Board of Governors of the Federal Reserve System

Overview of financial system vulnerabilities

Asset valuations

• Prices of risky assets generally fell amid a less favorable outlook and rising interest rates.
• Risk premiums in equity and corporate bond markets were near the middle of their historical distributions.
• Real estate valuations remained very elevated even though activity weakened and price increases slowed markedly.

Borrowing by businesses and households

• Although debt of nonfinancial businesses and households grew in the first half of 2022, the ratio of debt to gross domestic product (GDP) was little changed and remained at a moderate level.
• Interest coverage ratios for large businesses reached historically high levels, and debt issuance by the riskiest companies slowed. The business debt-to-GDP ratio remained high.
• Household debt was at modest levels relative to GDP and concentrated among prime-rated borrowers.

Leverage in the financial sector

• Banks’ risk-based capital ratios have remained in the middle of the range that has prevailed since 2010, and stress tests show the system remains resilient to a severe recession.
• Leverage was somewhat elevated at hedge funds, and bank lending to the broader set of nonbank financial institutions continued to grow.
• Monitoring some parts of the nonbank financial sector, where hidden pockets of leverage could amplify adverse shocks, could be enhanced with more comprehensive and timely data.

Funding risks

• Domestic banks maintained high levels of liquid assets and stable funding.
• Structural vulnerabilities persist at money market funds, some other mutual funds, and stablecoins.
• Central counterparties maintain elevated margin requirements amid high market volatility, which clearing members have continued to meet.

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.”

Figure 1.1 Nominal Treasury yields increased to levels seen before 2008

1.2 An estimate of the nominal Treasury term premium was low relative to its long-run history

Figure 1.3. Interest rate volatility increased amid heightened uncertainty

Figure 1.4. Treasury market depth suggests liquidity remained below historical norms

This is a line chart titled “Treasury market depth suggests liquidity remained below historical norms.” The x-axis measures from January 2019 to October 2022. The left y-axis measures the blue line labeled “30-year” and ranges from 0 to 35. The right y-axis measures the black line labeled “5-year” and the red line labeled “10-year” ranging from 0 to 350. Both axes are measured in millions of dollars. The black line begins around 150. It increases to roughly 250 in February 2019. It then declines to 150 by August 2019. It then drops sharply to around 100 and stays roughly around that value until the start of 2020. By February it reaches almost 175 and then drops sharply to around 25 in March 2020. It then increases steadily to around 200 in October 2020. The series oscillates between 200 and 250 from October 2020 through the end of 2020 before stabilizing around 225 in January 2021. There is a sharp decrease to around 100 in March 2021, a rebound to 150, and a decrease to 100 in April. The series then steadily increases to about 180 by June 2021, then decreases to about 150 in July. The series remains around 150 until October 2021 and then hovers between 100 and 150 until February 2022. The series then falls to around 50 in February 2022 where it remains until rising to 70 in May 2022, then falls and stays around 50 until the end of the series in October 2022. The red line begins in January 2019 around 100 and in the same month sees an increase to 225. In March, it rises to around 250, briefly drops to 200, before rising back to around 225 by early April. From April to July 2019, the series slowly declines to 180 and falls sharply to about 80. The series then rises to 130 in September 2019, falls to around 75 in October 2019, increases to 125 in November, and falls to 80 by year-end 2019. From January 2020 through February, the series rises to around 140 before falling sharply in March to around 10. It then increases to right above 150 by October 2020. The series generally oscillates between 100 and 150 from October 2020 to February 2022, except for a sharp drop to around 50 in late-February 2020. Starting in February 2022, the series falls from around 120 to 60 where it hovers until May 2022 when begins rising to 100 by June 2022. Then this line declines sharply to 50 and varies between around 50 and 75 until the end of the series in October 2022. The blue line begins around 15 in January 2019. From February to July, it stays between roughly 23 and 28. It then drops sharply to around 7 in August 2019 and remains there through October 2019. The series then rises to around 15 by February 2020 before falling sharply to below 5 in March 2020. The curve rises to around 7 by July 2020, before spiking to about 15 in late July. It then decreases to right below 10 in October 2020, where it remains until January 2021. The series spikes to about 15 in February 2021, falls to around 7, before rising steadily to about 20 by June 2021. The series then sharply decreases to about 10 by July 2021, rises back to 20 in October 2021, and then falls to around 12 by December 2021. The series falls from around 12 in February 2022 to around 8 in March 2022, before rising again to 11 in April 2022 and fluctuating around 10 until the series ends at 11 on October 20, 2022.

Figure A. Top-of-book average market depth for 2- and 10-year on-the-run Treasury notes

This is a line chart titled “Top-of-book average market depth for 2- and 10-year on-the-run Treasury notes.” The x-axis measures time, ranging from September 2019 to October 2022, with labels for January, April, July, and October each year. The y-axis is measured in millions of dollars with a range of 0 to 300 for the right y-axis and 0 to 60 for the left y-axis. The data are daily.

The black line denotes 2-year OTR depth and is plotted against the right scale. The series starts at 47 million rising upwards until February 2021 where it peaks at around 280 million before sharply dropping to 110 million in March 2021. There is a rebound and the series reaches just under 280 million in June 2021 before a sharp decrease and steady decline. The series has stayed constant around 10 million since March 2022. The second series is denoted by the blue line and measures 10-year OTR depth on the left scale. The series has a few sharp declines and peaks. The first value is just under 40 million but increases to nearly 50 million in January 2020 before a sharp decline to just under 10 million in March 2020. The series increases steadily until October 2020 at a value of nearly 60 million. There is some volatility and the series dips to 35 million in January 2021, but spikes back to 55 million in June of 2021. There is a steady decline to a final value of about 15 million on October 19, 2022.

Figure B. Average bid-ask spreads for 2- and 10-year on-the-run Treasury notes

This is a line chart titled “Average bid-ask spreads for 2- and 10-year on-the-run Treasury notes.” The x-axis measures time, ranging from September 2019 to October 2022, with labels for January, April, July, and October each year. The y-axis is measured in Cents per $100 notional value with a range of 0.3-0.7 for the right y-axis and 1.5-3.0 for the left y-axis. The data are daily.

The black line denotes 2-year OTR bid-ask spreads and is plotted against the right scale. The series starts just over 0.4 and remains steady until March 2020 where it peaks at nearly 0.6 before sharply dropping to 0.40 in April 2020. The series remains around this value until October 2021 where it begins to slowly increase through the next year and hovers around 0.45. The second series is denoted by the blue line and measures 10-year OTR bid-ask spreads on the left scale. The series follows the same pattern as the black line. The first value is around 1.7, increases to just under 3 in March 2020, then sharply declines to 1.65 in April 2020. The series slowly increases through October 2022 and stays between 1.6 and 1.8. There is a final value of 1.8 on October 19, 2022.

Figure C. Bid-ask spreads for E-mini S&P 500, crude oil, and wheat futures

This is a line chart titled “Bid-ask spreads for E-mini S&P 500, crude oil, and wheat futures.” The x-axis measures time, ranging from September 2019 to October 2022, with labels for January, April, July, and October each year. The y-axes measure Dollar spread (ticks) with a range of 0.9-1.5 for the right y-axis and 0.5-5.0 for the left y-axis. The data are daily. There are three series plotted on the chart.

The black line denotes Equity and is plotted against the right scale. The series starts around 1 and remains steady until March 2020 where it peaks at around 1.4 before sharply dropping back to 1 in April 2020. The series remains around this value until March 2022 where it increases to around 1.2. It slowly decreases through October 2022 to end around 1. The second series is denoted by the blue line and plots Oil on the left scale. The series starts around 1 and stays between 1.0 and 1.5 until March 2022 where it spikes sharply to 3.5 before decreasing back down to around 1.5 and eventually ends around there. The last series is denoted by the red line and plots Wheat on the left scale. The wheat series follows a very similar pattern to the Oil series. The series starts just over 1 and remains between 1.0 and 1.3 until March 2022. There is sharp increase to a peak of just over 4 before a slower decline back to an ending value of around 1.5.

Figure 1.5. Corporate bond yields rose to their highest levels in more than a decade

This is a line chart titled "Corporate bond yields rose to their highest levels in more than a decade." The x-axis measures time and ranges from years 1997 to 2022. The y-axis ranges from 0 to 24 percent. The data are monthly and there are two variables plotted on the chart. The first line is labeled "High-yield" and is designated by a black line. It begins at around 9 percent in 1997 and rises gradually to around 13 percent in 2002. It falls to around 7 percent in 2003 and remains there until 2007. The curve rises to 11 in 2008, before spiking to about 22 percent in late 2008. The series falls sharply in 2009 before decreasing more slowly to 7 percent in 2011. The series generally remains around 6 percent through 2020, with local spikes to around 9 in late 2011, early 2016, and early 2020. There series stays around 4 percent in 2021 before rising gradually to about 9 percent by October 2022 when the series ends. The second line is labeled "Triple-B" and is designated by a blue line. It begins at around 8 percent in 1997, fluctuates between 7 and 9 percent until 2002, and rises to 10 percent in late 2008. The series falls sharply to around 5 percent in late 2009. It remains between 3 and 5 percent from 2010 to 2019. It has a spike in early 2020 then decreases to around 2 percent in October 2020. It hovers at the level through 2021 before rising gradually to about 6 percent in October 2022.

Figure 1.6. As risk appetite declined, spreads to similar-maturity Treasury securities widened

This is a line chart titled “As risk appetite declined, spreads to similar-maturity Treasury securities widened." The x-axis measures time and ranges from 1997 to 2022. The data are monthly, and there are two variables plotted on the chart. The first line is labeled "High-yield" and is designated by a black line. This line corresponds to the values on the right y-axis, which ranges from 0 to 24 percentage points. It begins at around 3 percentage points in 1997 and rises steadily to around 10 percentage points by 2002. The series falls to 4 percentage points by the end of 2003 and then declines slowly to around 2 percent until 2007. The series then rises rapidly to its peak in late 2008 of around 20 percentage points. It then falls steeply in 2009 to around 6 percentage points before falls gradually to 4 percentage points in 2011. In late 2011, the series spikes to 8 percentage points, before falling steadily to around 4 percentage points in 2014. The series rises gradually from 2014 to 2016 to 8 percentage points, then falls to around 4 percentage points again in 2017, remaining there through 2019. In mid-2020, it jumps to almost 10 percent then drops to about 5 percent in October. It then steadily decreases to about 3 percentage points in April 2021 to just below 3 percentage points and remains there until April 2022. The series then begins rising gradually again to around 5 percentage points in October 2022. The second line is labeled "Triple B" and is designated by a blue line. This line corresponds to the values on the left y-axis, which ranges from 0 to 12 percentage points. It begins at just under 1 percentage point in 1997, rises to around 3.5 percentage by the end of 2002. It declines to around 1 percentage by the start of 2004 and remains there until mid-2007. From there, it rapidly rises to its peak in late 2008 of around 7.5 percentage points. It then falls steeply in 2009 to around 3 percentage points and declines further to 2 percentage points in 2011. The series jumps to 3 percentage points in mid-2011 before declining slowly to 1.5 percentage points in 2014. It then rises gradually to around 3 percentage points in early 2016, then declines to around 1 percentage point by early 2018. The series remains around 1.5 percentage points from 2018 through early 2020 before jumping to almost 4 percentage points. It then decreases to 1 percent by April 2021 and remains there through 2021. It slightly increases at the very end of 2021 into 2022 to around 2 percentage points, and it continues increasing into October 2022 where it ends around 4 percentage points.

Figure 1.7. The excess bond premium returned to a level consistent with its historical norm

Figure 1.8. Spreads in the leveraged loan market also increased

Figure 1.9. The price-to-earnings ratio of S&P 500 firms declined but remained a bit above its historical median

Figure 1.10. An estimate of the equity premium declined to about its historical median