50 60 70 80
Source: Federal reserve bank of New york survey of 25 market contacts from January to March.
49
Appendix Figure Notes
Figure 1.1. Nominal Treasury yields fell but remained high
Treasury rates are the 2-year and 10-year constant maturity yields based on the most actively
traded securities.
Figure 1.2. an estimate of the nominal Treasury term premium was near the top of its range
since 2010
Term premiums are estimated from a 3-factor term structure model using Treasury yields and
blue Chip interest rate forecasts.
Figure 1.3. Interest rate volatility remained well above its median since 2005
The data begin in april 2005. Implied volatility on the 10-year swap rate, 1 month ahead, is
derived from swaptions.
Figure 1.4. The price-to-earnings ratio of S&P 500 firms climbed to the upper end of its
historical range
The figure shows the aggregate forward price-to-earnings ratio of Standard & Poor’s (S&P) 500
firms, based on expected earnings for 12 months ahead.
Figure 1.5. an estimate of the equity premium remained well below its long-run median
The data begin in October 1991. The figure shows the difference between the aggregate forward
earnings-to-price ratio of Standard and Poor’s 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.
Figure 1.6. Volatility in equity markets remained near its historical median
realized volatility is computed from an exponentially weighted moving average of 5-minute daily
realized variances with 75 percent of the weight distributed over the past 20 business days.
Median refers to the median option-implied volatility.
Figure 1.7. Corporate bond yields fell somewhat and were near their median for the past 30 years
The triple-b series reflects the effective yield of the ICE bank of america Merrill Lynch (bofaML)
triple-b u.S. Corporate Index (C0a4), and the high-yield series reflects the effective yield of the
ICE bofaML u.S. High yield Index (H0a0).
Figure 1.8. Corporate bond spreads went down a little and were at low levels
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).
50 Financial Stability report
Figure 1.9. The excess bond premium remained just below its long-run average
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 1.10. Spreads on leveraged loans stayed moderately below their averages over the
past decade
The data show secondary-market discounted spreads to maturity. Spreads are the constant
spread used to equate discounted loan cash flows to the current market price. b-rated spreads
begin in July 1997. The black dashed line represents the data transitioning from monthly to
weekly in November 2013.
Figure 1.11. Treasury market depth remained below historical norms
Market depth is defined as the average top 3 bid and ask quote sizes for on-the-run Treasury
securities.
Figure 1.12. On-the-run market depth continued to be below historical norms
The data show the time-weighted average market depth at the best quoted prices to buy and sell,
for 2-year and 10-year Treasury notes. OTr is on-the-run.
Figure 1.13. a measure of liquidity in equity markets remained below its average
The data show the depth at the best quoted prices to buy and sell, defined as the ask size plus
the bid size divided by 2, for E-mini Standard & Poor’s 500 futures.
Figure 1.14. Commercial real estate prices adjusted for inflation were little changed
The data are deflated using the consumer price index. The dashed line at 100 indicates the index
to January 2001 values.
Figure 1.15. Income of commercial properties relative to prices increased but remained below its
historical average
The data are a 12-month moving average of weighted capitalization rates in the industrial, retail,
office, and multifamily sectors, based on national square footage in 2009.
Figure 1.16. banks reported having tightened lending standards for commercial real estate loans
banks’ responses are weighted by their commercial real estate loan market shares. Sur-
vey respondents to the Senior Loan Officer Opinion Survey on bank Lending Practices are
asked about the changes over the quarter. 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 1.17. Nominal house prices continued to increase in recent months
The data extend through September 2024 for Zillow, august 2024 for CoreLogic, and July 2024
for Case-Shiller.
Figure Notes 51
Figure 1.18. Model-based measures of house price valuations climbed to historically high levels
The owners’ equivalent rent value for 2024:Q3 is based on monthly data through august 2024.
The data for the market-based rents model begin in 2004:Q1 and extend through 2024:Q3. Valu-
ation is measured as the deviation from the long-run relationship between the price-to-rent ratio
and the real 10-year Treasury yield.
Figure 1.19. House price-to-rent ratios remained elevated across geographic areas
The data are seasonally adjusted. Percentiles are based on 19 large metropolitan
statistical areas.
Figure 1.20. Inflation-adjusted farmland prices rose further from already-elevated levels
The data for the u.S. begin in 1997. Midwest index is a weighted average of Corn belt and
Great Plains states derived from staff calculations. Values are given in real terms.
Figure 1.21. Farmland prices relative to rents increased to historical highs
The data for the u.S. begin in 1998. Midwest index is a weighted average of Corn belt and
Great Plains states derived from staff calculations.
Figure 2.1. The total debt of businesses and households relative to GDP declined to its lowest
level in 20 years
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 continued to edge down
The shaded bars with top caps indicate periods of business recession as defined by the National
bureau of Economic research: January 1980–July 1980, July 1981–November 1982, July 1990–
March 1991, March 2001–November 2001, December 2007–June 2009, and February 2020–
april 2020. GDP is gross domestic product.
Figure 2.3. business debt adjusted for inflation grew modestly
Nominal debt growth is seasonally adjusted and is translated into real terms after subtracting the
growth rate of the price deflator for the core personal consumption expenditures price index.
Figure 2.4. Net issuance of risky debt remained subdued
The data begin in 2004:Q2. Institutional leveraged loans generally exclude loan commitments
held by banks. The key identifies bars in order from top to bottom (except for some bars with at
least one negative value). For 2024:Q3, the value corresponds to preliminary data.
Figure 2.5. Gross leverage of large businesses stayed high by historical standards
Gross leverage is an asset-weighted average of the ratio of firms’ book value of total debt to book
value of total assets. The 75th percentile is calculated from a sample of the 2,500 largest firms
by assets. The dashed sections of the lines in 2019:Q1 reflect the structural break in the series
52 Financial Stability report
due to the 2019 compliance deadline for Financial accounting Standards board rule accounting
Standards update 2016-02. The accounting standard requires operating leases, previously con-
sidered off-balance-sheet activities, to be included in measures of debt and assets.
Figure 2.6. Interest coverage ratios, which indicate firms’ ability to service their debt, have
changed little
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. New leveraged loans with debt multiples greater than 4 have been near their lowest
levels in a decade
Volumes are for large corporations with earnings before interest, taxes, depreciation, and amor-
tization greater than $50 million and exclude existing tranches of add-ons and amendments as
well as restatements with no new money. The key identifies bars in order from top to bottom.
Figure 2.8. The default rate on leveraged loans remained well below its previous peaks
The data begin in December 1998. The data including distressed exchanges begin in Decem-
ber 2016. The default rate is calculated as the amount in default over the past 12 months divided
by the total outstanding volume of loans that are not in default at the beginning of the 12-month
period. The default rate including distressed exchanges is calculated as the number of issuers in
default or distressed exchange over the past 12 months divided by the total number of issuers
that are not in default 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 2.9. Inflation-adjusted household debt has been little changed
Subprime are those with an Equifax risk Score less than 620; near prime are from 620 to 719;
prime are greater than 719. Scores are measured contemporaneously. Student loan balances
before 2004 are estimated using average growth from 2004 to 2007, by risk score. The data are
converted to constant 2024 dollars using the consumer price index.
Figure 2.10. a model-based estimate of housing leverage stayed significantly below its
peak levels
Housing leverage is estimated as the ratio of the average outstanding mortgage loan balance
for owner-occupied homes with a mortgage to (1) current home values using the Zillow national
house price index and (2) model-implied house prices estimated by a staff model based on rents,
interest rates, and a time trend.
Figure 2.11. Mortgage delinquency rates remained close to the low end of their historical
distribution
Loss mitigation includes tradelines that have a narrative code of forbearance, natural disaster,
payment deferral (including partial), loan modification (including federal government plans), or
Figure Notes 53
loans with no scheduled payment and a nonzero balance. Delinquent includes loans reported to
the credit bureau as at least 30 days past due.
Figure 2.13. New mortgage extensions declined across all borrower categories
year-over-year change in balances for the second quarter of each year among those households
whose balance increased over this window. Subprime are those with an Equifax risk Score less
than 620; near prime are from 620 to 719; prime are greater than 719. Scores were measured
1 year ago. The data are converted to constant 2024 dollars using the consumer price index. The
key identifies bars in order from left to right.
Figure 2.14. Inflation-adjusted consumer credit has been about flat since late last year
The data are converted to constant 2024 dollars using the consumer price index. Student loan
data begin in 2005:Q1.
Figure 2.15. average maturity of auto loans at origination for used cars remained elevated
The data are seasonally adjusted. Loans for used auto vehicles only. Subprime are those with a
VantageScore less than 601; near prime are from 601 to 660; prime are greater than 660.
Figure 2.16. auto loan delinquencies have been somewhat above normal levels
Delinquent includes loans reported to the credit bureau as at least 30 days past due. The data
for auto loans are reported semiannually by the risk assessment, Data analysis, and research
Data Warehouse until 2017, after which they are reported quarterly. The data are seasonally
adjusted.
Figure 2.17. Inflation-adjusted credit card balances for subprime borrowers trended higher but
remained well below previous peaks
Subprime are those with an Equifax risk Score less than 620; near prime are from 620 to 719;
prime are greater than 719. Scores are measured contemporaneously. The data are converted to
constant 2024 dollars using the consumer price index.
Figure 2.18. Credit card delinquencies rose further to somewhat above their pre-pandemic levels
Delinquency measures the fraction of balances that are at least 30 days past due, excluding
severe derogatory loans, which are delinquent and have been charged off, foreclosed, or repos-
sessed by the lender. The data are seasonally adjusted.
Figure 3.1. banks maintained sound net interest margins
average interest rate on interest-earning assets is total interest income divided by total inter-
est-earning assets. average interest expense rate on liabilities is total interest expense divided
by total liabilities. The shaded bar with a top cap indicates a period of business recession as
defined by the National bureau of Economic research: February 2020–april 2020.
Figure 3.2. banks’ average risk-based capital ratios were above pre-pandemic levels
The data are seasonally adjusted by Federal reserve board staff. The sample consists of domes-
tic bank holding companies (bHCs) and intermediate holding companies (IHCs) with a substan-
tial u.S. commercial banking presence. G-SIbs are global systemically important banks. Large
54 Financial Stability report
non–G-SIbs are bHCs and IHCs with greater than $100 billion in total assets that are not G-SIbs.
before 2014:Q1 (advanced-approaches bHCs) or before 2015:Q1 (non-advanced-approaches
bHCs), the numerator of the common equity Tier 1 ratio is Tier 1 common capital. afterward,
the numerator is common equity Tier 1 capital. The denominator is risk-weighted assets. The
shaded bars with top caps indicate periods of business recession as defined by the National
bureau of Economic research: March 2001–November 2001, December 2007–June 2009, and
February 2020–april 2020.
Figure 3.3. The fair value losses of banks’ securities portfolios remained sizable
The figure plots the difference between the fair and amortized cost values of the securities. The
sample consists of all bank holding companies and commercial banks.
Figure 3.4. The ratio of tangible common equity to tangible assets increased for banks of all
categories
The data are seasonally adjusted by Federal reserve board staff. The sample consists of
domestic bank holding companies (bHCs), intermediate holding companies (IHCs) with a sub-
stantial u.S. commercial banking presence, and commercial banks. G-SIbs are global system-
ically important banks. Large non–G-SIbs are bHCs and IHCs with greater than $100 billion in
total assets that are not G-SIbs. bank equity is total equity capital net of preferred equity and
intangible assets. bank assets are total assets net of intangible assets. The shaded bars with
top caps indicate periods of business recession as defined by the National bureau of Economic
research: July 1990–March 1991, March 2001–November 2001, December 2007–June 2009,
and February 2020–april 2020.
Figure 3.5. The financial condition of firms with commercial and industrial bank loans
remained sound
The figure shows the weighted median leverage of nonfinancial firms that borrow using commer-
cial and industrial loans from the 24 banks that have filed in every quarter since 2013:Q1. Lever-
age is measured as the ratio of the book value of total debt to the book value of total assets of
the borrower, as reported by the lender, and the median is weighted by committed amounts.
Figure 3.6. Credit standards for commercial and industrial loans were little changed in the first
half of 2024
banks’ responses are weighted by their commercial and industrial loan market shares. Survey
respondents to the Senior Loan Officer Opinion Survey on bank Lending Practices are asked
about the changes over the quarter. results are shown for loans to large and medium-sized firms.
The shaded bars with top caps indicate periods of business recession as defined by the National
bureau of Economic research: March 2001–November 2001, December 2007–June 2009, and
February 2020–april 2020.
Figure 3.7. Leverage at broker-dealers remained near historical lows
Leverage is calculated by dividing total assets by equity.
Figure Notes 55
Figure 3.8. Trading profits in the first half of 2024 were within the range of the past 5 years
The sample includes all trading desks of bank holding companies subject to the Volcker rule
reporting requirement.
Figure 3.9. The current distribution of the sources of broker-dealer trading profits was in line with
recent averages
The sample includes all trading desks of bank holding companies subject to the Volcker rule
reporting requirement. The “other” category comprises desks trading in municipal securities,
foreign exchange, and commodities, as well as any unclassified desks. The key identifies series
in order from top to bottom.
Figure 3.10. Leverage at life insurers remained above the average observed in the previous
15 years
ratio is calculated as (total assets – separate account assets)/(total capital – accumulated other
comprehensive income) using generally accepted accounting principles. The largest 10 publicly
traded life and property and casualty insurers are represented.
Figure 3.11. Hedge funds’ leverage was at or near its highest level since data became available
Means are weighted by net asset value (NaV). On-balance-sheet leverage is the ratio of gross
asset value to NaV. Gross leverage is the ratio of gross notional exposure to NaV. Gross notional
exposure includes both on-balance-sheet exposures and off-balance-sheet derivative notional
exposures. Options are delta adjusted, and interest rate derivatives are reported at 10-year bond
equivalent values. The data are reported on a 2-quarter lag beginning in 2013:Q1.
Figure 3.12. balance sheet leverage at the 15 largest hedge funds declined
Leverage is measured by gross asset value (GaV) divided by net asset value (NaV). Funds are
sorted into cohorts based on GaV. average leverage is computed as the NaV-weighted mean. The
data are reported on a 2-quarter lag beginning in 2013:Q1.
Figure 3.13. Dealers indicated that the use of leverage by hedge funds remained largely
unchanged for most clients
Net percentage equals the percentage of institutions that reported increased use of financial
leverage over the past 3 months minus the percentage of institutions that reported decreased
use of financial leverage over the past 3 months. rEIT is real estate investment trust.
Figure 3.14. The pace of issuance of securitized products in 2024 has been strong
The data from the third quarter of 2024 are annualized to create the 2024 bar. rMbS is residen-
tial mortgage-backed securities; CMbS is commercial mortgage-backed securities; CDO is col-
lateralized debt obligation; CLO is collateralized loan obligation. The “other” category consists of
other asset-backed securities (abS) backed by credit card debt, student loans, equipment, floor
plans, and miscellaneous receivables; resecuritized real estate mortgage investment conduit
(re-rEMIC) rMbS; and re-rEMIC CMbS. The data are converted to constant 2024 dollars using
the consumer price index. The key identifies bars in order from top to bottom.
56 Financial Stability report
Figure 3.15. Growth of bank credit commitments to nonbank financial institutions slowed in
recent quarters
Committed amounts on credit lines and term loans extended to nonbank financial institutions by
a balanced panel of 24 bank holding companies that have filed Form Fr y-14Q in every quarter
since 2018:Q1. Nonbank financial institutions are identified based on reported North american
Industry Classification System (NaICS) codes. In addition to NaICS codes, a name-matching
algorithm is applied to identify specific entities such as real estate investment trusts (rEITs), spe-
cial purpose entities, collateralized loan obligations (CLOs), and asset-backed securities (abS).
bDC is business development company. rEITs incorporate both mortgage (trading) rEITs and
equity rEITs. broker-dealers also include commodity contracts dealers and brokerages and other
securities and commodity exchanges. Other financial vehicles include closed-end investment and
mutual funds.
Figure 3.16. aggregate credit commitments to special purpose entities, collateralized loan obliga-
tions, and asset-backed securities grew rapidly as commitments to real estate investment trusts
shrank between 2023:Q2 and 2024:Q2
The figure shows 2024:Q2-over-2023:Q2 growth rates as of the end of the second quarter
of 2024. 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. ratio of runnable money-like liabilities to GDP remained around its historical median
The black striped area denotes the period from 2008:Q4 to 2012:Q4, when insured deposits
increased because of the Transaction account Guarantee program. The “other” category consists
of variable-rate demand obligations (VrDOs), federal funds, funding-agreement-backed securities,
private liquidity funds, offshore money market funds, short-term investment funds, local govern-
ment investment pools, and stablecoins. Securities lending includes only lending collateralized
by cash. GDP is gross domestic product. Values for VrDOs come from bloomberg beginning
in 2019:Q1. See Jack bao, Josh David, and Song Han (2015), “The runnables,” FEDS Notes
(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 share of high-quality liquid assets to total assets remained above
pre-pandemic levels
The sample consists of domestic bank holding companies (bHCs), intermediate holding compa-
nies (IHCs) with a substantial u.S. commercial banking presence, and commercial banks. G-SIbs
are global systemically important banks. Large non–G-SIbs are bHCs and IHCs with greater than
$100 billion in total assets that are not G-SIbs. Liquid assets are cash plus estimates of securi-
ties that qualify as high-quality liquid assets as defined by the Liquidity Coverage ratio require-
ment. accordingly, Level 1 assets as well as discounts and restrictions on Level 2 assets are
incorporated into the estimate.
Figure Notes 57
Figure 4.3. banks’ reliance on short-term wholesale funding stayed low but increased further
since 2023:Q4
Short-term wholesale funding is defined as the sum of large time deposits with maturity less
than 1 year, federal funds purchased and securities sold under agreements to repurchase,
deposits in foreign offices with maturity less than 1 year, trading liabilities (excluding revalu-
ation 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. assets under management at money market funds increased to an all-time high
in august
The data are converted to constant 2024 dollars using the consumer price index.
Figure 4.5. Market capitalization of major stablecoins grew significantly this year to near its
previous peak
The key identifies series in order from top to bottom.
Figure 4.6. Corporate bonds held by bond mutual funds remained stable in the first half of 2024
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 2024 dollars using the consumer
price index.
Figure 4.7. assets held by bank loan and high-yield mutual funds moved up in the first half
of 2024
The data are converted to constant 2024 dollars using the consumer price index. The key identi-
fies series in order from top to bottom.
Figure 4.8. Mutual fund flows were solid in early 2024 but have dissipated
Mutual fund assets under management as of September 2024 included $2,403 billion in
investment-grade bond mutual funds, $268 billion in high-yield bond mutual funds, and $80 bil-
lion in bank loan mutual funds. bank loan mutual funds, also known as floating-rate bond funds,
are excluded from high-yield bond mutual funds.
Figure 4.9. Life insurers’ reliance on nontraditional liabilities for funding increased further in the
first half of 2024
The data are converted to constant 2024 dollars using the consumer price index. FHLb is Federal
Home Loan bank. The data are annual from 2006 to 2010 and quarterly thereafter. The key iden-
tifies bars in order from top to bottom.
Figure 4.10. Life insurers continued to hold a significant share of risky and illiquid assets on their
balance sheets
The data are converted to constant 2023 dollars using the consumer price index. Securitized
products include collateralized loan obligations for corporate debt, private-label commercial
58 Financial Stability report
mortgage-backed securities for commercial real estate (CrE), and private-label residential
mortgage-backed securities and asset-backed securities (abS) backed by autos, credit cards,
consumer loans, and student loans for other abS. Illiquid corporate debt includes private place-
ments, bank and syndicated loans, and high-yield bonds. alternative investments include assets
filed under Schedule ba. P&C is property and casualty. The key identifies bars in order from top
to bottom.
Box 5.1. Survey of Salient Risks to Financial Stability
Figure a. Fall 2024: Most cited potential shocks 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 impact on the functioning of the u.S.
financial system?”
Figure b. Spring 2024: Most cited potential shocks 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 impact on the functioning of the u.S.
financial system?”
59
Revisions
On March 2, 2026, the term “forward P/E” on page 7 was corrected to “forward earnings-to-
price” ratio.
On November 29, 2024, the label colors in figure 3.11 were corrected to show the top label
corresponding to “Mean gross leverage” and the bottom label to “Mean balance sheet leverage.”
Find other Federal Reserve Board publications at www.federalreserve.gov/publications/default.htm,
or visit our website to learn more about the Board and how to connect with us on social media.
www.federalreserve.gov
1124
Cite this document
APA
Federal Reserve (2024, November 21). Financial Stability Report. Financial Stability, Federal Reserve. https://whenthefedspeaks.com/doc/financial_stability_report_20241122
BibTeX
@misc{wtfs_financial_stability_report_20241122,
author = {Federal Reserve},
title = {Financial Stability Report},
year = {2024},
month = {Nov},
howpublished = {Financial Stability, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/financial_stability_report_20241122},
note = {Retrieved via When the Fed Speaks corpus}
}