Federal Reserve Bank of New York Recognizes Vulnerability of American Lenders

The report of the Federal Reserve Bank of New York contains a statement that at present financial institutions that are part of the structure of the banking sector of the United States are in a more stable position compared to their condition during the crisis of 2008, but this does not mean that creditors are completely healthy.

Federal Reserve Bank of New York Recognizes Vulnerability of American Lenders

The Federal Reserve Bank of New York stated that the current crisis situation in the mentioned industry spotlighted an important problem. In this case, the vulnerability of financial institutions to interest rate hikes is implied. The report of the mentioned bank notes that the ability of creditors to limit the impact of cycles of increase of this indicator on deposit rates allows them to benefit. At the same time, it is separately indicated that financial institutions are gradually receiving the advantages of appropriate tactics of action.

The Federal Reserve Bank of New York also said that in the short term, lenders may face losses in their securities portfolio. The implementation of the corresponding scenario may cause a reduction in funding. Also, another potential consequence of this possibility, the experts of the mentioned bank say a decrease in the level of effective capital.

The lender capital vulnerability index in the United States, based on the 2008 crisis, is currently at a historically low level of about 1.55% of GDP.

The aforementioned report also notes that the surge in the American banking sector at the beginning of the coronavirus pandemic in 2020, primarily due to loan reservations, is currently showing a downward trend. The current dynamic is explained by the fact that the unemployment rate in the United States by the end of 2021 returned to the value that was characteristic of the so-called pre-pandemic period. Also, in this case, the expected losses on loans are important factors.

Experts of the Federal Reserve Bank of New York note that the capital vulnerability index, based on the 2022 scenario, remains slightly elevated compared to recent historical standards. According to them, the existence of a vulnerability factor is explained by the fact that lenders are exposed to a sudden drop in the value of securities in the event of a scenario of an increase in interest rates.

Financing based on the Fed model is considered stable. However, the economic value of lenders’ securities portfolios has decreased amid rising interest rates.

The Federal Reserve Bank of New York also argues that the subsequent gradual increase in net interest margin, largely due to the influence of the dynamics of the deposit rate indicator, can compensate for the initial drop in the value of securities. At the same time, potentially rapid losses can still cause a shortage of capital in financial institutions.

In early November, the October survey of the opinion of the senior credit inspector of the Federal Reserve System on the practice of bank lending was published. This report contains information that credit conditions in the American banking sector have tightened, and demand for corresponding financial services has slowed down in the third quarter of the current year.

As we have reported earlier, Bank of America CEO Believes in Optimistic Prospects for US Economy.

Serhii Mikhailov

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Serhii’s track record of study and work spans six years at the Faculty of Philology and eight years in the media, during which he has developed a deep understanding of various aspects of the industry and honed his writing skills; his areas of expertise include fintech, payments, cryptocurrency, and financial services, and he is constantly keeping a close eye on the latest developments and innovations in these fields, as he believes that they will have a significant impact on the future direction of the economy as a whole.