The Federal Reserve flagged vulnerabilities tied to leverage in a semi-annual report on financial stability that said the banking system remained “sound and resilient.”
The report, which isn’t a forecast, said that hedge fund leverage had increased. It had grown across strategies and earlier this year reached the highest level since regulators began tracking it as they currently do more than a decade ago, the Fed said.
“While banks and broker-dealers have maintained solid capital positions, leverage for some other types of financial entities — such as hedge funds and life insurers —was elevated relative to historical standards,” the report said. “When taken together, the overall level of vulnerability due to financial-sector leverage was notable.”
Asset valuations were elevated, the Fed said in the report, adding that they had returned to close to the higher-end of their normal range since April’s volatility spike. Meanwhile, concerns posed by business and household debt, as well as funding risks, remained “moderate,” the central bank said.
The report is based data gathered by regulators, as well as a survey of financial market participants.
Written by: Katanga Johnson — With assistance from Enda Curran @Bloomberg
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