Speech by Fed Vice Chairman Stanley Fischer

posted in: Monetary Policy, Notes | 0

Appreciating asset prices increase the appetite for risk and leverage

“…elevated valuation pressures, especially when combined with high leverage, can lead to excessive credit growth. When asset prices are appreciating rapidly and expected to continue to do so, borrowers and lenders are more willing to accept higher degrees of risk and leverage”

Banks have high regulatory capital

“Regulatory capital at large banks is now at multidecade highs. The largest banks have already met their fully phased-in capital requirements, including the conservation buffer and the capital surcharge for the global systemically important banks….Measures of earnings strength, such as the return on assets, continue to approach pre-crisis levels at most banks, although with interest rates being so low, the return on assets might be expected to have declined relative to their pre-crisis levels–and that fact is also a cause for concern.”

On debt levels

“In the private nonfinancial sector, which includes corporations and households, total debt remains well below its long-run trend, largely driven by subdued borrowing among households. However, the corporate business sector appears to be notably leveraged, with the current aggregate corporate-sector leverage standing near 20-year highs.”

Auto and Student loans are a spot of bother

“Auto loan balances and delinquency rates are high for borrowers with lower credit scores, meaning that the riskiest borrowers are borrowing more and not paying it back as often….Student loan balances keep rising, and delinquency rates on those loans are near historical highs”

We dare not be complacent on risk

“There is no doubt the soundness and resilience of our financial system has improved since the 2007-09 crisis. We have a better capitalized and more liquid banking system, less run-prone money markets, and more robust resolution mechanisms for large financial institutions. However, it would be foolish to think we have eliminated all risks.”

 

https://www.federalreserve.gov/newsevents/speech/fischer20170627a.htm