5. Near-Term Risks to the Financial System
The Federal Reserve routinely engages in discussions with domestic and international policymakers, academics, community groups, and others to gauge the set of risk events that, should they occur, would be of greatest concern to these groups. As captured in the box "Survey of Salient Risks to Financial Stability," fewer respondents in recent outreach noted risks associated with fiscal sustainability than had done so in the spring survey, while more participants cited risks related to high interest rates or geopolitical developments.
The following discussion considers possible interactions of existing domestic vulnerabilities with three potential near-term risks.
A further increase in term premiums leading to higher-than-anticipated long-term interest rates, particularly if accompanied by persistent inflation, could pose risks for both borrowers and lenders
Higher interest rates and inflation could have significant financial and economic effects, including declines in asset prices. In the near term, higher interest rates, as well as weaker balance sheets resulting from asset price declines, could raise consumer borrowing costs and, along with inflation, strain household budgets, increasing the potential for delinquencies. Debt-servicing costs for governments and businesses would similarly increase, which, for businesses, could amplify existing vulnerabilities linked to high leverage and upcoming refinancing needs. In this context, reduced spending likely would lead to slower economic growth. Collectively, these factors could lead to fair value losses on fixed-rate securities among financial intermediaries, which, in turn, could reduce the supply of credit to the economy and further weigh on economic activity.
A marked slowdown in global economic growth could exacerbate existing financial vulnerabilities
A pronounced economic slowdown in the U.S. and other economies could weigh on investor, business, and consumer sentiment and prompt a broader pullback from riskier assets or those with elevated valuations, increasing volatility in financial markets and raising the potential for market dislocations. Tighter funding market conditions could also result from weaker investor sentiment, leading to reduced dollar credit from non-U.S. banks and sales of dollar debt securities by international investors that rely on less stable wholesale sources for dollar funding or for hedging exchange rate risk.16 Weaker-than-expected economic activity could also erode the fundamentals of some businesses and households by broadly reducing the outlook for revenue and income growth, impairing their ability to service debt and raising the potential for defaults and delinquencies. These increased credit risks could strain the balance sheets of financial intermediaries, which may restrict the supply of credit as a result. In addition, concerns about elevated public debt levels and fiscal sustainability in many advanced economies may limit governments' ability to respond to weaker growth.
Cyberattacks and other cyber events could disrupt market functioning and the provision of financial services
Over recent years, cyber events, and the risks they pose to the financial system, have been a recurring concern for participants in the Federal Reserve's market outreach surveys. In other venues, industry experts have suggested that new technologies like AI could introduce new possibilities for cyber events. In addition to malicious cyberattacks and costly heists, non-malicious cyber events, such as software malfunctions, have caused disruptions to the provision of financial services. Shocks caused by cyber events may propagate through complex interdependencies among financial institutions and market infrastructures as well as service providers and can be further amplified by existing financial vulnerabilities. For example, a cyber event at a financial market utility may disrupt core infrastructure that supports clearing and settlement, degrading market liquidity. An attack on a large financial institution could impair its ability to access or verify data, complete transactions, or meet obligations, posing risks for funding and depositor runs as well as fire sales. Attacks on critical third-party providers could affect multiple institutions, with the effects of such disruptions likely to be further amplified when there is limited substitutability for the affected services. Through continued interagency coordination and information sharing, U.S. government agencies and financial regulators are advancing efforts to further protect the financial system and financial infrastructure from cyber risks.
Box 5.1. Survey of Salient Risks to Financial Stability
As part of its market intelligence gathering, staff from the Federal Reserve Bank of New York solicited views from a wide range of contacts on risks to U.S. financial stability. During September and October, the staff surveyed 23 contacts, including professionals at broker-dealers, banks, investment funds, and advisory firms. This section is a summary of the views provided by survey respondents and should not be interpreted as representing the views of the Federal Reserve Board or the Federal Reserve Bank of New York.
Policy uncertainty was the most cited risk in this survey (figure A), similar to the previous survey (figure B). A number of geopolitical risks and the prospect of higher long-term interest rates were also frequently cited this cycle. Persistent inflation was again one of the most cited risks, along with concerns over private credit. Concerns about AI, a depreciating U.S. dollar, and a sharp decline in asset prices were also frequently cited this round. The prospect of a successful cyberattack continued to be flagged as having the most severe potential consequences.
Figure A. Fall 2025: Most cited potential shocks over the next 12 to 18 months
Accessible Version | Return to text
Note: Responses are to the following question: "Over the next 12–18 months, which shocks, if realized, do you think would have the greatest negative impact on the functioning of the U.S. financial system?"
Source: Federal Reserve Bank of New York survey of 23 market contacts from September through October.
Figure B. Spring 2025: Most cited potential shocks over the next 12 to 18 months
Accessible Version | Return to text
Note: Responses are to the following question: "Over the next 12–18 months, which shocks, if realized, do you think would have the greatest negative impact on the functioning of the U.S. financial system?"
Source: Federal Reserve Bank of New York survey of 22 market contacts from February through April.
Policy uncertainty
Respondents continued to highlight concerns about policy uncertainty, including trade policy, central bank independence, and the availability of economic data.
Geopolitical risks
Contacts cited a range of geopolitical risks and are monitoring for the potential broadening of existing tensions. Respondents also noted that financial market indicators may not currently be reflecting geopolitical risks.
Persistent inflation
Respondents continued to note the risk of persistent inflation, though not as frequently as some surveys over the past several years. One difference from many of those previous surveys is that respondents noted the risk of high inflation alongside a weakening labor market.
Higher long-term rates
Respondents highlighted the potential for higher long-term interest rates, which could be driven by rising term premia, elevated inflation expectations, or weak demand for U.S. Treasury securities. Some noted that higher rates would likely increase unrealized losses in the banking sector and could force fixed-income investors to take mark-to-market losses.
Artificial intelligence
Respondents noted that a turn in the prevailing sentiment toward AI, which has been viewed as a main driver of recent U.S. equity performance, could lead to a correction in risk assets. Participants noted that such a turn could lead to large losses in private and public markets and, if the declines were large enough, drive a further slowdown in the labor market and tighten financial conditions.
Private credit
Private credit markets were cited as a concern more frequently than in the previous survey. Respondents noted the opacity of private credit as contributing to uncertainties over potential negative spillovers, which could include impacts on banks in the event of credit stress or the failure of a nonbank financial institution.
References
16. Non-U.S. banks' large role in dollar-denominated financial intermediation and their dollar funding vulnerabilities are documented in the box "Vulnerabilities in Global U.S. Dollar Funding Markets" in Board of Governors of the Federal Reserve System (2021), Financial Stability Report (Washington: Board of Governors, May), pp. 55–58, https://www.federalreserve.gov/publications/files/financial-stability-report-20210506.pdf. The sale of dollar securities by international investors during a period of strained liquidity is documented in the box "The Role of Foreign Investors in the March 2020 Turmoil in the U.S. Treasury Market" in Board of Governors of the Federal Reserve System (2021), Financial Stability Report (Washington: Board of Governors, November), pp. 22–25, https://www.federalreserve.gov/publications/files/financial-stability-report-20211108.pdf. Return to text