By Howard Schneider
WASHINGTON (Reuters) – Trade tensions, turbulent Brexit talks and unrest in China and emerging markets could upset an American financial system where asset prices are "high" and the quality of corporate credit could "deteriorate," said the US Federal Reserve a very first report devoted to financial stability.
The report noted several ways in which the financial system is well protected against unexpected shocks. He cited the strong capital position of banks, which is generally moderate in household borrowing, and a system less vulnerable to the type of credit crunch or credit crunch that had almost paralyzed the global economy during the financial crisis of the 1990s. 2007-2009.
But the report has highlighted the high price of shares according to some measures, the value of commercial real estate "increasing faster than rents" and the willingness of lenders to finance risky business loans.
"The debt of the business sector relative to (gross domestic product) is historically high and there are signs of deteriorating credit standards," the Fed report said.
If a number of external shocks occurred, such as a growing trade war between the United States and their major trading partners, a disorderly disruption between Britain and the European Union or a market crisis emerging markets, "the resulting decline in asset prices could be particularly severe". large, since the estimates seem high by historical standards ".
The report even highlighted the Fed's monetary policy decisions as a risk, pointing out that global markets needed to adjust to rising interest rates, and that "some adjustments could take place abruptly".
Yet, even in areas where the Fed's evolving financial dashboard indicates potential problems, the signs of risk were generally mitigated. For example, the "risky" debt held by companies, whether it's speculative bonds or leveraged loans, has soared in recent months and now stands at 2 000 billion dollars. However, default rates remain low and the cost of servicing the debt as a percentage of profits is stable and is at its lowest level in 20 years.
Overall, borrowing from households and non-financial firms "has increased along with economic activity," the report says, and remains well below the peaks of the financial crisis.
US stock markets opened up, with little reaction when the Fed's report was released half an hour later.
The report is the first of what the Fed envisions as a bi-annual risk assessment for financial stability, defined as the degree to which the financial system can continue to lend to businesses and households even in the event of an external shock.
The Fed has expressed its views on financial stability in other documents and presentations.
But giving financial stability a publication of choice shows the importance of the issue as Fed officials strive to avoid the mistakes that led to the 2007 financial crisis. Powell recently stated that policymakers had suffered "a lack of imagination" at the time as to the central financial stability of the economy. The report aims to show the public what the central bank is monitoring and how these market segments are performing.
Powell also asks the Fed to speak more openly and more frequently to markets and the public. Past Fed Presidents have initiated and intensified these efforts, but Mr. Powell said he wanted to continue on this path in order to maintain public confidence in the use of the broad powers of the central bank – and help ensure the Fed's independence from elected officials in defining monetary policy.
In separate reports released on Wednesday, President Donald Trump reiterated his criticism of Powell's interest rate hike, and Treasury Secretary Steve Mnuchin reportedly asked bond investors what would happen to investors. They thought of the Fed's policy.
Federal Reserve officials said they had not specifically made a conclusion about the general state of financial stability, which was up to policymakers. Powell must speak later Wednesday.
But they compared the current situation, when leverage is low among households and banks, to the pre-crisis situation, when most of the US had been overused.
Wednesday's document will feed the debate of policymakers on various issues, such as the opportunity to impose additional capital requirements on large banks. By reducing lending, an additional capital requirement during good economic times is one way for proponents to believe that the worst financial bubbles could be avoided.
(Report by Howard Schneider, additional report by Michelle Price, edited by Chizu Nomiyama)