Fed Posts Financial Stability Report
The Federal Reserve Board published a "Financial Stability Report" recently, which comments on "Funding Risks," "Vulnerabilities from funding risks remained notable, reflecting challenges at some banks and structural vulnerabilities in other sectors engaged in liquidity transformation. The banking industry maintained a high level of liquidity since the October report. Funding risks for most banks remained low, and large banks that are subject to the liquidity coverage ratio (LCR) continued to maintain ample levels of high-quality liquid assets (HQLA). Deposit outflows stabilized over the second half of last year following the March 2023 banking-sector stresses and turned into inflows by the fourth quarter of 2023. Nevertheless, some banks continued to face funding challenges, including higher costs for funding and relatively high reliance on uninsured deposits. The Bank Term Funding Program (BTFP) ceased extending new loans on March 11, 2024." They write, "Prime MMFs and similar cash-management vehicles remained a prominent source of vulnerability given their susceptibility to runs and the significant role they play in short-term funding markets. In addition, some cash-management vehicles, including retail prime MMFs, government MMFs, and short-term investment funds, maintained stable net asset values (NAVs) but may face difficulties doing so because they hold assets in their portfolios whose valuations are vulnerable to sharp movements in interest rates." The report adds, "Stablecoins are also prone to run risks like those of MMFs and other cash-management vehicles. However, the combined market capitalization of all stablecoins (roughly $150 billion currently) remained small relative to the broader funding markets, and stablecoins are not widely used as cash-management vehicles." Finally, it says, "Some open-end bond mutual funds remained susceptible to large redemptions because they must allow shareholders to redeem every day even though the funds hold assets that can face losses and become illiquid amid stress. Life insurers continued to face funding risk owing to their reliance on a higher-than-average share of nontraditional liabilities in combination with an increasing share of illiquid and risky assets on their balance sheets. Overall, estimated runnable money-like financial liabilities grew 8.8 percent to $21.3 trillion (75 percent of nominal GDP) over the past year, as a decline in uninsured deposits was more than offset by an increase in assets under management at MMFs. As a share of GDP, runnable liabilities remained above their historical median."
