Fed: Risks to US financial system ease as economy recovers

NEW YORK (AP) — The risks to the U.S. financial system have eased significantly compared to a year earlier, the Federal Reserve said Monday.

The central bank noted that as the economy recovers from the pandemic-driven recession, the balance sheets of individual Americans and businesses continue to strengthen.

However, the Fed did cite the significant rise in asset prices — most notably home and stock prices — as well as the rise of volatile trading of so-called “meme” stocks as potential risks to the financial system.

The observations came in the Fed's semiannual Financial Stability Report on trends going on in both trading, investing as well as economic issues. The report is not an economic forecast, nor does it try to predict the next risk to the financial system. But it does attempt to highlight areas of concern to central bankers.

Overall the financial system is in better shape than it was a year ago and even six months ago, the Fed said. Borrowing by individual Americans and businesses continues to trend back to pre-pandemic levels. Low interest rates have made handling higher levels of debt easier. Banks are reporting record profits and their balance sheets are nearly back to where they were before the pandemic.

The Fed did note the rise in asset prices from a year earlier, and how prices for assets ranging from stocks to homes are at levels above historic norms. The central bank said in its report that it has not seen a decrease in credit quality for mortgages, however, which was the cause of financial crisis of 2008 and Great Recession.

If investors were to decrease their appetite for risk, or if interest rates were to rise significantly, these high asset prices could fall noticeably, which would be a risk to the financial system, the Fed said.

One notable...