Board of Governors of the Federal Reserve System

4. Funding Risks

Vulnerabilities from funding risks were roughly in line with historical norms

Funding risks for most banks remained moderate. As a share of assets, uninsured deposits—an important component of most banks' funding risk—were largely unchanged and significantly below elevated levels attained in 2023. Large banks also maintained sound levels of high-quality liquid assets (HQLA). 

Assets in cash-management vehicles continued to grow, primarily driven by government MMFs, which have historically proved the least susceptible to large-scale investor redemptions among cash-management vehicles. Runnable instruments as a share of GDP remained roughly flat at around the middle of its historical distribution, and instruments susceptible to market freezes continued to gradually decline as a share of total runnables. Stablecoin growth moderated in recent months.

Although life insurers' nontraditional liabilities represent only a small share of general account assets, they grew faster than assets. Separately, some types of private credit vehicles faced increased redemption requests triggered by concerns about reduced returns and the quality of some underlying assets. These requests caused most of those private credit vehicles to exercise their right to limit the size of redemptions. Some open-end bond and loan mutual funds remained exposed to liquidity transformation risks that could cause asset fire sales in market downturns, as they allow daily redemptions while holding assets that might become illiquid in times of stress.

Table 4.1 gives the outstanding amounts of runnable money-like liabilities, and figure 4.1 shows the total relative to GDP standing at 86 percent at the end of 2025.

Table 4.1. Size of selected instruments and institutions

Most banks maintained high levels of liquidity, and their funding sources were little changed

Aggregate liquidity in the banking system as measured by the ratio of HQLA to short-term debt ticked down for large banks since the previous report but remains at the higher end of the historical distribution for all bank groups (figure 4.2). Many U.S. G-SIBs continued to hold a significant portion of their HQLA in HTM securities, primarily in long-duration agency mortgage-backed securities. Because current market prices for these instruments remained well below their original book values, selling them would require banks to recognize that gap on their balance sheets. Consequently, to generate liquidity from these holdings without impacting regulatory capital, these banks would likely rely on repo market access rather than outright asset sales.¹¹

More generally, banks' funding structures were little changed in the aggregate over the second half of 2025 (figure 4.3). Uninsured deposits as a percentage of total assets were in line with levels seen through the mid-2010s and significantly lower than their peak level in 2022. Since 2023, large banks increased their reliance on short-term wholesale funding sources with maturities of less than one year. The current level is around the highest over the past decade but well below pre-2009 peaks. Over the same period, regional banks generally relied more on reciprocal and, to a lesser degree, brokered deposits. While all reciprocal deposits and a majority of brokered deposits are fully insured, they are more expensive than traditional core insured deposits and may not be as stable during times of stress.

Assets in cash-management vehicles continued to grow, primarily driven by inflows into government money market funds

As of January 2026, total MMF assets had risen to $7.9 trillion from $7.2 trillion a year earlier, likely because MMF yields remained consistently more attractive than those of most bank deposits (figure 4.4). The main contributor to this growth was inflows into government funds, which are less susceptible to runs because they only hold U.S. government and agency securities as well as repos backed by them. Assets under management in institutional prime MMFs—historically, the most vulnerable segment—account for 3 percent of MMFs' assets.

Other cash-management vehicles, including dollar-denominated offshore MMFs and short-term investment funds, also invest in money market instruments and engage in liquidity transformation. Estimated aggregate assets under management remained around $2.2 trillion as of the end of 2025. Many of these vehicles have portfolios similar to prime MMFs. Although the exact size of those most similar to prime MMFs is difficult to gauge owing to data gaps, estimates range from $1 trillion to $2 trillion.

Stablecoin growth moderated

Stablecoin assets—digital assets designed to maintain a stable value relative to a national currency or another reference asset—have grown 16 percent from July 2025 to the end of last year.¹² However, this rapid growth has moderated in recent months amid a broader decline in the price of crypto-assets—a pattern consistent with the fact that stablecoins are mostly used to facilitate crypto-trading activities—and the level is currently $320 billion, concentrated among the two largest issuers (figure 4.5).

The GENIUS Act (Guiding and Establishing National Innovation for U.S. Stablecoins Act) was signed into law in July 2025. This legislation established a federal regulatory framework for the issuance and transaction of "payment stablecoins." Currently, regulatory agencies are drafting rules to implement the act's core provisions. Key among these are new requirements regarding reserve transparency and redemption rights, which are designed to mitigate run risks and foster sustainable growth within this asset class.

Bond and loan mutual funds navigated recent volatility without incident

As of the fourth quarter of 2025, mutual funds held approximately $1.6 trillion in U.S. corporate bonds—accounting for around 14 percent of U.S. corporate bonds outstanding (figure 4.6). Assets under management in mutual funds with holdings that are concentrated in bank loans and high-yield bonds—which are riskier and less liquid forms of debt—were around $362 billion in February 2026, about 20 percent below the high levels in 2021 (figure 4.7). Despite heightened volatility, inflows largely offset outflows for high-yield corporate bond and bank loan mutual funds in the beginning of 2026, leaving net flows roughly neutral (figure 4.8).

Central counterparties increased margin requirements amid heightened volatility, but margin calls were met with no difficulties

The start of the conflict between the U.S. and Iran introduced a wave of volatility into energy markets, affecting the markets for crude oil and European natural gas most acutely. In response, central counterparties (CCPs) increased margin requirements significantly for products within the affected markets. There was no evidence that market participants faced difficulty in meeting those demands. CCPs had been actively working to improve their risk-management practices and liquidity positions well before this latest market disruption by increasing prefunded mutualized resources from already high levels. Elevated initial margins and ample overall prefunded resources lower the risk faced by CCPs of the potential default by a clearing member or market participant.

Life insurers' nontraditional liabilities increased further while remaining a small share of assets

Life insurers continued to increase their reliance on nontraditional liabilities, including funding-agreement-backed securities, Federal Home Loan Bank advances, and cash received through securities lending and repo transactions (figure 4.9). Total nontraditional liabilities summed to $531 billion in the fourth quarter of 2025, growing 15 percent in real terms from a year ago, although they remain small relative to insurers' asset portfolios. Measures of the share of illiquid assets to total assets for life insurers and for property and casualty insurers were around 37 percent and 14 percent, respectively, in 2024 (figure 4.10).

Some private credit vehicles faced increases in redemption requests

In recent years, firms active in private credit markets have been raising more capital from individual investors through two types of "semi-liquid" vehicles: perpetual-life BDCs and interval funds. These semi-liquid vehicles offer investors an option to redeem capital subject to restrictions, such as discretionary redemption caps. As sentiment in private credit markets deteriorated over the past year—reflecting changes in interest rates, some defaults, and other concerns about asset quality—semi-liquid private credit vehicles have faced notable increases in redemption requests, and in most cases their managers chose to cap redemptions. Although outflows from these funds have moderately exceeded new inflows in the first quarter of 2026, redemption requests have remained manageable. See the box "Developments in Private Credit" for more information.

Based on data through the fourth quarter of 2025, banks continued lending to private credit funds and BDCs, with aggregate loan commitments and outstanding amounts increasing relative to the previous quarter. There were some reductions in loan commitments to certain private credit vehicles during this period, while commitments to other private credit vehicles increased. These adjustments were consistent with historical patterns and seemed to reflect normal risk-management practices at banks.

 

References

 

 11. Securities held in HTM accounts are accounted at fair value for liquidity coverage ratio purposes but at book value for regulatory capital purposes. Selling HTM securities (rather than holding them to maturity) could "taint" the entire HTM investment portfolio, requiring it to be marked to market. This could result in the selling bank recognizing a significant mark-to-market loss and reduction in regulatory capital. Banks with access to repo markets can raise cash by pledging securities in a repo transaction without tainting their HTM portfolio. Return to text

 12. Stablecoins are typically backed by a pool of "reserve" assets that include Treasury bills and other short-term instruments, but some stablecoins also include loans and other digital assets as part of their reserve. Return to text