Financial Stability Report 20240419

Financial Stability Report
April 2024
B O A R D O F G OV E R N O R S O F T H E F E D E R A L R E S E RV E S Y S T E M
The Federal Reserve System is the central
bank of the United States. It performs five key
functions to promote the effective operation
of the U.S. economy and, more generally, the
public interest.
The Federal Reserve

conducts the nation’s monetary policy to promote maximum employment
and stable prices in the U.S. economy;
promotes the stability of the financial system and seeks to minimize
and contain systemic risks through active monitoring and engagement in
the U.S. and abroad;
promotes the safety and soundness of individual financial institutions
and monitors their impact on the financial system as a whole;
fosters payment and settlement system safety and efficiency through
services to the banking industry and the U.S. government that facilitate
U.S.-dollar transactions and payments; and
promotes consumer protection and community development through
consumer-focused supervision and examination, research and analysis of
emerging consumer issues and trends, community economic development
activities, and administration of consumer laws and regulations.
To learn more about us, visit www.federalreserve.gov/aboutthefed.htm.

iii
Contents
Purpose and Framework. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v
Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1 Asset Valuations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2 Borrowing by Businesses and Households . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
3 Leverage in the Financial Sector. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
4 Funding Risks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Box 4.1. The Bank Term Funding Program. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
5 Near-Term Risks to the Financial System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

Box 5.1. Survey of Salient Risks to Financial Stability . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Appendix: Figure Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Note: This report generally reflects information that was available as of April 1, 2024.
v
Purpose and Framework
This report presents the Federal Reserve Board’s current assessment of the stability of the U.S.
financial system. By publishing this report, the Board intends to promote public understand-
ing by increasing transparency around, and creating accountability for, the Federal Reserve’s
views on this topic. Financial stability supports the objectives assigned to the Federal Reserve,
including full employment and stable prices, a safe and sound banking system, and an efficient
payments system.
A financial system is considered stable when

banks, other lenders, and financial markets More on the Federal
are able to provide households, communities, Reserve’s Monitoring Efforts
and businesses with the financing they need
to invest, grow, and participate in a well- See the Financial Stability section of the
Federal Reserve Board’s website for more
functioning economy—and can do so even information on how the Federal Reserve
when hit by adverse events, or “shocks.” monitors the stability of the U.S. and world
financial systems.
Consistent with this view of financial stabil- The website includes:

ity, the Federal Reserve Board’s monitoring
framework distinguishes between shocks to, • a more detailed look at our monitoring
framework for assessing risk in each
and vulnerabilities of, the financial system. category;
Shocks are inherently difficult to predict, • more data and research on related topics;
while vulnerabilities, which are the aspects • information on how we coordinate, cooper-
of the financial system that would exacerbate ate, and otherwise take action on financial
system issues; and
stress, can be monitored as they build up or
• public education resources describing the
recede over time. As a result, the framework
importance of our efforts.
focuses primarily on assessing vulnerabilities,
with an emphasis on four broad categories
and how those categories might interact to
amplify stress in the financial system.1
1. Valuation pressures arise when asset prices are high relative to economic fundamentals or
historical norms. These developments are often driven by an increased willingness of investors
to take on risk. As such, elevated valuation pressures may increase the possibility of outsized
drops in asset prices (see Section 1, Asset Valuations).
1
For a review of the research literature in this area, see Tobias Adrian, Daniel Covitz, and Nellie Liang (2015), “Finan-
cial Stability Monitoring,” Annual Review of Financial Economics, vol. 7 (December), pp. 357–95.
vi Financial Stability Report
2. Excessive borrowing by businesses and households exposes the borrowers to distress if

their incomes decline or the assets they own fall in value. In these cases, businesses and
households with high debt burdens may need to cut back spending, affecting economic activity
and causing losses for investors (see Section 2, Borrowing by Businesses and Households).
3. Excessive leverage within the financial sector increases the risk that financial institutions will
not have the ability to absorb losses without disruptions to their normal business operations
when hit by adverse shocks. In those situations, institutions will be forced to cut back lending,
sell their assets, or even shut down. Such responses can impair credit access for households
and businesses, further weakening economic activity (see Section 3, Leverage in the
Financial Sector).
4. Funding risks expose the financial system to the possibility that investors will rapidly
withdraw their funds from a particular institution or sector, creating strains across markets
or institutions. Many financial institutions raise funds from the public with a commitment
to return their investors’ money on short notice, but those institutions then invest much of
those funds in assets that are hard to sell quickly or have a long maturity. This liquidity and
maturity transformation can create an incentive for investors to withdraw funds quickly in
adverse situations. Facing such withdrawals, financial institutions may need to sell assets
quickly at “fire sale” prices, thereby incurring losses and potentially becoming insolvent, as
well as causing additional price declines that can create stress across markets and at other
institutions (see Section 4, Funding Risks).
The Federal Reserve’s monitoring framework also tracks domestic and international develop-
ments to identify near-term risks—that is, plausible adverse developments or shocks that could
stress the U.S. financial system. The analysis of these risks focuses on assessing how such
potential shocks may spread through the U.S. financial system, given our current assessment of
vulnerabilities.
While this framework provides a systematic way to assess financial stability, some potential
risks may be novel or difficult to quantify and therefore are not captured by the current approach.
Given these complications, we rely on ongoing research by the Federal Reserve staff, academ-
ics, and other experts to improve our measurement of existing vulnerabilities and to keep pace
with changes in the financial system that could create new forms of vulnerabilities or add to
existing ones.
Purpose and Framework vii
Federal Reserve actions to promote the resilience of the

financial system
The assessment of financial vulnerabilities informs Federal Reserve actions to promote the resil-
ience of the financial system. The Federal Reserve works with other domestic agencies directly
and through the Financial Stability Oversight Council to monitor risks to financial stability and to
undertake supervisory and regulatory efforts to mitigate the risks and consequences of financial
instability.
Actions taken by the Federal Reserve to promote the resilience of the financial system include
its supervision and regulation of financial institutions. In the aftermath of the 2007–09 financial
crisis, these actions have included requirements for more and higher-quality capital, an innova-
tive stress-testing regime, and new liquidity regulations applied to the largest banks in the United
States. In addition, the Federal Reserve’s assessment of financial vulnerabilities informs deci-
sions regarding the countercyclical capital buffer (CCyB). The CCyB is designed to increase the
resilience of large banking organizations when there is an elevated risk of above-normal losses
and to promote a more sustainable supply of credit over the economic cycle.
1
Overview
This report reviews vulnerabilities affecting the stability of the U.S. financial system related to
valuation pressures, borrowing by businesses and households, financial-sector leverage, and
funding risks. It also highlights several near-term risks that, if realized, could interact with these
vulnerabilities.
A summary of the developments in the four broad categories of vulnerabilities since the
October 2023 Financial Stability Report is as follows:
Overview of financial system vulnerabilities
Borrowing by businesses Leverage in the

Asset valuations and households financial sector Funding risks
• Equity price-to- • The ratio of total • The banking system • Most domestic banks
earnings ratios moved private debt to gross remained sound and maintained high levels
to the upper end domestic product resilient, with risk-based of liquid assets and
of their historical (GDP) declined capital ratios well above stable funding.
distributions. further, approaching regulatory requirements.
its historical average. • However, concerns over
• Corporate bond spreads • Nonetheless, some uninsured deposits and
fell to levels that are • The business debt-to- banks continued to face other factors continued
low relative to their GDP ratio remained sizable fair value losses to generate funding
historical averages. high, but business on some fixed-rate pressures for a subset
debt continued to assets held on their of banks.
• Prices of residential decline in real terms balance sheets.
real estate remained amid subdued risky • Structural
high relative to debt issuance. Firms’ vulnerabilities
ability to service their
• Leverage increased
fundamentals. from already elevated persisted at money
debt remained robust. market funds, some
levels at the largest
• Prices of commercial hedge funds. other mutual funds,
real estate declined • Household debt was and stablecoins.
amid deteriorating at modest levels
relative to GDP and • Broker-dealer leverage
fundamentals. remained near • Life insurers
concentrated among continued to hold a
prime-rated borrowers. historically low levels.
high share of illiquid
and risky assets.
2 Financial Stability Report
1. Asset valuations. Valuations rose further to levels that were high relative to
fundamentals across major asset classes. Equity prices grew faster than expected
earnings, pushing the forward price-to-earnings ratio to the upper end of its historical
distribution. Corporate bond spreads narrowed and currently stand at levels that are low
relative to their long-run averages. Residential property prices remained high relative to
fundamentals and prices continued to rise in recent months. Prices of commercial real
estate (CRE) declined amid weak demand for office properties (see Section 1, Asset
Valuations).
2. Borrowing by businesses and households. The balance sheets of nonfinancial

businesses and households remained solid, as the ratio of total private debt to gross
domestic product (GDP) declined further, approaching its historical average. Although
business debt remained high when measured relative to GDP (or to business assets for
publicly traded corporations), business debt declined in real terms throughout last year.
Firms’ ability to service their debt remained robust owing to strong earnings and low
borrowing costs on existing debt. Household debt remained at modest levels relative
to GDP, and most of that debt is owed by households with strong credit histories or
considerable home equity (see Section 2, Borrowing by Businesses and Households).
3. Leverage in the financial sector. The banking sector remained sound and resilient
overall, and most banks continued to report capital levels well above regulatory
requirements. Nevertheless, fair value losses on fixed-rate assets remained sizable
for some banks, and some banks with concentrated exposure to loans backed by
commercial real estate properties experienced stress. Outside the banking sector,
available data suggest that hedge fund leverage grew to historic highs, driven primarily
by borrowing by the largest hedge funds. Leverage at life insurance companies remained
around its median, while they continued to take on credit and liquidity risk. Broker-dealer
leverage remained near historical lows (see Section 3, Leverage in the Financial Sector).
4. Funding risks. Liquidity at most domestic banks remained ample, with limited reliance
on short-term wholesale funding. Nevertheless, some banks continued to face
funding strains, likely owing to vulnerabilities associated with high levels of uninsured
deposits, declines in the fair value of assets, and elevated exposure to CRE. Structural
vulnerabilities remained in other short-term funding markets. Prime and tax-exempt
money market funds (MMFs), as well as other cash-investment vehicles and stablecoins,
remained vulnerable to runs. Bond and loan funds that hold assets that can become
illiquid during periods of stress remained susceptible to large redemptions. In addition,
life insurers continued to rely on a higher-than-average share of nontraditional liabilities
(see Section 4, Funding Risks).
Overview 3
This report also discusses potential near-term risks, based in part on the most frequently cited
risks to U.S. financial stability as gathered from outreach to a wide range of researchers, aca-
demics, and market contacts conducted from late January through the end of March (discussed
in the box “Survey of Salient Risks to Financial Stability”). The risk of persistent inflationary
pressures leading to a more restrictive than expected monetary policy stance remained the most
frequently cited risk, mentioned by nearly three-fourths of survey participants. The share of survey
participants mentioning policy uncertainty as a risk to the financial system stood at just under
two-thirds, significantly higher than in the October report. Over half of all survey participants men-
tioned the potential effect of large realized losses on CRE and residential real estate, down from
three-fourths of all participants in the previous survey. Rounding out the top five, risks associated
with the reemergence of banking-sector stress and with fiscal debt sustainability in advanced
economies continued to feature prominently.
In addition, the report also contains the box “The Bank Term Funding Program,” which describes
the role the program played in providing funding to the banking system beginning with its incep-
tion in response to the March 2023 banking-sector stresses up until it ceased extending new
loans on March 11, 2024.
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.”
Persistent inflation; Policy Commercial and Banking-sector Fiscal debt

monetary tightening uncertainty residential real estate stress sustainability
April 72% 60% 56% 44% 40%

of contacts of contacts of contacts of contacts of contacts
2024 surveyed surveyed surveyed
surveyed surveyed
October 72% 24% 72% 56% 44%

of contacts of contacts of contacts of contacts of contacts
2023
surveyed surveyed surveyed surveyed surveyed
5
1 Asset Valuations
Asset valuations increased to elevated levels relative to

fundamentals
Since the October report, equity valuations increased further. Valuations in corporate bond
markets also appeared stretched as corporate credit spreads, the difference in yields on corpo-
rate bond and yields on similar-maturity Treasury securities, narrowed since the previous report,
falling to levels in the lower range of their historical distributions. Liquidity in short-term Treasury
markets remained low by historical standards, although market liquidity was consistent with ele-
vated measures of interest rate volatility. Nonetheless, Treasury market liquidity conditions could
amplify the impact of shocks on asset valuations.
Residential real estate valuations remained near the peak levels seen in the mid-2000s.
CRE market conditions continued to deteriorate, especially for the office sector, and prices con-
tinued to decline against a backdrop of high vacancy rates and weakening rents. Farmland prices
were historically elevated relative to rents, reflecting limited inventories of land.
Table 1.1 shows the sizes of the asset markets discussed in this section. The largest asset mar-
kets are those for equities, residential real estate, Treasury securities, and CRE.
Treasury yields decreased slightly and remain high relative to the

past 15 years
Yields on Treasury securities decreased slightly since the October report but remained close
to their highest levels over the past decade and a half (figure 1.1). A model-based estimate of
the nominal Treasury term premium—a measure of the compensation that investors require to
hold longer-term Treasury securities rather than shorter-term ones—remained low relative to its
long-run history despite edging up through March (figure 1.2). While interest rate volatility implied
by options declined a touch, it remained elevated by historical norms (figure 1.3). This volatility
reflected, in part, uncertainty about the economic outlook and the associated path of monetary
policy, which likely heightened the sensitivity of Treasury yields to news about output growth, infla-
tion, and the supply of Treasury securities.
Table 1.1. Size of selected asset markets
Growth, Average annual growth,

Outstanding
Item 2022:Q4–2023:Q4 1997–2023:Q4
(billions of dollars)
(percent) (percent)
Equities 57,175 22.2 9.2
Residential real estate 56,415 3.6 6.2
Treasury securities 26,227 10.0 8.2
Commercial real estate 22,518 −6.3 6.4
Investment-grade corporate bonds 7,533 5.4 8.1
Farmland 3,420 7.7 5.8
High-yield and unrated corporate bonds 1,631 −2.6 6.2
1
Leveraged loans 1,397 −1.1 13.2
Price growth (real)

Commercial real estate2 −1.3 3.1
3
Residential real estate 2.1 2.7
Note: The data extend through 2023:Q4. Growth rates are measured from Q4 of the year immediately preceding the period through Q4 of the
final year of the period. Equities, real estate, and farmland are at nominal market value; bonds and loans are at nominal book value.
1
The amount outstanding shows institutional leveraged loans and generally excludes loan commitments held by banks. For example, lines of
credit are generally excluded from this measure. Average annual growth of leveraged loans is from 2000 to 2023:Q4, as this market was
fairly small before then.
2
One-year growth of commercial real estate prices is from December 2022 to December 2023, and average annual growth is from
December 1999 to December 2023. Both growth rates are calculated from equal-weighted nominal prices deflated using the consumer
price index (CPI).
3
One-year growth of residential real estate prices is from December 2022 to December 2023, and average annual growth is from
December 1998 to December 2023. Nominal prices are deflated using the CPI.
Source: For leveraged loans, PitchBook Data, Leveraged Commentary & Data; for corporate bonds, Mergent, Inc., Fixed Income Securities Data-
base; for farmland, Department of Agriculture; for residential real estate price growth, CoreLogic, Inc.; for commercial real estate price growth,
CoStar Group, Inc., CoStar Commercial Repeat Sale Indices; for all other items, Federal Reserve Board, Statistical Release Z.1, “Financial
Accounts of the United States.”
Figure 1.1. Nominal Treasury yields remained close to the highest levels in the past 15 years
Percent, annual rate

8
Monthly
7
2-year
6
10-year
5
Mar.
4
3
2
1
0
1999 2004 2009 2014 2019 2024

Source: Federal Reserve Board, Statistical Release H.15, “Selected Interest Rates.”
Asset Valuations 7
Figure 1.2. An estimate of the nominal Figure 1.3. Interest rate volatility fell slightly
Treasury term premium remained relatively low but continued to be elevated by historical norms
Percentage points Basis points

2.5 250
Monthly Monthly
2.0
200
1.5
1.0 150
0.5
0.0 Mar. 100
Mar.
−0.5
Median = 80.22 50
−1.0
−1.5 0
1999 2004 2009 2014 2019 2024 2006 2009 2012 2015 2018 2021 2024
Source: Department of the Treasury; Wolters Kluwer, Source: For data through July 13, 2022, Barclays and
Blue Chip Financial Forecasts; Federal Reserve Bank S&P Global; for data from July 14, 2022, onward, ICAP,
of New York; Federal Reserve Board staff estimates. Swaptions and Interest Rate Caps and Floors Data.
Measures of equity market valuations rose further from already

high levels
The ratio of prices to expected 12-month earnings, or the P/E ratio, increased since the October
report and currently sits in the upper end of its historical distribution since 1989 (figure 1.4).
The difference between the forward P/E ratio and the real 10-year Treasury yield—a measure
of the additional return that investors require for holding stocks relative to risk-free bonds (the
equity premium)—declined, on net, since the October report and currently stands well below its
historical median (figure 1.5).2 Equity market volatility was subdued, and option-implied volatility
Figure 1.4. The price-to-earnings ratio of Figure 1.5. An estimate of the equity premium
S&P 500 firms increased to levels further fell further below its historical median
above its historical median
Percentage points
10
Ratio Monthly
30
Monthly 8
27
24 6
Mar.
21 4
Median = 4.71
18 Mar.
2
15
Median = 15.64
12 0
9 −2
6 1994 2000 2006 2012 2018 2024
1989 1996 2003 2010 2017 2024
Source: Refinitiv, Institutional Brokers’ Estimate
Source: Refinitiv, Institutional Brokers’ Estimate System, North American Summary & Detail
System, North American Summary & Detail Estimates, Level 2, Current & History Data, Adjusted
Estimates, Level 2, Current & History Data, Adjusted and Unadjusted, https://www.lseg.com/en/
and Unadjusted, https://www.lseg.com/en/ data-analytics/financial-data/company-data/ibes-
data-analytics/financial-data/company-data/ibes- estimates.
estimates.
2
This estimate is constructed based on expected corporate earnings for 12 months ahead. Alternative measures of the
equity premium that incorporate longer-term earnings forecasts suggest more elevated equity valuation pressures.
remained in the lower quarter of its historical

Figure 1.6. Volatility in equity markets
decreased to levels slightly below the distribution (figure 1.6).
historical median
Percent
Monthly
80 Spreads in corporate debt
Option-implied volatility
Realized volatility
70
markets narrowed to low levels
60
50 Yields for both investment- and speculative-
Median = 19.12
40
grade bonds fell a bit since the October report
30
20 and currently stand near the median of their
Mar.
10 respective historical distributions (figure 1.7).
0
1996 2000 2004 2008 2012 2016 2020 2024 While the decline in corporate bond yields
Source: Cboe Volatility Index® (VIX®) accessed via was modest, it nevertheless outpaced that
Bloomberg Finance L.P.; Federal Reserve Board staff
estimates. of comparable-maturity Treasury securities,
and, as a result, corporate bond spreads
narrowed to levels that are low relative to
Figure 1.7. Corporate bond yields fell slightly their historical distributions (figure 1.8). The
to levels near their historical medians
excess bond premium—a risk premium mea-
Percent sure that captures the gap between corporate
24
Monthly 22 bond spreads and expected credit losses—
20
Triple-B 18 remained near its historical mean (figure 1.9).
High-yield 16
14 Market-based forecasts of credit quality
12
10 (one-year-ahead default probabilities) of
8
Mar. nonfinancial firms have mildly improved since
6
4
2 the October report but remain somewhat ele-
0
1999 2004 2009 2014 2019 2024 vated by historical standards for speculative-
Source: ICE Data Indices, LLC, used with permission. grade issuers.
Figure 1.8. Corporate bond spreads narrowed to low levels relative to their historical distributions
Percentage points Percentage points

12 24
11 Monthly 22
10 Triple-B (left scale) 20
9 High-yield (right scale) 18
8 16
7 14
6 12
5 10
4 8
3 6
2 4
1 Mar. 2
0 0
1999 2004 2009 2014 2019 2024
Source: ICE Data Indices, LLC, used with permission.
Asset Valuations 9
Figure 1.9. The excess bond premium fell slightly but remained near the middle of the historical range
Percentage points
4
Monthly
3
0
Feb.
−1
−2
1999 2004 2009 2014 2019 2024
Source: Federal Reserve Board staff calculations based on Lehman Brothers Fixed Income Database (Warga);
Intercontinental Exchange, Inc., ICE Data Services; Center for Research in Security Prices, CRSP/Compustat Merged
Database, Wharton Research Data Services; S&P Global, Compustat.
The average spread on leveraged loans in the secondary market fell a touch since the October
report but remained roughly in line with its average over the past decade (figure 1.10). The trailing
12-month loan default rate moved up, on net, since the last report, and the year-ahead expected
default rate remained somewhat elevated relative to its historical trend.
Figure 1.10. Spreads on leveraged loans declined modestly
Percentage points
30
B 25
BB
Frequency change 20
15
10
Mar. 5
29
0
1999 2004 2009 2014 2019 2024
Source: PitchBook Data, Leveraged Commentary & Data.
Market liquidity stayed near the lower end of its historical range
Market liquidity refers to the ease and cost of buying and selling an asset. Low liquidity can
amplify the volatility of asset prices and result in larger price moves in response to shocks. In
extreme cases, low liquidity can threaten market functioning, leading to a situation in which par-
ticipants are unable to trade without incurring a significant cost.
Treasury market liquidity is important because of the key role these securities play in the financial
system. Various measures of market liquidity, such as market depth, suggest that liquidity in the
Treasury cash market remained low (figures 1.11 and 1.12), although at levels that reflect ele-
vated measures of interest rate volatility. The effect of low levels of market depth on price impact
has been limited because market participants split trades into smaller quantities, and liquidity
providers have been able to replenish the limited volume of quotes rapidly enough to meet incom-
ing order flow without large moves in prices. Nevertheless, conditions in the Treasury cash market
appear challenged and could amplify shocks.
Figure 1.11. Treasury market depth increased but remained below historical norms
Millions of dollars Millions of dollars

35 350
5-day moving average
30 5-year (right scale) 300
10-year (right scale)
25 30-year (left scale)
250
20 200
15 Mar. 150
28
10 100
5 50
0 0
Mar. June Sept. Dec. Mar. June Sept. Dec. Mar. June Sept. Dec. Mar. June Sept. Dec. Mar. June Sept. Dec. Mar.
2019 2020 2021 2022 2023 2024
Source: Inter Dealer Broker Community.
Figure 1.12. On-the-run market depth improved in recent months but remained below historical norms
Millions of dollars Millions of dollars

60 300
50 2-year OTR market depth (right scale) 250
10-year OTR market depth (left scale)
40 200
30 150
20 Mar. 100
10 28 50
0 0
Sept. Dec. Mar. June Sept. Dec. Mar. June Sept. Dec. Mar. June Sept. Dec. Mar. June Sept. Dec. Mar.
2019 2020 2021 2022 2023 2024
Source: BrokerTec; Federal Reserve Board staff calculations.
In other markets, liquidity conditions present a mixed picture. Liquidity in corporate bond markets
remained in line with the average level observed in recent years, and bid-ask spreads were close
to their lowest levels since the 2007–09 financial crisis. In contrast, liquidity conditions in equity
markets remained low by longer-term historical standards and deteriorated somewhat despite
lower equity volatility (figure 1.13).
Asset Valuations 11
Figure 1.13. A measure of liquidity in equity markets remained below average
Market depth (number of contracts)

300
250
200
150
Mar.
28 100
50
0
Sept. Dec. Mar. June Sept. Dec. Mar. June Sept. Dec. Mar. June Sept. Dec. Mar. June Sept. Dec. Mar.
2019 2020 2021 2022 2023 2024
Source: Refinitiv, DataScope Tick History; Federal Reserve Board staff calculations.
Commercial real estate prices declined but remained high relative

to rents
Aggregate CRE prices measured in inflation-adjusted terms continued to decline over the second
half of last year (figure 1.14), with declines in these price measures broad based across all CRE
sectors. These transaction-based price measures likely do not yet fully reflect the deterioration
in CRE market prices because, rather than realizing losses, many owners wait for more favor-
able conditions to put their properties on the market. Capitalization rates at the time of property
purchase, which measure the annual income of commercial properties relative to their prices,
moved modestly higher but remained at historically low levels, suggesting that prices remain high
relative to fundamentals (figure 1.15). The CRE office sector has faced strains resulting from an
Figure 1.14. Commercial real estate prices, Figure 1.15. Income of commercial properties
adjusted for inflation, continued to decline relative to prices continued to grow but
remained well below historical norms
Jan. 2001 = 100
180
Monthly Percent
10.0
160 Monthly
9.5
140 9.0
8.5
Feb. 120 8.0
7.5
100 7.0
80 Feb. 6.5
6.0
60 5.5
2004 2008 2012 2016 2020 2024 5.0
2004 2008 2012 2016 2020 2024
Source: Real Capital Analytics; consumer price index,
Bureau of Labor Statistics via Haver Analytics. Source: Real Capital Analytics; Andrew C. Florance,
Norm G. Miller, Ruijue Peng, and Jay Spivey (2010),
“Slicing, Dicing, and Scoping the Size of the U.S.
Commercial Real Estate Market,” Journal of Real
Estate Portfolio Management, vol. 16 (May–August),
pp. 101–18.
ongoing post-pandemic adjustment, and these strains could contribute to additional weakness in
prices and rents going forward. Vacancy rates for offices located in central business districts and
coastal cities increased further, and rents continued to decline since the October report. In the
October 2023 and January 2024 Senior Loan Officer Opinion Survey on Bank Lending Practices
(SLOOS), banks reported weaker demand and tighter standards for all CRE loan categories during
the second half of 2023 (figure 1.16).
Figure 1.16. Banks reported tightening lending standards for commercial real estate loans
Net percentage of banks reporting

100
Quarterly
80
Tightening
60
40
Q4
20
0
−20
−40
Easing
−60
−80
−100
1998 2003 2008 2013 2018 2023
Source: Federal Reserve Board, Senior Loan Officer Opinion Survey on Bank Lending Practices; Federal Reserve
Board staff calculations.
Residential real estate valuations remained high relative to rents as

house prices continued to increase
Valuations in the residential real estate sector remained at elevated levels relative to historical
standards and moved higher since the October report. House prices continued to rise through
the first two months of the year (figure 1.17). A model of house price valuation based on prices
Figure 1.17. House prices continued to increase in recent months
12-month percent change

25
Monthly
20
15
10
5
0
Zillow
−5
CoreLogic −10
Case-Shiller −15
−20
−25
2003 2006 2009 2012 2015 2018 2021 2024
Source: Zillow, Inc., Real Estate Data; CoreLogic, Inc., Real Estate Data; S&P Case-Shiller Home Price Indices.
Asset Valuations 13
relative to market rents and the real 10-year Treasury yield suggests that valuations in housing
markets were increasingly stretched. Moreover, an alternative measure of valuation pressures
(which uses owners’ equivalent rent instead of market rents and, therefore, has a longer history)
also suggested elevated valuations (figure 1.18). Moreover, the median price-to-rent ratio mea-
sured across a wide distribution of geographic areas remained close to its previous peak in the
mid-2000s (figure 1.19). That said, credit conditions for borrowers remained tighter relative to the
early 2000s, suggesting that weak credit standards are not driving house price growth.
Figure 1.18. Model-based measures of house price valuations rose to historically high levels
Percent
40
Quarterly
30
Owners’ equivalent rent
Market-based rents 20
10
0
−10
−20
−30
1982 1989 1996 2003 2010 2017 2024
Source: For house prices, Zillow, Inc., Real Estate Data; for rent data, Bureau of Labor Statistics.
Figure 1.19. House price-to-rent ratios remained elevated across geographic areas
Jan. 2010 = 100

220
Monthly
Median
Middle 80 percent of markets 180
140
Feb. 100
60
1996 2000 2004 2008 2012 2016 2020 2024
Source: For house prices, Zillow, Inc., Real Estate Data; for rent data, Bureau of Labor Statistics.
Farmland valuations remained high relative to farm income

Farmland valuations remained elevated, as farmland prices increased to near-historical highs
(figure 1.20). Farmland price-to-rent ratios diverged further from their historical norms, reaching
a level more than twice the median of their historical distribution (figure 1.21). Prices continued
to be sustained in the short run by limited farmland inventory despite declining farm income, ele-
vated interest rates, and higher operating costs.
Figure 1.20. Farmland prices increased to near-historical highs
2022 dollars per acre

8000
Annual
Midwest index 7000
U.S.
6000
5000
Median = $3,433.33 4000

3000
2000
1000
1968 1973 1978 1983 1988 1993 1998 2003 2008 2013 2018 2023
Source: Department of Agriculture; Federal Reserve Bank of Minneapolis staff calculations.
Figure 1.21. Farmland prices grew faster than rents
Ratio
40
Annual
Midwest index 35
U.S.
30
25
Median = 18.18 20
15
10
5
1968 1973 1978 1983 1988 1993 1998 2003 2008 2013 2018 2023
Source: Department of Agriculture; Federal Reserve Bank of Minneapolis staff calculations.
15
2 Borrowing by Businesses and

Households
Vulnerabilities from business and household debt remained moderate

Households and businesses continued to improve their financial condition, on net, reducing
outstanding debts relative to GDP. Business debt-to-GDP and gross leverage of public corpora-
tions remained at levels near the top of their respective historical ranges but significantly lower
than record highs seen at the onset of the pandemic. Interest coverage ratios (ICRs)—defined
as the ratio of earnings before interest and tax to interest expense—remained flat at a level that
pointed to robust debt-servicing capacity, reflecting resilient earnings. In addition, the prevalence
of fixed-rate borrowing among many businesses has attenuated the effect of higher interest rates
on debt-servicing costs.
The household debt-to-GDP ratio continued to decline, while the aggregate household debt
service ratio remained flat. Homeowners have solid equity cushions, and many households
continued to benefit from lower interest rate payments associated with refinancing or home
purchases several years ago. That said, some borrowers continued to be financially stretched,
and auto loan and credit card delinquencies for nonprime borrowers increased. While balance
sheets in the nonfinancial business and household sectors remained sound, a sharp downturn in
economic activity would depress business earnings and household incomes and could reduce the
debt-servicing capacity of smaller, riskier businesses with already low ICRs as well as particularly
financially stretched households.
Table 2.1 shows the amounts outstanding and recent historical growth rates of different forms of
debt owed by nonfinancial businesses and households as of the fourth quarter of 2023. The
overall debt-to-GDP ratio declined further and now stands somewhat below the level prevailing
over the past decade (figure 2.1). This gradual decline of the debt-to-GDP ratio is due to slower
growth in combined total nonfinancial debt relative to the growth rate of nominal GDP over
the past three years. Taken separately, both the household and business debt-to-GDP ratios
decreased, in line with the decline in the overall debt-to-GDP ratio (figure 2.2).
Business debt vulnerabilities remain moderate relative to

historical levels
Nonfinancial business debt adjusted for inflation declined over the past year (figure 2.3), and net
issuance of risky debt—defined as the difference between issuance of speculative-grade bonds,
unrated bonds, and leveraged loans minus retirements and repayments—was negative in the
Table 2.1. Outstanding amounts of nonfinancial business and household credit

Outstanding
Item 2022:Q4–2023:Q4 1997–2023:Q4
(percent) (percent)
Total private nonfinancial credit 41,081 2.2 5.5
Total nonfinancial business credit 21,126 1.8 5.9
Corporate business credit 13,637 1.5 5.5
Bonds and commercial paper 8,249 3.0 5.7
Bank lending 2,211 1.9 4.2
1
Leveraged loans 1,359 −1.3 13.4
Noncorporate business credit 7,489 2.3 6.9
Commercial real estate credit 3,220 2.7 6.2
Total household credit 19,955 2.7 5.1
Mortgages 13,053 2.8 5.1
Consumer credit 5,020 2.6 5.3
Student loans 1,727 −2.1 7.4
Auto loans 1,556 3.8 5.3
Credit cards 1,319 8.8 3.6
Nominal GDP 27,945 5.8 4.6
Note: The data extend through 2023:Q4. Outstanding amounts are in nominal terms. Growth rates are measured from Q4 of the year immedi-
ately preceding the period through Q4 of the final year of the period. The table reports the main components of corporate business credit, total
household credit, and consumer credit. Other, smaller components are not reported. The commercial real estate (CRE) row shows CRE debt
owed by both nonfinancial corporate and noncorporate businesses as defined in Table L.220: Commercial Mortgages in the “Financial
Accounts of the United States.” Total household-sector credit includes debt owed by other entities, such as nonprofit organizations. GDP is
gross domestic product.
1
Leveraged loans included in this table are an estimate of the leveraged loans that are made to nonfinancial businesses only and do not
include the small amount of leveraged loans outstanding for financial businesses. The amount outstanding shows institutional leveraged
loans and generally excludes loan commitments held by banks. For example, lines of credit are generally excluded from this measure.
Average annual growth of leveraged loans is from 2000 to 2023:Q4, as this market was fairly small before then.
Source: For leveraged loans, PitchBook Data, Leveraged Commentary & Data; for GDP, Bureau of Economic Analysis, national income and
product accounts; for all other items, Federal Reserve Board, Statistical Release Z.1, “Financial Accounts of the United States.”
Figure 2.1. The total debt of businesses and households relative to GDP declined further
Ratio
2.0
Quarterly
1.7
Q4 1.4
1.1
0.8
1981 1987 1993 1999 2005 2011 2017 2023
Source: Federal Reserve Board staff calculations based on Bureau of Economic Analysis, national income and
product accounts, and Federal Reserve Board, Statistical Release Z.1, “Financial Accounts of the United States.”
Borrowing by Businesses and Households 17
Figure 2.2. Both business and household debt-to-GDP ratios decreased
Ratio Ratio
1.1 1.0
Quarterly
1.0
0.9
0.9
0.8
0.8
Q4
0.7 0.7
0.6 Nonfinancial business 0.6
0.5 (right scale)
Household (left scale) 0.5
0.4
0.3 0.4
1981 1987 1993 1999 2005 2011 2017 2023
Source: Federal Reserve Board staff calculations based on Bureau of Economic Analysis, national income and
product accounts, and Federal Reserve Board, Statistical Release Z.1, “Financial Accounts of the United States.”
fourth quarter of 2023 and subdued in the

Figure 2.3. Business debt adjusted for
first quarter of 2024 (figure 2.4). Similarly, the inflation continued to decline
net issuance of institutional leveraged loans
Percent change, annual rate
has been tepid for much of the past year. 20
Quarterly
15
Gross leverage—the ratio of debt to assets— 10
of all publicly traded nonfinancial firms 5
edged down slightly in the third quarter of 0
Q4
2023 but stayed high by historical standards −5
(figure 2.5). Net leverage—the ratio of debt −10
less cash to total assets—also inched down 1998 2003 2008 2013 2018 2023
Source: Federal Reserve Board, Statistical Release Z.1,
among all large publicly traded businesses, “Financial Accounts of the United States.”
although it remained at an elevated level.
Figure 2.4. Net issuance of risky debt remained subdued
Billions of dollars
120
Quarterly
Institutional leveraged loans 100
High-yield and unrated bonds 80
60
40
Q1 20
0
−20
−40
−60
2004 2008 2012 2016 2020 2024
Source: Mergent, Inc., Fixed Income Securities Database; PitchBook Data, Leveraged Commentary & Data.
Overall, firms remained well placed to service

Figure 2.5. Gross leverage of large businesses
stayed at high levels by historical standards their debt, despite some emerging signs of
weakness among riskier firms. After declining
Percent
55
Quarterly from its peak reached post-pandemic, the
75th percentile 50
All firms median ICR stayed largely flat through the
45
first three quarters of 2023 owing to resilient
Q3 40
35
earnings (figure 2.6). In addition, the pass-
30 through of higher interest rates to firms’
25 borrowing costs remained moderate, reflect-
20 ing record fixed-rate debt issuance by firms
2003 2007 2011 2015 2019 2023
during the pandemic when interest rates were
Source: Federal Reserve Board staff calculations
based on S&P Global, Compustat. low.3 Corporate earnings remained strong
through the first three quarters of 2023.
Figure 2.6. Firms’ ability to service their debt,
as measured by the interest coverage ratio, However, signs of stress in debt servicing
remained robust
and deterioration in credit quality continued
Ratio
6 to emerge. For example, the 12-month trailing
Quarterly
5 corporate bond default rate moved up further,
Median for all firms
Median for all non-investment-grade firms 4 on net, since the October report and stood
3 near the median of its historical distribution.
Q3 2 Expectations of year-ahead defaults remained
1
somewhat elevated relative to their history.
0
2003 2007 2011 2015 2019 2023 Small and middle-market firms that are
Source: Federal Reserve Board staff calculations
based on S&P Global, Compustat.
privately held—which have less access to
capital markets and primarily borrow from
banks, private credit and equity funds, and
sophisticated investors (such as insurance companies and brokers, for example)—account for
roughly 60 percent of outstanding U.S. debt. While data for these firms are not as comprehen-
sive as those for larger firms, vulnerabilities for these firms appeared to inch up throughout
the second half of 2023 as higher interest rates started to reduce earnings and raise the cost
of debt servicing. Although subdued by historical standards, median gross and net leverage of
small firms and businesses continued to increase into the fourth quarter of 2023. The ICR for
the median firm in this category continued to decline from its peak in 2022, falling notably in the
fourth quarter of 2023, but remained above pre-pandemic levels.
3
Only about 6 percent of outstanding bonds rated triple-B and 2 percent of outstanding high-yield bonds are due within
a year—that is, up to the first quarter of 2025.
The credit quality of outstanding and newly issued leveraged loans has shown continued signs of
deterioration over the past several quarters. ICRs on outstanding leveraged loans declined in the
third quarter of 2023 and more recent high-frequency data suggest that rating downgrades con-
tinued to outpace upgrades. Meanwhile, the default rate remained around its historical median
(figure 2.7). The share of newly issued loans to large corporations with debt multiples—defined
as the ratio of debt to earnings before interest, taxes, depreciation, and amortization—greater
than 4 fell in 2023 to its lowest level in the past decade, reflecting a waning willingness of
investors to tolerate additional leverage, and only modestly rebounded in the first quarter of 2024
(figure 2.8).
Figure 2.7. The default rate on leveraged loans remained around its historical median
Percent
14
Monthly
12
10
8
6
4
Feb. 2
0
−2
1999 2004 2009 2014 2019 2024
Source: PitchBook Data, Leveraged Commentary & Data.
Figure 2.8. New leveraged loans with debt multiples greater than 4 rebounded modestly in early 2024
Percent
Debt multiples ≥ 6x
Debt multiples 5x–5.99x
Debt multiples 4x–4.99x
Debt multiples < 4x Q1
100
80
60
40
20
0
2003 2006 2009 2012 2015 2018 2021 2024
Source: Mergent, Inc., Fixed Income Securities Database; PitchBook Data, Leveraged Commentary & Data.
Delinquencies at small businesses edged up

Interest rates on small business loans ticked down in the most recent data but remained at
high levels overall—near the top of the range observed since 2008. According to the National
Federation of Independent Business Small Business Economic Trends Survey, the share of firms
that borrow regularly dropped somewhat and stayed in the lower range of its historical distribu-
tion in February 2024.4 Credit availability appeared to tighten for small firms in recent months.
Data from the Small Business Lending Survey showed that banks continued to tighten standards
on small businesses.5 However, measures of small business loan originations were stable and
the share of firms with unmet financing needs remained unchanged at a low level as of Febru-
ary 2024. Small business credit quality has deteriorated in recent quarters, as longer-term delin-
quency rates rose from their historic lows to above their pre-pandemic levels.
Vulnerabilities from household debt remained moderate

Outstanding household debt adjusted for infla-
Figure 2.9. Real household debt edged up
tion increased marginally in the fourth quarter
Trillions of dollars (real)
16 of 2023, due to slight increases in the prime
Quarterly Prime
Near prime 14 and subprime categories (figure 2.9). Since
Subprime 12
the October report, the ratio of total required
10
8 household debt payments to total disposable
Q4
6 income (the household debt service ratio)
4
decreased a touch and remained at mod-
2
0
est levels. As most household debt carries
1999 2003 2007 2011 2015 2019 2023 fixed interest rates, the increase in interest
Source: Federal Reserve Bank of New York Consumer
Credit Panel/Equifax; consumer price index, Bureau
rates starting in early 2022 has only par-
of Labor Statistics via Haver Analytics. tially passed through to household interest
expenses.
Mortgage credit risk remained generally low

Mortgage debt, which accounts for roughly two-thirds of total household debt, grew more slowly
than GDP over the past two quarters. An estimate of housing leverage, which measures home
values as a function of rents and other market fundamentals, increased modestly but remained
significantly lower than its peak levels before 2008 (figure 2.10, black line). The overall mortgage
delinquency rate increased only marginally in the fourth quarter of 2023, continuing to tick up
from the historically low levels reached in 2021, while the share of mortgage balances in loss-
mitigation programs ticked down from already low levels (figure 2.11). Delinquency rates
have been held in check by large home equity cushions and strong underwriting standards
(figure 2.12).
4
This survey’s data are available on the National Federation of Independent Business’s website at https://www.nfib.
com/surveys/small-business-economic-trends.
5
This survey’s data are available on the Federal Reserve Bank of Kansas City’s website at https://www.kansascityfed.
org/surveys/small-business-lending-survey.
Figure 2.10. A model-based estimate of Figure 2.11. Mortgage delinquency rates

housing leverage increased modestly ticked up from low levels
1999:Q1 = 100 Percent of mortgages

180 10
Quarterly Quarterly
Relative to model-implied values
160 8
Relative to market value
140
6
120
4
100
Q4 Delinquent Q4
80 Delinquent/loss mitigation 2
60 0
1999 2003 2007 2011 2015 2019 2023 2003 2007 2011 2015 2019 2023
Source: Federal Reserve Bank of New York Consumer Source: Federal Reserve Bank of New York Consumer
Credit Panel/Equifax; Zillow, Inc., Real Estate Data; Credit Panel/Equifax.
Bureau of Labor Statistics via Haver Analytics.
New mortgage extensions, which have been Figure 2.12. Very few homeowners had
skewed heavily toward prime borrowers over negative equity in their homes
the past decade, continued to decline sharply Percent of mortgages
30
in 2023 amid elevated mortgage rates and Monthly
25
high housing prices (figure 2.13). In the sec-
20
ond quarter of 2023, the early payment delin-
15
quency rate—the share of balances becoming
10
delinquent within one year of mortgage origi-
Dec.
5
nation—continued to rise from its 2020 low,
0
possibly reflecting higher interest expenses
2011 2013 2015 2017 2019 2021 2023
and the corresponding financial strains on Source: CoreLogic, Inc., Real Estate Data.
newly originated mortgages.
Figure 2.13. New mortgage extensions declined across all borrower categories
Billions of dollars (real)

1800
Annual
Subprime 1600
Near prime 1400
Prime 1200
1000
800
600
400
200
0
2002 2005 2008 2011 2014 2017 2020 2023
Source: Federal Reserve Bank of New York Consumer Credit Panel/Equifax; consumer price index, Bureau of Labor
Statistics via Haver Analytics.
Credit risk of consumer debt edged up with some signs of stress

among borrowers with low credit scores
Consumer debt—which accounts for the
Figure 2.14. Real consumer credit edged
down since late last year remaining one-third of household debt and
consists primarily of student, auto, and credit
2000 card loans—edged down in real terms since
Quarterly
Student loans 1800
the last report (figure 2.14) and, in nominal
Auto loans 1600
Credit cards 1400 terms, increased at a slower pace than nomi-
Q4
1200
nal GDP. However, delinquency rates for auto
1000
800 loans and credit cards increased, particularly
600 among borrowers with lower credit scores.
400
200
1999 2003 2007 2011 2015 2019 2023
Real auto loan balances ticked up for prime
Source: Federal Reserve Bank of New York Consumer
Credit Panel/Equifax; consumer price index, Bureau and subprime borrowers but declined mod-
of Labor Statistics via Haver Analytics. estly for near-prime borrowers (figure 2.15).
Overall, total real auto loan balances
remained below pandemic highs. The share of
auto loans in mitigation—that is, when the lender offers relief or repayment options to a borrower
struggling to keep up their loan payments—ticked down in the fourth quarter of 2023. That said,
this share increased modestly over the past several quarters and currently stands roughly in line
with its historical median. The share of auto loans in delinquent status increased somewhat—
although the upward trend has moderated recently—and stayed at a level above its historical
median (figure 2.16). Behind this moderate increase in the overall delinquency rate was a much
sharper rise in auto loan delinquencies for subprime borrowers throughout 2023.
Figure 2.15. Real auto loans outstanding Figure 2.16. Auto loan delinquencies remained
ticked up for prime and subprime borrowers at levels above their historical median
Billions of dollars (real) Percent

900 10
Quarterly Quarterly
Prime 800
Near prime Delinquent 8
700
Subprime Delinquent/loss mitigation
Q4
600 6
500 Q4
400 4
300
2
200
100 0
1999 2003 2007 2011 2015 2019 2023 2003 2007 2011 2015 2019 2023
Credit Panel/Equifax; consumer price index, Bureau Credit Panel/Equifax.
of Labor Statistics via Haver Analytics.
Aggregate real credit card balances continued to increase over the second half of the year, with
broad-based increases across the credit score distribution (figure 2.17). As interest rates on
credit card balances are flexible, they increased in line with short-term rates over the past year.
Credit card delinquency rates have continued to rise over the same period (figure 2.18).
After rising rapidly for more than a decade, inflation-adjusted student loan debt began to decline
with the onset of the pandemic and has continued to do so through the end of 2023.
Figure 2.17. Real credit card balances Figure 2.18. Credit card delinquencies
continued to rise in the second half of 2023 increased further in the second half of 2023
Billions of dollars (real) Percent

600 8
Quarterly Quarterly
500
Q4 6
400
Q4
300 4
Prime 200
Near prime 2
Subprime 100
0 0
1999 2003 2007 2011 2015 2019 2023 2003 2007 2011 2015 2019 2023
Credit Panel/Equifax; consumer price index, Bureau Credit Panel/Equifax.
of Labor Statistics via Haver Analytics.
25
3 Leverage in the Financial Sector
Vulnerabilities associated with financial leverage remained notable,

reflecting fair value losses on fixed-rate assets for some banks and
elevated leverage at some nonbanks
The banking system, overall, remained sound and resilient. Measures of regulatory capital for
banks increased over the second half of 2023 and point to the resilience of the banking sector as
a whole. Nevertheless, fair value losses on fixed-rate assets remained sizable for some banks,
and some banks have concentrated exposures to loans backed by CRE.
Outside the banking sector, leverage at broker-dealers stayed near historically low levels, but
limited capacity or willingness of broker-dealers to intermediate in Treasury markets during market
stress remained a structural vulnerability. Life insurers continued to take on liquidity and credit
risk, while their leverage increased and stood around its median. Measures of hedge fund lever-
age increased in the third quarter of 2023 to the highest level observed since the beginning of
data availability, with the increase driven primarily by the largest hedge funds.
Table 3.1 shows the sizes and growth rates of the assets of financial institutions discussed in
this section.
Bank profitability remained robust

Amid the considerable increase in interest rates over the past two years, the profitability of the
banking sector stayed solid. Banks’ average rates on interest-earning assets remained well
above the average interest expense rates on liabilities (figure 3.1). That said, interest expenses
increased somewhat faster than interest income, reflecting a higher share of interest-bearing
deposits on banks’ balance sheets and somewhat higher deposit rates. As a result, net interest
margins, which measure banks’ yield on their interest-earning assets after netting out interest
expenses, declined a notch in the aggregate in 2023.
Measures of banks’ capital increased, while fair value losses in

fixed-rate assets remained sizable for some banks
The common equity Tier 1 (CET1) ratio—a regulatory risk-based measure of bank capital
adequacy—increased during the fourth quarter of 2023 across all bank categories (figure 3.2).
CET1 ratios for global systemically important banks (G-SIBs) reached the highest levels recorded
in the past decade, while CET1 ratios for large non–G-SIBs and other bank holding companies
were close to pre-pandemic levels.
Table 3.1. Size of selected sectors of the financial system, by types of institutions and vehicles

Total assets
Item 2022:Q4–2023:Q4 1997–2023:Q4
(percent) (percent)
Banks and credit unions 26,159 2.1 5.9
Mutual funds 19,600 13.1 9.0
Insurance companies 13,126 9.1 5.6
Life 9,820 8.5 5.7
Property and casualty 3,306 11.0 5.6
1
Hedge funds 10,127 11.5 7.5
Broker-dealers2 5,569 13.0 5.1
Outstanding
Securitization 13,446 2.4 5.5
Agency 11,940 2.4 5.9
3
Non-agency 1,506 2.5 3.6
Note: The data extend through 2023:Q4 unless otherwise noted. Outstanding amounts are in nominal terms. Growth rates are measured from
Q4 of the year immediately preceding the period through Q4 of the final year of the period. Life insurance companies’ assets include both gen-
eral and separate account assets.
1
Hedge fund data start in 2012:Q4 and are updated through 2023:Q3. Growth rates for the hedge fund data are measured from Q3 of the
year immediately preceding the period through Q3 of the final year of the period.
2
Broker-dealer assets are calculated as unnetted values.
3
Non-agency securitization excludes securitized credit held on balance sheets of banks and finance companies.
Source: Federal Reserve Board, Statistical Release Z.1, “Financial Accounts of the United States”; Federal Reserve Board, “Enhanced Financial
Accounts of the United States.”
Figure 3.1. Banks’ average interest rate on interest-earning assets remained significantly above the
average expense rate on liabilities
Percent
7
Quarterly
Average interest rate on interest-earning assets 6
Average interest expense rate on liabilities
5
Q4
4
3
2
1
0
2015 2017 2019 2021 2023

Source: Federal Reserve Board, Form FR Y-9C, Consolidated Financial Statements for Holding Companies.
Leverage in the Financial Sector 27
Figure 3.2. Banks’ risk-based capital ratio increased to or beyond pre-pandemic levels
Percent of risk-weighted assets

14
Quarterly
Q4 12
10
8
G-SIBs 6
Large non–G-SIBs
Other BHCs 4
2
0
2002 2005 2008 2011 2014 2017 2020 2023
Source: Federal Reserve Board, Form FR Y-9C, Consolidated Financial Statements for Holding Companies.
Higher interest rates continued to affect the fair value of banks’ holdings of fixed-rate assets. As
interest rates rose from pandemic lows over the past two years, the fair value of these securities
declined, but these declines started to moderate somewhat toward the end of 2023. At the end
of the fourth quarter of 2023, banks had declines in fair value of $204 billion in available-for-sale
(AFS) portfolios and $274 billion in held-to-maturity portfolios (figure 3.3).
Figure 3.3. The fair value losses of banks’ securities portfolios declined through the end of 2023 but
remained sizable
Billions of dollars
200
Quarterly
100
Q4
0
−100
−200
−300
Available-for-sale securities −400
Held-to-maturity securities −500
−600
−700
−800
2017 2018 2019 2020 2021 2022 2023
Source: Federal Financial Institutions Examination Council, Call Report Form FFIEC 031, Consolidated Reports of
Condition and Income (Call Report); Federal Reserve Board, Form FR Y-9C, Consolidated Financial Statements for
Holding Companies.
An alternative measure of bank capital is the ratio of tangible common equity to total tangible
assets. The tangible common equity ratio has similarities to the CET1 ratio in that both exclude
intangible items such as goodwill from the measurement of capital, but there are also important
differences between the two. In contrast with CET1, the tangible common equity ratio does not
account for the riskiness of assets but does include fair value declines on AFS securities for all
banks. The tangible common equity ratio moved up across all bank categories in the second half
of the year (figure 3.4). Nonetheless, this ratio remained at a level below its average over the
past decade.
Figure 3.4. The ratio of tangible common equity to tangible assets increased for banks of all
categories
Percent of tangible assets

12
Quarterly
10
8
Q4
6
G-SIBs 4
Large non–G-SIBs
Other BHCs 2
0
1987 1993 1999 2005 2011 2017 2023
Source: For data through 1996, Federal Financial Institutions Examination Council, Call Report Form FFIEC 031,
Consolidated Reports of Condition and Income (Call Report). For data from 1997 onward, Federal Reserve Board,
Form FR Y-9C, Consolidated Financial Statements for Holding Companies; Federal Financial Institutions Examination
Council, Call Report Form FFIEC 031, Consolidated Reports of Condition and Income (Call Report).
Credit quality at banks remained sound overall, despite rising

delinquencies in some consumer and commercial real estate
loan segments
As of the fourth quarter of 2023, aggregate credit quality in the nonfinancial sector remained
sound overall. That said, the quality of outstanding loans worsened in some sectors, as the
delinquency rates for credit card, auto, and CRE loans—especially those backed by office
properties—increased in the second half of 2023. Exposures in auto and credit card loans
remained concentrated in a few large banks. As interest rates increased over the past two
years, banks continued to build their allowances for loan losses on credit card and CRE port-
folios in anticipation of rising delinquencies. Nevertheless, risks on loans backed by CRE prop-
erties remained elevated, and banks with concentrated exposure to this sector are particularly
vulnerable.
Borrower leverage for bank commercial and industrial (C&I) loans decreased somewhat since the
October report (figure 3.5). Recent SLOOS survey responses indicated that lending standards
continued to tighten across most loan categories during the second half of 2023, suggesting
that banks were limiting their exposure to this risk. That said, the pace at which standards were
tightened has reportedly slowed, especially for C&I loans, as the percentage of banks reporting
tightening standards declined relative to the first half of 2023 (figure 3.6).
Figure 3.5. Borrower leverage for bank commercial and industrial loans inched down
Debt as percentage of assets

36
Quarterly
34
32
Q4
30
Non-publicly-traded firms 28
Publicly traded firms
26
24
2013 2015 2017 2019 2021 2023
Source: Federal Reserve Board, Form FR Y-14Q (Schedule H.1), Capital Assessments and Stress Testing.
Figure 3.6. The percentage of banks reporting tightening standards for commercial and industrial
loans declined in the second half of 2023
Net percentage of banks reporting

100
Quarterly
80
Tightening
60
40
20
Q4
0
−20
−40
Easing
−60
−80
−100
1998 2003 2008 2013 2018 2023
Source: Federal Reserve Board, Senior Loan Officer Opinion Survey on Bank Lending Practices; Federal Reserve
Board staff calculations.
Leverage at broker-dealers remained low

Risks posed to the financial system by broker-dealer leverage remained low. Despite a small
uptick in the fourth quarter of 2023, the leverage ratio stood near historically low levels
(figure 3.7), as dealer equity kept up with the continued expansion in assets. Reflecting seasonal
trends, end-of-year profits declined, dropping below typical pre-pandemic levels (figure 3.8). The
share of fixed income, rates, and credit in trading profits decreased in the most recent data, while
the share of equity increased (figure 3.9). Since the October report, net secured borrowing of
primary dealers declined somewhat but remained elevated overall and in line with net positions.
Dealers’ intermediation activity remained broadly stable at elevated levels. That said, insufficient
intermediation capacity during periods of stress remained a structural vulnerability in the sector.
Figure 3.7. Leverage at broker-dealers Figure 3.8. Trading profits in December

remained near historical lows declined below their average
Ratio of assets to equity Millions of dollars

50 1000
Quarterly Monthly average
900
40 800
700
30 600
500
20 400
Q4 300
10 200
Dec.
100
0 0
1995 1999 2003 2007 2011 2015 2019 2023 2018 2019 2020 2021 2022 2023
Source: Federal Reserve Board, Statistical Release Z.1, Source: Federal Reserve Board, Reporting,
“Financial Accounts of the United States.” Recordkeeping, and Disclosure Requirements
Associated with Regulation VV (Proprietary Trading
and Certain Interests in and Relationships with
Covered Funds, 12 C.F.R. pt. 248).
Figure 3.9. Equities increased further as a share of trading profits in the most recent data
Percent
Monthly average
Equity
Fixed income, rates, and credit
Other Dec.
100
80
60
40
20
0
2018 2019 2020 2021 2022 2023
Source: Federal Reserve Board, Reporting, Recordkeeping, and Disclosure Requirements Associated with Regulation VV
(Proprietary Trading and Certain Interests in and Relationships with Covered Funds, 12 C.F.R. pt. 248).
In the March 2024 Senior Credit Officer Opinion Survey on Dealer Financing Terms (SCOOS),
dealers reported that terms on securities financing transactions and over-the-counter derivatives
remained about unchanged.6 Use of financial leverage was also reported to have changed little
on net. Additionally, the special questions in the March SCOOS asked about changes in financing
terms and market conditions for selected segments of the market for commercial mortgage-
backed securities (CMBS) collateralized by office properties. Overall, answers to the special
questions point to a tightening of financing terms and weakening of liquidity in the office CMBS
market, as collateral quality has weakened and demand for funding has increased.
6
The SCOOS is available on the Federal Reserve Board’s website at https://www.federalreserve.gov/data/scoos.htm.
Life insurers continued to take on liquidity and credit risk, while their
leverage remained in the middle of its historical range
In the fourth quarter of 2023, leverage at
Figure 3.10. Leverage at life insurance
property and casualty insurers remained companies rose and remained around
its median
near the bottom of its historical distribution,
while leverage at life insurers rose and stood Ratio of assets to equity
15
Quarterly Life
around the median of its historical distribution Property and casualty
12
(figure 3.10). Life insurers continued to take
on liquidity and credit risk in their portfolios by 9
Q4
allocating an increasing percentage of assets 6
to risky and less liquid instruments, such as 3
leveraged loans, high-yield corporate bonds,
0
privately placed corporate bonds, and alterna- 2003 2007 2011 2015 2019 2023
tive investments. Further, because insurance Source: Generally accepted accounting principles data
from 10-Q and 10-K filings accessed via S&P Global,
companies are large holders of CMBS and Capital IQ Pro.
have material direct exposures to commercial
mortgages, a significant correction in com-
mercial property values could put pressure on
their capital positions.
Leverage at hedge funds reached its highest level in available data

Comprehensive data collected through the U.S. Securities and Exchange Commission’s (SEC)
Form PF indicated that measures of leverage averaged across all hedge funds increased further in
the third quarter of 2023, reaching the highest level observed since the beginning of data avail-
ability. Leverage increased when measured using either average on-balance-sheet leverage (blue
line in figure 3.11)—which captures financial leverage from secured financing transactions, such
as repurchase agreements and margin loans, but does not capture leverage embedded through
derivatives—or average gross leverage of hedge funds (black line in figure 3.11), a broader mea-
sure that also incorporates off-balance-sheet derivatives exposures. Leverage at the largest funds
was significantly higher, with the average on-balance-sheet leverage of the top 15 hedge funds
by gross asset value rising in the third quarter of 2023 to about 18-to-1 (figure 3.12). These high
levels of leverage were facilitated, in part, by low haircuts on Treasury collateral in some markets
where many funds obtain short-term financing.7 More recent data from the March SCOOS sug-
gested that hedge fund leverage flattened out as the use of financial leverage by hedge funds
remained largely unchanged between mid-November 2023 and mid-February 2024 (figure 3.13).
7
See Ayelen Banegas and Phillip Monin (2023), “Hedge Fund Treasury Exposures, Repo, and Margining,” FEDS Notes
(Washington: Board of Governors of the Federal Reserve System, September 8), https://doi.org/10.17016/2380-
7172.3377.
Figure 3.11. Leverage at hedge funds reached Figure 3.12. Leverage at the largest hedge
its highest level since data became available funds increased
Ratio Ratio
10 30
Quarterly Quarterly
9
Top 15, by GAV 25
8
7 16–50, by GAV 20
51+, by GAV
6
Q3 5 15
Mean gross leverage Q3
Mean balance sheet leverage
4 10
3
2 5
1 0
0
2013 2015 2017 2019 2021 2023 2013 2015 2017 2019 2021 2023
Source: Securities and Exchange Commission, Source: Securities and Exchange Commission,
Form PF, Reporting Form for Investment Advisers to Form PF, Reporting Form for Investment Advisers to
Private Funds and Certain Commodity Pool Operators Private Funds and Certain Commodity Pool Operators
and Commodity Trading Advisors. and Commodity Trading Advisors.
Figure 3.13. Dealers indicated that the use of leverage by hedge funds remained largely unchanged
Net percentage
40
Quarterly
20
Q1
0
−20
Hedge funds
Trading REITs −40
Insurance companies
Mutual funds −60
−80
2012 2014 2016 2018 2020 2022 2024
Source: Federal Reserve Board, Senior Credit Officer Opinion Survey on Dealer Financing Terms.
As of the third quarter of 2023, data from Form PF showed that net repurchase agreement bor-
rowing, one measure of the Treasury cash-futures basis trade, grew to near historic highs, while
data from the Commodity Futures Trading Commission (CFTC) Traders in Financial Futures report
also showed leveraged funds’ short Treasury futures positions were near historical highs.8 Mean-
while, indicators based on data from the first quarter of 2024, including leveraged funds’ short
Treasury futures positions and a basis trade proxy from Treasury TRACE, suggested the basis
trade might have declined from its levels at the end of 2023 but remained elevated. This highly
leveraged trade, which involves shorting a Treasury futures contract and purchasing a Treasury
note deliverable into that contract, with the note typically financed in bilateral repurchase agree-
ment markets, was popular among hedge funds between mid-2018 and February 2020, and its
subsequent unwinding contributed to the Treasury market turmoil in March 2020.
8
CFTC data and reports are available on the CFTC’s website at https://www.cftc.gov/MarketReports/
CommitmentsofTraders/index.htm.
Issuance of non-agency securities by securitization vehicles started

recovering in 2024 despite ongoing concerns about commercial
real estate
Non-agency securitization issuance—which increases the amount of leverage in the financial
system—started to recover in the first three months of 2024 from subdued levels experienced
throughout 2023 (figure 3.14).9 Credit spreads on most major securitized products generally
narrowed since the October report. In the CMBS segment, lower-rated tranche spreads did not
decline as much as senior-tranche spreads, likely reflecting ongoing investor concerns on credit
risks in CRE loans underlying CMBS deals. Credit performance across securitized products
backed by riskier loan collateral continued to show signs of deterioration, indicated by increasing
loan delinquency rates or default rates compared with their respective historical averages. This
deterioration in credit performance was especially pronounced in CRE-related securitization deals
involving office loans as well as certain segments of multifamily loans. Delinquency rates in cer-
tain CRE collateralized loan obligations also increased notably.
Figure 3.14. Issuance of non-agency securitized products increased in early 2024 from the subdued
levels of 2023

3200
Annual
Other
2800
Private-label RMBS 2400
Non-agency CMBS 2000
Auto loan/lease ABS
CDOs (including CLOs and ABS CDOs) 1600
1200
800
400
0
2003 2006 2009 2012 2015 2018 2021 2024
Source: Green Street, Commercial Mortgage Alert’s CMBS Database and Asset-Backed Alert’s ABS Database;
consumer price index, Bureau of Labor Statistics via Haver Analytics.
Bank lending to nonbank financial institutions increased

Bank lending to nonbank financial institutions (NBFIs) can be informative about the amount of
leverage used by NBFIs and shed light on their interconnectedness with the rest of the financial
system. After remaining flat in the third quarter of 2023, bank credit commitments to NBFIs
9
Securitization allows financial institutions to bundle loans or other financial assets and sell claims on the cash flows
generated by these assets as tradable securities, much like bonds. By funding assets with debt issued by invest-
ment funds known as special purpose entities (SPEs), securitization can add leverage to the financial system, in part
because SPEs are generally subject to regulatory regimes, such as risk retention rules, that are less stringent than
banks’ regulatory capital requirements. Examples of the resulting securities include collateralized loan obligations
(predominantly backed by leveraged loans), asset-backed securities (often backed by credit card and auto debt),
CMBS, and residential mortgage-backed securities.
resumed growing in the fourth quarter (figure 3.15). The year-over-year growth rate in commit-
ted amounts was largely due to loans to open-end investment funds and special purpose enti-
ties and securitization vehicles, both of which grew about 15 percent over the course of 2023
(figure 3.16). This growth was partially offset by declines in bank credit commitments to real
estate investment trusts. Utilization rates on credit lines to NBFIs, which averaged close to
50 percent of total committed amounts, decreased. Delinquency rates on banks’ lending to NBFIs
continued to decline for nearly all counterparties in the fourth quarter of 2023.
Figure 3.15. Bank credit commitments to nonbank financial institutions grew
Billions of dollars
Q4 1 2250
Quarterly
1. Financial transactions processing 2 2000
2. Private equity, BDCs, and credit funds 3 1750
4
3. Broker-dealers 5 1500
6
4. Insurance companies
7 1250
5. REITs
6. Open-end investment funds 1000
7. Special purpose entities, CLOs, and ABS 8 750
8. Other financial vehicles 500
9. Real estate lenders and lessors 9
250
10. Consumer lenders, other lenders, and lessors 10
0
2018 2019 2020 2021 2022 2023
Figure 3.16. Aggregate credit commitments to nonbank financial institutions increased in 2023
for most sectors except real estate investment trusts, broker-dealers, and real estate lenders
and lessors
Percent
30
Committed amounts
Utilized amounts 20
10
0
−10
−20
−30
−40
REITs Financial Consumer, Insurance PE, Broker- Open-end SPEs, Real Other Total
transactions leasing, companies BDCs, dealers investment CLOs, estate financial
processing & other & credit funds & ABS lenders vehicles
lenders funds & lessors
35
4 Funding Risks
Vulnerabilities from funding risks remained notable, reflecting

challenges at some banks and structural vulnerabilities in other
sectors engaged in liquidity transformation
The banking industry maintained a high level of liquidity since the October report. Funding risks
for most banks remained low, and large banks that are subject to the liquidity coverage ratio
(LCR) continued to maintain ample levels of high-quality liquid assets (HQLA). Deposit outflows
stabilized over the second half of last year following the March 2023 banking-sector stresses
and turned into inflows by the fourth quarter of 2023. Nevertheless, some banks continued
to face funding challenges, including higher costs for funding and relatively high reliance on
uninsured deposits. The Bank Term Funding Program (BTFP) ceased extending new loans on
March 11, 2024.
Prime MMFs and similar cash-management vehicles remained a prominent source of vulnerability
given their susceptibility to runs and the significant role they play in short-term funding markets.
In addition, some cash-management vehicles, including retail prime MMFs, government MMFs,
and short-term investment funds, maintained stable net asset values (NAVs) but may face diffi-
culties doing so because they hold assets in their portfolios whose valuations are vulnerable to
sharp movements in interest rates. Stablecoins are also prone to run risks like those of MMFs
and other cash-management vehicles. However, the combined market capitalization of all stable-
coins (roughly $150 billion currently) remained small relative to the broader funding markets, and
stablecoins are not widely used as cash-management vehicles.
Some open-end bond mutual funds remained susceptible to large redemptions because they
must allow shareholders to redeem every day even though the funds hold assets that can face
losses and become illiquid amid stress. Life insurers continued to face funding risk owing to their
reliance on a higher-than-average share of nontraditional liabilities in combination with an increas-
ing share of illiquid and risky assets on their balance sheets.
Overall, estimated runnable money-like financial liabilities grew 8.8 percent to $21.3 trillion
(75 percent of nominal GDP) over the past year, as a decline in uninsured deposits was more
than offset by an increase in assets under management at MMFs. As a share of GDP, runnable
liabilities remained above their historical median (table 4.1 and figure 4.1).
Table 4.1. Size of selected instruments and institutions

Outstanding/total assets
Item 2022:Q4–2023:Q4 1997–2023:Q4
(percent) (percent)
Total runnable money-like liabilities1 21,348 9.0 4.8
Uninsured deposits 6,692 −10.7 11.0
Domestic money market funds2 5,822 24.3 6.0
Government 4,763 20.3 15.2
Prime 937 52.1 2.5
Tax exempt 123 11.2 −1.3
Repurchase agreements 4,843 33.1 5.8
Commercial paper 1,235 .6 2.6
Securities lending3 811 .8 6.8
Bond mutual funds 4,525 6.2 8.0
Note: The data extend through 2023:Q4 unless otherwise noted. Outstanding amounts are in nominal terms. Growth rates are measured from
Q4 of the year immediately preceding the period through Q4 of the final year of the period. Total runnable money-like liabilities exceed the
sum of listed components. Unlisted components of runnable money-like liabilities include variable-rate demand obligations, federal funds,
funding-agreement-backed securities, private liquidity funds, offshore money market funds, short-term investment funds, local government
investment pools, and stablecoins.
1
Average annual growth is from 2003:Q1 to 2023:Q4.
2
Average annual growth is from 2001:Q1 to 2023:Q4.
3
Average annual growth is from 2000:Q1 to 2023:Q2. Securities lending includes only lending collateralized by cash.
Source: Securities and Exchange Commission, Private Funds Statistics; iMoneyNet, Inc., Offshore Money Fund Analyzer; Bloomberg Finance L.P.;
Securities Industry and Financial Markets Association: U.S. Municipal Variable-Rate Demand Obligation Update; Risk Management Association,
Securities Lending Report; DTCC Solutions LLC, an affiliate of the Depository Trust & Clearing Corporation: commercial paper data; Federal
Reserve Board staff calculations based on Investment Company Institute data; Federal Reserve Board, Statistical Release Z.1, “Financial
Accounts of the United States”; Federal Financial Institutions Examination Council, Consolidated Reports of Condition and Income (Call
Report); Morningstar, Inc., Morningstar Direct; Llama Corp, DeFiLlama.
Figure 4.1. Ratios of runnable money-like liabilities to GDP remained above their historical medians
Percent of GDP
120
Quarterly 1. Other 4. Domestic money market funds
2. Securities lending 5. Repurchase agreements 100
3. Commercial paper 6. Uninsured deposits
Q4 80
1
2
60
4 3
40
5
20
6
0
2002 2005 2008 2011 2014 2017 2020 2023
Source: Securities and Exchange Commission, Private Funds Statistics; iMoneyNet, Inc., Offshore Money Fund
Analyzer; Bloomberg Finance L.P.; Securities Industry and Financial Markets Association: U.S. Municipal Variable-
Rate Demand Obligation Update; Risk Management Association, Securities Lending Report; DTCC Solutions LLC,
an affiliate of the Depository Trust & Clearing Corporation: commercial paper data; Federal Reserve Board staff
calculations based on Investment Company Institute data; Federal Reserve Board, Statistical Release Z.1, “Financial
Accounts of the United States”; Federal Financial Institutions Examination Council, Consolidated Reports of
Condition and Income (Call Report); gross domestic product, Bureau of Economic Analysis via Haver Analytics; Llama
Corp, DeFiLlama.
Funding Risks 37
Most banks maintained high levels of liquid assets and stable

funding
Aggregate liquidity in the banking system appeared ample, as HQLA measured relative to total
assets stabilized at most banks in the second half of 2023 (figure 4.2). Moreover, U.S. G-SIBs
continued to hold more HQLA than required by their LCR—the requirement that ensures banks
hold sufficient HQLA to fund estimated cash outflows for 30 days during a hypothetical stress
event. While banks’ reliance on short-term wholesale funding increased slightly over the second
half of last year, the levels remained low relative to longer-term averages (figure 4.3).
Figure 4.2. The amount of high-quality liquid Figure 4.3. Banks’ reliance on short-term
assets held by most banks stabilized in the wholesale funding remained low
second half of 2023
Percent of assets
40
Percent of assets Quarterly
32
Quarterly 35
28
G-SIBs 30
Q4 24
Large non–G-SIBs 25
Other BHCs 20
16 20
12 Q4 15
8 10
4 5
0 2003 2007 2011 2015 2019 2023
2003 2007 2011 2015 2019 2023
Source: Federal Reserve Board, Form FR Y-9C,
Source: Federal Reserve Board, Form FR Y-9C, Consolidated Financial Statements for Holding
Consolidated Financial Statements for Holding Companies.
Companies.
Deposit flows have stabilized across most bank groups over the past six months, as market sen-
timent has improved following the banking-sector stresses in March 2023. However, key vulner-
abilities that interacted to cause the regional banking crisis last spring—large fair value losses
relative to regulatory capital and elevated reliance on uninsured deposits—remained elevated for
a subset of banks.
The BTFP helped support the stability of the financial system and thereby American businesses
and households, providing funding during the acute phase of the banking-sector stresses, and
many depository institutions continued to rely on it over the past year. The box “The Bank Term
Funding Program” summarizes how the BTFP was effective in helping banks to safeguard deposits
while continuing to meet the credit needs of the economy over the past year.
Box 4.1. The Bank Term Funding Program

The banking system came under severe stress in March 2023. After experiencing deposit withdraw-
als of unprecedented speed, Silicon Valley Bank and Signature Bank collapsed on March 10 and
March 12, respectively, when it became clear that they did not have sufficient liquidity to meet per-
sistent and increasingly significant deposit outflows. The two failures generated broader concerns
about destabilizing runs at other commercial banks with similar profiles—those with heavy reliance
on uninsured deposits and large unrealized losses in their securities portfolios. Concerns over
broader contagion led some of those banks to face rapid deposit outflows.
In response to the market turmoil, the Federal Reserve Board, the Federal Deposit Insurance Corpo-
ration (FDIC), and the U.S. Department of the Treasury took actions to protect bank depositors, sup-
port financial stability, and minimize the effect of stress in the banking system on businesses, house-
holds, taxpayers, and the broader economy.1 The Federal Reserve Board, with approval by the Secre-
tary of the Treasury, established the BTFP pursuant to section 13(3) of the Federal Reserve Act.2
The BTFP provided depository institutions an additional source of liquidity against high-quality securi-
ties for them to meet the needs of all their depositors. The ability of depository institutions to access
funding without selling securities at a loss during stress limited destabilizing runs and the associated
potential for further contagion throughout the banking system. While the banking system saw deposit
outflows of $472 billion in the first quarter of 2023, those outflows moderated to $99 billion in the
second quarter and slowed further to $90 billion in the third quarter. Deposits in the banking system
experienced inflows of $260 billion in the fourth quarter. Banks with total assets below $250 billion
experienced the greatest deposit outflows in the first quarter; outflows fell off rapidly in the second
quarter and turned to inflows in the third and fourth quarters.
Eligible BTFP borrowers included federally insured banks, savings associations, and credit unions, as
well as U.S. branches and agencies of foreign banks that were eligible for primary credit under the
Federal Reserve’s discount window. The BTFP extended advances of up to one year against the par
value of eligible collateral, consisting of securi-
ties that are eligible for purchase by the Federal
Figure A. Outstanding balances of the Reserve in open market operations, such as U.S.
Bank Term Funding Program declined in Treasury securities, U.S. agency securities, and
early 2024 U.S. agency mortgage-backed securities, and
were owned by the borrower as of March 12,
Billions of dollars 2023. Under the BTFP, no haircuts were applied
200
Weekly
180 to eligible collateral. The rate for advances was
Mar.
27 160 fixed for the duration of the advance at the one-
140 year overnight index swap rate plus 10 basis
120 points on the day the advance was made. The
100
interest rate applicable to new BTFP advances
80
60 was adjusted on January 24, 2024, to be no
40 lower than the interest rate on reserve balances
20 on the same day the advance was made.
0
Mar. May July Sept. Nov. Jan. Mar. As figure A shows, credit extended through
2023 2024
the BTFP increased at a rapid pace initially,
Source: Federal Reserve Board, Statistical Release reaching a level above $60 billion by the end
H.4.1, “Factors Affecting Reserve Balances,”
of March 2023. Credit extended continued to
accessed via Federal Reserve Economic Data.
increase in subsequent months, although at a
(continued)
1
On March 12, 2023, the Secretary of the Treasury, after receiving a written recommendation from the FDIC’s board of direc-
tors and the Federal Reserve Board, and consulting with the President, approved a systemic risk exception, enabling the FDIC
to complete the resolution of Silicon Valley Bank and Signature Bank in a manner that fully protected all depositors.
2
With approval of the Secretary of the Treasury, the Treasury committed to make available up to $25 billion from the Exchange
Stabilization Fund as a backstop for the BTFP.
Funding Risks 39
Box 4.1—continued
slower pace, surpassing $100 billion by the end of August 2023. Outstanding balances increased fur-
ther in late 2023, surpassing $165 billion before gradually declining in early 2024. The BTFP ceased
extending new loans, as scheduled, on March 11, 2024. Since its establishment, the BTFP extended
advances to 1,804 depository institutions, of which 1,706, or 95 percent, were small institutions
with total assets below $10 billion.3 Advances taken out on or before March 11, 2024, will mature,
depending on the term requested by the borrower, up to one year from the date the advance was
made and need not be repaid before the maturity date. As a result, the BTFP continues to provide
liquidity to eligible depository institutions.
3
More than 9,000 institutions were eligible to borrow from the BTFP.
Money market funds and other cash-management vehicles remained

susceptible to runs owing to structural vulnerabilities
Assets managed by MMFs increased steadily since the October report, as MMFs continued to
provide more attractive yields relative to most bank deposits (figure 4.4).
Figure 4.4. Assets under management at money market funds continued to rise

1. Government
7000
Monthly Jan.
2. Tax exempt 6000
3. Retail prime
4. Institutional prime 5000
4000
1 3000
2
2000
3 1000
4
0
2000 2004 2008 2012 2016 2020 2024
Source: Federal Reserve Board staff calculations based on Investment Company Institute data; consumer price
index, Bureau of Labor Statistics via Haver Analytics.
On July 12, 2023, the SEC voted to adopt reforms for MMFs.10 Some key elements of the reforms—
increased minimum requirements for funds’ daily and weekly liquid assets and elimination of tempo-
rary gates and fees linked to liquid asset levels—are already in effect. Mandatory dynamic liquidity
fees for institutional prime and institutional tax-exempt funds will go into effect later this year. On
net, the reforms represent significant progress in making prime and tax-exempt MMFs more resil-
ient, although these funds remain vulnerable to runs in periods of significant stress.
Other cash-management vehicles, such as dollar-denominated offshore MMFs and short-term

investment funds, also invest in money market instruments, engage in liquidity transformation,
and are vulnerable to runs. Since the October report, estimated aggregate assets under man-
agement (AUM) of these cash-management vehicles remained roughly at $1.8 trillion. Currently,
between $0.6 trillion and $1.6 trillion of these vehicles’ AUM are in portfolios like those of U.S.
prime MMFs, and large redemptions from these vehicles also have the potential to destabilize
short-term funding markets.11
10
See U.S. Securities and Exchange Commission (2023), “SEC Adopts Money Market Fund Reforms and Amendments
to Form PF Reporting Requirements for Large Liquidity Fund Advisers,” press release, July 12, https://www.sec.gov/
news/press-release/2023-129.
11
Cash-management vehicles included in this total are dollar-denominated offshore MMFs, short-term investment funds,
private liquidity funds, ultrashort bond mutual funds, and local government investment pools.
Funding Risks 41
Many cash-management vehicles—including retail and government MMFs, offshore MMFs, and
short-term investment funds—seek to maintain stable NAVs that are typically rounded to $1.00. If
short-term interest rates rise sharply or portfolio assets lose value for other reasons, the market
values of these funds may fall below their rounded share prices, which can put the funds under
strain, particularly if they also have large, concurrent redemptions.
Stablecoins remained vulnerable to runs

Stablecoin assets—digital assets designed to maintain a stable value relative to a national
currency or another reference asset—grew steadily since the October report. The total market
capitalization of stablecoins grew to around $150 billion (figure 4.5). While not widely used as a
cash-management vehicle or for transactions for real economic activity, stablecoins are important
for digital asset investors. Stablecoins remain structurally vulnerable to runs and lack a compre-
hensive prudential regulatory framework. Moreover, stablecoins could scale quickly, particularly if
the stablecoin is supported by access to an existing customer base.
Figure 4.5. Market capitalization of major stablecoins increased slightly since late last year
Billions of dollars
200
Daily 1
3 Mar.
1. Other 2
25
2. TerraUSD 4
150
3. Dai
4. Binance USD 5
5. USD Coin
100
6. Tether
50
6
0
Mar. June Sept. Dec. Mar. June Sept. Dec. Mar. June Sept. Dec. Mar.
2021 2022 2023 2024
Source: Llama Corp, DeFiLlama.
Bond mutual funds’ asset holdings stabilized, but the funds remained
exposed to liquidity risks
Mutual funds that invest substantially in corporate bonds, municipal bonds, and bank loans
may be particularly exposed to liquidity transformation risks, given the relative illiquidity of their
assets and the requirement that these funds offer redemptions daily. Despite some outflows
amid rising interest rates since 2022, the outstanding amount of corporate bonds held by mutual
funds remained high at approximately $1.3 trillion as of the fourth quarter of 2023, the latest
data available, representing about 13 percent

Figure 4.6. Corporate bonds held by bond
mutual funds remained stable in the second of corporate bonds outstanding (figure 4.6).
half of 2023
Total AUM of the subcategories of mutual
Billions of dollars (real) funds holding high-yield bonds and bank
2100
Quarterly
1800 loans, which primarily hold riskier and less
1500 liquid assets, stabilized in recent months
Q4
1200 (figure 4.7). Bond and loan mutual funds also
900 experienced negative returns and notable
600 outflows during most of 2022, but outflows
300
stabilized throughout last year and into early
0
2003 2007 2011 2015 2019 2023 2024 (figure 4.8).
Source: Federal Reserve Board staff estimates based
on Federal Reserve Board, Statistical Release Z.1,
“Financial Accounts of the United States”; consumer
price index, Bureau of Labor Statistics via Haver
Analytics.
Figure 4.7. Assets held by bank loan and high-yield mutual funds stayed relatively flat through early 2024

600
Monthly
525
Bank loan mutual funds 450
High-yield bond mutual funds
Feb. 375
300
225
150
75
0
2000 2004 2008 2012 2016 2020 2024
Source: Investment Company Institute; consumer price index, Bureau of Labor Statistics via Haver Analytics.
Figure 4.8. Flows have stabilized for bond and bank loan mutual funds
Billions of dollars
150
Monthly
Investment-grade bond mutual funds 100
Bank loan mutual funds
High-yield bond mutual funds 50
−50
−100
−150
Feb. June Oct. Feb. June Oct. Feb. June Oct. Feb. June Oct. Feb. June Oct. Feb. June Oct. Feb. June Oct. Feb.
2017 2018 2019 2020 2021 2022 2023 2024
Source: Investment Company Institute.
Funding Risks 43
Central counterparties’ initial margin levels and prefunded resources

remained high, even as interest rate volatility has moderated
Central counterparties’ (CCP) initial margin levels remained high even as market volatility slightly
decreased during the second half of 2023. CCPs also maintained high levels of prefunded
resources. Elevated initial margins and ample overall prefunded resources work together to imply
a relatively low vulnerability at CCPs to a potential default by a clearing member or market par-
ticipant.12 These two factors also reduce the possibility of large liquidity demands from a CCP to
its credit providers (banks). However, additional liquidity risk remains around the concentration of
clients at the largest clearing members, which could make transferring client positions to other
clearing members challenging if it were ever necessary.
Life insurers’ nontraditional liabilities remained high

Over the past decade, the share of less liquid assets held on life insurers’ balance sheets—
including CRE loans, less liquid corporate debt, and alternative instruments—has gradually
increased (figure 4.9). Over this same period, life insurers have continued to increase their
nontraditional liabilities—including funding-agreement-backed securities and cash received
through repurchase agreements and securities lending transactions (figure 4.10). These liabilities
can create liquidity risk through withdrawals or the inability to roll over funding if invested pro-
ceeds are not appropriately matched. The steady decline in the liquidity of life insurers’ assets in
conjunction with growing nontraditional liabilities makes it potentially more difficult for life insur-
ers to meet a sudden rise in withdrawals and other claims.
Figure 4.9. Life insurers continued to hold more risky, illiquid assets on their balance sheets
Percent share Billions of dollars

60 3000
1. Other ABS 4. Alternative investments Share of life insurer assets (left scale)
50 2. CRE loans 5. Illiquid corporate debt Share of P&C insurer assets 2500
3. CRE loans, securitized 6. Illiquid corporate debt, (left scale)
40 securitized 2000
30 1500
20 1000
10 500
0 0
2006 2008 2010 2012 2014 2016 2018 2020 2022
Source: Consumer price index, Bureau of Labor Statistics via Haver Analytics; Federal Reserve Board staff estimates based
on data from Bloomberg Finance L.P. and National Association of Insurance Commissioners Annual Statutory Filings.
12
Prefunded resources represent financial assets, including cash and securities, transferred by the clearing members
to the CCP to cover that CCP’s potential credit exposure in case of default by one or more clearing members. These
prefunded resources are held as initial margin and prefunded mutualized resources, which builds the resilience of
CCPs to the possible default of a clearing member or market participant.
Figure 4.10. Life insurers continued to use nontraditional liabilities for funding

550
Repurchase agreements 500
Securities lending cash collateral 450
Q4
FHLB advances 400
Funding-agreement-backed securities 350
300
250
200
150
100
50
0
2007 2009 2011 2013 2015 2017 2019 2021 2023
Source: Consumer price index, Bureau of Labor Statistics via Haver Analytics; Moody’s Analytics, Inc., CreditView,
Asset-Backed Commercial Paper Program Index; Securities and Exchange Commission, Forms 10-Q and 10-K;
National Association of Insurance Commissioners, quarterly and annual statutory filings accessed via S&P Global,
Capital IQ Pro; Bloomberg Finance L.P.
45
5 Near-Term Risks to the Financial

System
The Federal Reserve routinely engages in discussions with domestic and international policy-
makers, academics, community groups, and others to gauge the set of risks of greatest concern
to these groups. As noted in the box “Survey of Salient Risks to Financial Stability,” in recent
outreach, contacts were particularly focused on the risk of persistent inflationary pressures
leading to a more restrictive than expected monetary policy stance, risks to the financial sector
from increased policy uncertainty, and the potential effect of large losses on CRE and residential
real estate. Risks associated with the reemergence of banking-sector stress and with fiscal debt
sustainability in advanced economies also featured prominently.
The following discussion considers possible interactions of existing domestic vulnerabilities with
several potential near-term risks, including international risks.
Higher-for-longer interest rates in the U.S. and other advanced

economies could create strains in the global financial system
Interest rates may stay higher for longer than markets currently expect for a range of reasons.
The neutral level of interest rates is uncertain. Inflation could persist for longer than expected,
which could result in more restrictive monetary policy, heightened volatility in financial markets,
and corrections in asset prices. In the U.S., higher-for-longer interest rates could strain the bal-
ance sheets and debt-servicing capacity of households and businesses, weakening the economic
outlook. Financial intermediaries, including lenders with high exposures to CRE and consumer
loans, could encounter greater losses as a result of higher interest rates, leading to a further
tightening in financing conditions. In foreign economies, persistently high interest rates could
challenge the debt-servicing capacity of households, businesses, and governments, including in
emerging market economies (EMEs) that borrow externally. This stress could transmit to the U.S.
through strains in dollar funding markets, rapid rebalancing of portfolios, and reduced credit from
foreign lenders to U.S. borrowers.
A worsening of global geopolitical tensions could lead to broad

adverse spillovers
Conflict in the Middle East and Russia’s ongoing war against Ukraine pose risks to global eco-
nomic activity, including the possibility of sustained disruptions to energy and commodity markets
and global value chains. Further escalation of geopolitical tensions or policy uncertainty could
reduce economic activity, boost inflation, and heighten volatility in financial markets. The global
financial system could be affected by a pullback from risk-taking, declines in asset prices, and
losses for exposed U.S. and foreign businesses and investors.
Weakness in economic activity could compound existing strains

in real estate markets, both domestically and abroad, and could
amplify risks to the global financial system
In the U.S., unexpectedly weak economic growth could lead to a reduction in investor risk appetite
and additional strains in CRE, especially in the office building sector, where vulnerabilities have
mounted in the post-pandemic period. A more pronounced correction in commercial property
prices could result in significant losses for banks and nonbank investors with concentrated expo-
sures to the sector. Such losses may reduce the willingness of financial intermediaries to supply
credit to the economy, which would further weigh on economic activity.
Slower global growth and higher interest rates could also put pressure on real estate markets
abroad. In China, residential real estate prices continue to fall, potentially putting further pressure
on the highly indebted property sector. Stresses in China could spill over to other EMEs that rely
on trade with China or credit from Chinese entities. Given the importance of EMEs, particularly
China, to world trade and activity, such stresses could exacerbate adverse spillovers to global
asset markets and economic activity, weighing on economic and financial conditions in the U.S.
Near-Term Risks to the Financial System 47
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 solic-
ited views from a wide range of contacts on risks to U.S. financial stability. From late January to late
March 2024, the staff surveyed 25 contacts, including professionals at broker-dealers, investment
funds, research and advisory firms, and academics.
The risk of persistent inflationary pressures leading to a more restrictive than expected monetary
policy stance remained the most frequently cited risk (figure A). While the share of survey participants
mentioning policy uncertainty as a risk to the financial system increased notably, the share mention-
ing the potential for large CRE losses, the reemergence of banking-sector stress, concerns over fiscal
debt sustainability, and market volatility remained high, albeit down relative to results reported in the
previous survey (figure B). Other risks highlighted in the current survey include potential market liquid-
ity strains in the U.S. Treasury market, with particular attention on the (cash-futures) basis trade, a
correction in risky asset prices, and a potential cyberattack. This discussion summarizes the most
cited risks from this round of outreach.
Persistent inflation and monetary tightening

Elevated inflation and the implications of tighter monetary policy remained the top-cited risk. Many
of these respondents continued to note that a reacceleration of inflation could keep rates higher for
longer than previously expected. However, several contacts cited the potential lagged effects of prior
policy tightening as a key watchpoint and suggested that the FOMC may fall behind the curve in lower-
ing rates or may not act quickly enough in the event of a sudden economic downturn.
Policy uncertainty
Respondents flagged policy uncertainty as a potentially significant source of shocks that could impact
the financial sector. Contacts noted several areas of uncertainty including trade policy and other
foreign policy issues possibly related to escalating geopolitical tensions. They also noted policy uncer-
tainty associated with the U.S. elections in November.
Commercial real estate

Real estate market stress, particularly in CRE, was again frequently cited. Survey respondents con-
tinued to flag higher interest rates as a major headwind for the sector, with some noting that maturity
walls over the next couple of years could pose refinancing risks, putting further downward pressure
on prices and valuations. Respondents flagged that CRE exposures could negatively affect the bank-
ing system, with vulnerabilities particularly high for smaller and regional U.S. banks.
Banking-sector stress
Respondents continued to note the potential for banking-sector stress to reemerge. In addition to
risks from CRE exposure, respondents cited the prospect that interest rates may stay higher for lon-
ger than previously expected as a catalyst for potential renewed deposit outflows. Despite being a
frequently cited risk, some respondents continued to note that the U.S. banking system is well
capitalized.
Fiscal debt sustainability

Concerns over fiscal debt sustainability among advanced economies were again cited as a top risk,
with respondents noting particular concern regarding the U.S. Many respondents believed that defi -
cits would remain wide and fiscal consolidation would remain unlikely.
(continued)
Box 5.1—continued
Market liquidity strains and volatility
Respondents continued to highlight risks surrounding the potential for strained liquidity and elevated
volatility across a range of financial markets. Disruptions in the Treasury market were top of mind, as
well as a flight to safe-haven assets and general concerns over cyber threats.
Figure A. Spring 2024: Most cited potential risks over the next 12 to 18 months
Persistent inflation; monetary tightening

Policy uncertainty
Commercial and residential real estate
Treasury market dysfunction/basis trade
U.S.–China tensions
Middle East tensions
Cyberattacks
Severe U.S./global recession Percentage of respondents
0 10 20 30 40 50 60 70 80
Source: Federal Reserve Bank of New York survey of 25 market contacts from January to March.
Figure B. Fall 2023: Most cited potential risks over the next 12 to 18 months
Persistent inflation; monetary tightening

Commercial and residential real estate
China economy/financial sector
Under-regulated nonbanks
Foreign divestment from U.S. assets
Higher long-term rates
Leverage buildup
Russia–Ukraine war Percentage of respondents
0 10 20 30 40 50 60 70 80
Source: Federal Reserve Bank of New York survey of 25 market contacts from August to October.
49
Appendix Figure Notes
Figure 1.1. Nominal Treasury yields remained close to the highest levels in the past 15 years
The 2-year and 10-year Treasury rates are the monthly average of the constant-maturity yields
based on the most actively traded securities.
Figure 1.2. An estimate of the nominal Treasury term premium remained relatively low
Term premiums are estimated from a 3-factor term structure model using Treasury yields and
Blue Chip interest rate forecasts.
Figure 1.3. Interest rate volatility fell slightly but continued to be elevated by historical norms
The data begin in April 2005. Implied volatility on the 10-year swap rate, 1 month ahead, is
derived from swaptions.
Figure 1.4. The price-to-earnings ratio of S&P 500 firms increased to levels further above its
historical median
The figure shows the aggregate forward price-to-earnings ratio of Standard & Poor’s (S&P) 500
firms, based on expected earnings for 12 months ahead.
Figure 1.5. An estimate of the equity premium fell further below its historical median
The data begin in October 1991. The figure shows the difference between the aggregate forward
earnings-to-price ratio of Standard & Poor’s 500 firms and the expected real Treasury yields,
based on expected earnings for 12 months ahead. Expected real Treasury yields are calculated
from the 10-year consumer price index inflation forecast, and the smoothed nominal yield curve is
estimated from off-the-run securities.
Figure 1.6. Volatility in equity markets decreased to levels slightly below the historical median
Realized volatility is computed from an exponentially weighted moving average of 5-minute daily
realized variances with 75 percent of the weight distributed over the past 20 business days.
Median refers to the median option-implied volatility.
Figure 1.7. Corporate bond yields fell slightly to levels near their historical medians
The triple-B series reflects the effective yield of the ICE Bank of America Merrill Lynch (BofAML)
triple-B U.S. Corporate Index (C0A4), and the high-yield series reflects the effective yield of the
ICE BofAML U.S. High Yield Index (H0A0).
Figure 1.8. Corporate bond spreads narrowed to low levels relative to their historical distributions
The triple-B series reflects the option-adjusted spread of the ICE Bank of America Merrill Lynch
(BofAML) triple-B U.S. Corporate Index (C0A4), and the high-yield series reflects the option-
adjusted spread of the ICE BofAML U.S. High Yield Index (H0A0).
Figure 1.9. The excess bond premium fell slightly but remained near the middle of the
historical range
The excess bond premium (EBP) is a measure of bond market investors’ risk sentiment. It is
derived as the residual of a regression that models corporate bond spreads after controlling for
expected default losses. By construction, its historical mean is zero. Positive (negative) EBP val-
ues indicate that investors’ risk appetite is below (above) its historical mean.
Figure 1.10. Spreads on leveraged loans declined modestly

The data show secondary-market discounted spreads to maturity. Spreads are the constant
spread used to equate discounted loan cash flows to the current market price. B-rated spreads
begin in July 1997. The black dashed line represents the data transitioning from monthly to
weekly in November 2013.
Figure 1.11. Treasury market depth increased but remained below historical norms
Market depth is defined as the average top 3 bid and ask quote sizes for on-the-run Treasury
securities.
Figure 1.12. On-the-run market depth improved in recent months but remained below
historical norms
The data show the time-weighted average market depth at the best quoted prices to buy and sell,
for 2-year and 10-year Treasury notes. OTR is on-the-run.
Figure 1.13. A measure of liquidity in equity markets remained below average

The data show the depth at the best quoted prices to buy and sell, defined as the ask size plus
the bid size divided by 2, for E-mini Standard & Poor’s 500 futures.
Figure 1.14. Commercial real estate prices, adjusted for inflation, continued to decline
The data are deflated using the consumer price index.
Figure 1.15. Income of commercial properties relative to prices continued to grow but remained
well below historical norms
The data are a 12-month moving average of weighted capitalization rates in the industrial, retail,
office, and multifamily sectors, based on national square footage in 2009.
Figure 1.16. Banks reported tightening lending standards for commercial real estate loans
Banks’ responses are weighted by their commercial real estate loan market shares. Sur-
vey respondents to the Senior Loan Officer Opinion Survey on Bank Lending Practices are
asked about the changes over the quarter. The shaded bars with top caps indicate periods of
business recession as defined by the National Bureau of Economic Research: March 2001–
November 2001, December 2007–June 2009, and February 2020–April 2020.
Figure 1.17. House prices continued to increase in recent months

The data extend through February 2024 for Zillow and January 2024 for CoreLogic and
Case-Shiller.
Figure 1.18. Model-based measures of house price valuations rose to historically high levels
The owners’ equivalent rent value for 2024:Q1 is based on monthly data through January 2024.
The data for the market-based rents model begin in 2004:Q1 and extend through 2023:Q4.
Figure Notes 51
Valuation is measured as the deviation from the long-run relationship between the price-to-rent
ratio and the real 10-year Treasury yield.
Figure 1.19. House price-to-rent ratios remained elevated across geographic areas
The data are seasonally adjusted. Percentiles are based on 19 large metropolitan statistical areas.
Figure 1.20. Farmland prices increased to near-historical highs

The data for the U.S. begin in 1997. Midwest index is a weighted average of Corn Belt and Great
Plains states derived from staff calculations. Values are given in real terms.
Figure 1.21. Farmland prices grew faster than rents

The data for the U.S. begin in 1998. Midwest index is a weighted average of Corn Belt and Great
Plains states derived from staff calculations.
Figure 2.1. The total debt of businesses and households relative to GDP declined further
The shaded bars with top caps indicate periods of business recession as defined by the National
Bureau of Economic Research: January 1980–July 1980, July 1981–November 1982, July 1990–
March 1991, March 2001–November 2001, December 2007–June 2009, and February 2020–
April 2020. GDP is gross domestic product.
Figure 2.2. Both business and household debt-to-GDP ratios decreased

Bureau of Economic Research: January 1980–July 1980, July 1981–November 1982, July 1990–
March 1991, March 2001–November 2001, December 2007–June 2009, and February 2020–
April 2020. GDP is gross domestic product.
Figure 2.3. Business debt adjusted for inflation continued to decline

Nominal debt growth is seasonally adjusted and is translated into real terms after subtracting the
growth rate of the price deflator for the core personal consumption expenditures price index.
Figure 2.4. Net issuance of risky debt remained subdued

The data begin in 2004:Q2. Institutional leveraged loans generally exclude loan commitments
held by banks. The key identifies bars in order from top to bottom (except for some bars with at
least one negative value). For 2024:Q1, the value corresponds to preliminary data.
Figure 2.5. Gross leverage of large businesses stayed at high levels by historical standards
Gross leverage is an asset-weighted average of the ratio of firms’ book value of total debt to
book value of total assets. The 75th percentile is calculated from a sample of the 2,500 larg-
est firms by assets. The dashed sections of the lines in 2019:Q1 reflect the structural break
in the series due to the 2019 compliance deadline for Financial Accounting Standards Board
rule Accounting Standards Update 2016-02. The accounting standard requires operating
leases, previously considered off-balance-sheet activities, to be included in measures of debt
and assets.
Figure 2.6. Firms’ ability to service their debt, as measured by the interest coverage ratio,
remained robust
The interest coverage ratio is earnings before interest and taxes divided by interest payments.
Firms with leverage less than 5 percent and interest payments less than $500,000 are excluded.
Figure 2.7. The default rate on leveraged loans remained around its historical median
The data begin in December 1998. The default rate is calculated as the amount in default over
the past 12 months divided by the total outstanding volume at the beginning of the 12-month
period. The shaded bars with top caps indicate periods of business recession as defined by
the National Bureau of Economic Research: March 2001–November 2001, December 2007–
June 2009, and February 2020–April 2020.
Figure 2.8. New leveraged loans with debt multiples greater than 4 rebounded modestly in
early 2024
Volumes are for large corporations with earnings before interest, taxes, depreciation, and amor-
tization greater than $50 million and exclude existing tranches of add-ons and amendments as
well as restatements with no new money. The key identifies bars in order from top to bottom.
Figure 2.9. Real household debt edged up

Subprime are those with an Equifax Risk Score less than 620; near prime are from 620 to 719;
prime are greater than 719. Scores are measured contemporaneously. Student loan balances
before 2004 are estimated using average growth from 2004 to 2007, by risk score. The data are
converted to constant 2023 dollars using the consumer price index.
Figure 2.10. A model-based estimate of housing leverage increased modestly

Housing leverage is estimated as the ratio of the average outstanding mortgage loan balance
for owner-occupied homes with a mortgage to (1) current home values using the Zillow national
house price index and (2) model-implied house prices estimated by a staff model based on rents,
interest rates, and a time trend.
Figure 2.11. Mortgage delinquency rates ticked up from low levels

Loss mitigation includes tradelines that have a narrative code of forbearance, natural disaster,
payment deferral (including partial), loan modification (including federal government plans), or
loans with no scheduled payment and a nonzero balance. Delinquent includes loans reported to
the credit bureau as at least 30 days past due.
Figure 2.13. New mortgage extensions declined across all borrower categories
Year-over-year change in balances for the second quarter of each year among those households
whose balance increased over this window. Subprime are those with an Equifax Risk Score less
than 620; near prime are from 620 to 719; prime are greater than 719. Scores were measured
1 year ago. The data are converted to constant 2023 dollars using the consumer price index. The
key identifies bars in order from left to right.
Figure Notes 53
Figure 2.14. Real consumer credit edged down since late last year
The data are converted to constant 2023 dollars using the consumer price index. Student loan
data begin in 2005:Q1.
Figure 2.15. Real auto loans outstanding ticked up for prime and subprime borrowers
prime are greater than 719. Scores are measured contemporaneously. The data are converted to
constant 2023 dollars using the consumer price index.
Figure 2.16. Auto loan delinquencies remained at levels above their historical median
Loss mitigation includes tradelines that have a narrative code of forbearance, natural disaster,
payment deferral (including partial), loan modification (including federal government plans), or loans
with no scheduled payment and a nonzero balance. Delinquent includes loans reported to the credit
bureau as at least 30 days past due. The data for auto loans are reported semiannually by the
Risk Assessment, Data Analysis, and Research Data Warehouse until 2017, after which they are
reported quarterly. The data for delinquent/loss mitigation begin in 2001:Q1.
Figure 2.17. Real credit card balances continued to rise in the second half of 2023
prime are greater than 719. Scores are measured contemporaneously. The data are converted to
constant 2023 dollars using the consumer price index.
Figure 2.18. Credit card delinquencies increased further in the second half of 2023
Delinquency measures the fraction of balances that are at least 30 days past due, excluding
severe derogatory loans, which are delinquent and have been charged off, foreclosed, or repos-
sessed by the lender. The data are seasonally adjusted.
Figure 3.1. Banks’ average interest rate on interest-earning assets remained significantly above
the average expense rate on liabilities
Average interest rate on interest-earning assets is total interest income divided by total
interest-earning assets. Average interest expense rate on liabilities is total interest expense
divided by total liabilities. The shaded bar with a top cap indicates a period of business recession
as defined by the National Bureau of Economic Research: February 2020–April 2020.
Figure 3.2. Banks’ risk-based capital ratio increased to or beyond pre-pandemic levels
The data are seasonally adjusted by Federal Reserve Board staff. The sample consists of domes-
tic bank holding companies (BHCs) and intermediate holding companies (IHCs) with a substan-
tial U.S. commercial banking presence. G-SIBs are global systemically important banks. Large
non–G-SIBs are BHCs and IHCs with greater than $100 billion in total assets that are not G-SIBs.
Before 2014:Q1 (advanced-approaches BHCs) or before 2015:Q1 (non-advanced-approaches
BHCs), the numerator of the common equity Tier 1 ratio is Tier 1 common capital. Afterward,
the numerator is common equity Tier 1 capital. The denominator is risk-weighted assets. The
shaded bars with top caps indicate periods of business recession as defined by the National
Bureau of Economic Research: March 2001–November 2001, December 2007–June 2009, and
February 2020–April 2020.
Figure 3.3. The fair value losses of banks’ securities portfolios declined through the end of 2023
but remained sizable
The figure plots the difference between the fair and amortized cost values of the securities. The
sample consists of all bank holding companies and commercial banks.
Figure 3.4. The ratio of tangible common equity to tangible assets increased for banks of all
categories
The data are seasonally adjusted by Federal Reserve Board staff. The sample consists of
domestic bank holding companies (BHCs), intermediate holding companies (IHCs) with a sub-
stantial U.S. commercial banking presence, and commercial banks. G-SIBs are global system-
ically important banks. Large non–G-SIBs are BHCs and IHCs with greater than $100 billion in
total assets that are not G-SIBs. Bank equity is total equity capital net of preferred equity and
intangible assets. Bank assets are total assets net of intangible assets. The shaded bars with
top caps indicate periods of business recession as defined by the National Bureau of Economic
Research: July 1990–March 1991, March 2001–November 2001, December 2007–June 2009,
and February 2020–April 2020.
Figure 3.5. Borrower leverage for bank commercial and industrial loans inched down
The figure shows the weighted median leverage of nonfinancial firms that borrow using commer-
cial and industrial loans from the 24 banks that have filed in every quarter since 2013:Q1. Lever-
age is measured as the ratio of the book value of total debt to the book value of total assets of
the borrower, as reported by the lender, and the median is weighted by committed amounts.
Figure 3.6. The percentage of banks reporting tightening standards for commercial and industrial
loans declined in the second half of 2023
Banks’ responses are weighted by their commercial and industrial loan market shares. Survey
respondents to the Senior Loan Officer Opinion Survey on Bank Lending Practices are asked
about the changes over the quarter. Results are shown for loans to large and medium-sized firms.
Figure 3.7. Leverage at broker-dealers remained near historical lows

Leverage is calculated by dividing total assets by equity.
Figure 3.8. Trading profits in December declined below their average

The sample includes all trading desks of bank holding companies subject to the Volcker rule
reporting requirement.
Figure 3.9. Equities increased further as a share of trading profits in the most recent data
The sample includes all trading desks of bank holding companies subject to the Volcker rule
reporting requirement. The “other” category comprises desks trading in municipal securities,
Figure Notes 55
foreign exchange, and commodities, as well as any unclassified desks. The key identifies series
in order from top to bottom.
Figure 3.10. Leverage at life insurance companies rose and remained around its median
Ratio is calculated as (total assets – separate account assets)/(total capital – accumulated other
comprehensive income) using generally accepted accounting principles. The largest 10 publicly
traded life and property and casualty insurers are represented.
Figure 3.11. Leverage at hedge funds reached its highest level since data became available
Means are weighted by net asset value (NAV). On-balance-sheet leverage is the ratio of gross
asset value to NAV. Gross leverage is the ratio of gross notional exposure to NAV. Gross notional
exposure includes both on-balance-sheet exposures and off-balance-sheet derivative notional
exposures. Options are delta adjusted, and interest rate derivatives are reported at 10-year bond
equivalent values. The data are reported on a 2-quarter lag beginning in 2013:Q1.
Figure 3.12. Leverage at the largest hedge funds increased

Leverage is measured by gross asset value (GAV) divided by net asset value (NAV). Funds are
sorted into cohorts based on GAV. Average leverage is computed as the NAV-weighted mean.
Figure 3.13. Dealers indicated that the use of leverage by hedge funds remained largely
unchanged
Net percentage equals the percentage of institutions that reported increased use of financial
leverage over the past 3 months minus the percentage of institutions that reported decreased
use of financial leverage over the past 3 months. REIT is real estate investment trust.
Figure 3.14. Issuance of non-agency securitized products increased in early 2024 from the sub-
dued levels of 2023
The data from the first quarter of 2024 are annualized to create the 2024 bar. RMBS is residen-
tial mortgage-backed securities; CMBS is commercial mortgage-backed securities; CDO is col-
lateralized debt obligation; CLO is collateralized loan obligation. The “other” category consists of
other asset-backed securities (ABS) backed by credit card debt, student loans, equipment, floor
plans, and miscellaneous receivables; resecuritized real estate mortgage investment conduit
(Re-REMIC) RMBS; and Re-REMIC CMBS. The data are converted to constant 2024 dollars using
the consumer price index. The key identifies bars in order from top to bottom.
Figure 3.15. Bank credit commitments to nonbank financial institutions grew

Committed amounts on credit lines and term loans extended to nonbank financial institutions by
a balanced panel of 24 bank holding companies that have filed Form FR Y-14Q in every quarter
since 2018:Q1. Nonbank financial institutions are identified based on reported North American
Industry Classification System (NAICS) codes. In addition to NAICS codes, a name-matching
algorithm is applied to identify specific entities such as real estate investment trusts (REITs), spe-
cial purpose entities, collateralized loan obligations (CLOs), and asset-backed securities (ABS).
BDC is business development company. REITs incorporate both mortgage (trading) REITs and
equity REITs. Broker-dealers also include commodity contracts dealers and brokerages and other
securities and commodity exchanges. Other financial vehicles include closed-end investment and
mutual funds.
Figure 3.16. Aggregate credit commitments to nonbank financial institutions increased in 2023
for most sectors except real estate investment trusts, broker-dealers, and real estate lenders
and lessors
The figure shows 2023:Q4-over-2022:Q4 growth rates as of the end of the fourth quarter of
2023. REIT is real estate investment trust; PE is private equity; BDC is business development
company; SPE is special purpose entity; CLO is collateralized loan obligation; ABS is asset-backed
securities. The key identifies bars in order from left to right.
Figure 4.1. Ratios of runnable money-like liabilities to GDP remained above their historical medians
The black striped area denotes the period from 2008:Q4 to 2012:Q4, when insured deposits
increased because of the Transaction Account Guarantee program. The “other” category consists
of variable-rate demand obligations (VRDOs), federal funds, funding-agreement-backed securities,
private liquidity funds, offshore money market funds, short-term investment funds, local govern-
ment investment pools, and stablecoins. Securities lending includes only lending collateralized
by cash. GDP is gross domestic product. Values for VRDOs come from Bloomberg beginning
in 2019:Q1. See Jack Bao, Josh David, and Song Han (2015), “The Runnables,” FEDS Notes
(Washington: Board of Governors of the Federal Reserve System, September 3), https://www.
federalreserve.gov/econresdata/notes/feds-notes/2015/the-runnables-20150903.html.
Figure 4.2. The amount of high-quality liquid assets held by most banks stabilized in the second
half of 2023
The sample consists of domestic bank holding companies (BHCs), intermediate holding compa-
nies (IHCs) with a substantial U.S. commercial banking presence, and commercial banks. G-SIBs
are global systemically important banks. Large non–G-SIBs are BHCs and IHCs with greater than
$100 billion in total assets that are not G-SIBs. Liquid assets are cash plus estimates of securi-
ties that qualify as high-quality liquid assets as defined by the Liquidity Coverage Ratio require-
ment. Accordingly, Level 1 assets as well as discounts and restrictions on Level 2 assets are
incorporated into the estimate.
Figure 4.3. Banks’ reliance on short-term wholesale funding remained low

Short-term wholesale funding is defined as the sum of large time deposits with maturity less
than 1 year, federal funds purchased and securities sold under agreements to repurchase,
deposits in foreign offices with maturity less than 1 year, trading liabilities (excluding revalu-
ation losses on derivatives), and other borrowed money with maturity less than 1 year. The
shaded bars with top caps indicate periods of business recession as defined by the National
Figure 4.4. Assets under management at money market funds continued to rise
The data are converted to constant 2024 dollars using the consumer price index.
Figure Notes 57
Figure 4.5. Market capitalization of major stablecoins increased slightly since late last year
The key identifies series in order from top to bottom.
Figure 4.6. Corporate bonds held by bond mutual funds remained stable in the second half of 2023
The data show holdings of all U.S. corporate bonds by all U.S.-domiciled mutual funds (holdings of
foreign bonds are excluded). The data are converted to constant 2023 dollars using the consumer
price index.
Figure 4.7. Assets held by bank loan and high-yield mutual funds stayed relatively flat through
early 2024
The data are converted to constant 2024 dollars using the consumer price index. The key identi-
fies series in order from top to bottom.
Figure 4.8. Flows have stabilized for bond and bank loan mutual funds
Mutual fund assets under management as of February 2024 included $2,263 billion in
investment-grade bond mutual funds, $327 billion in high-yield bond mutual funds, and $79 billion
in bank loan mutual funds. Bank loan mutual funds, also known as floating-rate bond funds, are
excluded from high-yield bond mutual funds.
Figure 4.9. Life insurers continued to hold more risky, illiquid assets on their balance sheets
The data are converted to constant 2022 dollars using the consumer price index. Securitized
products include collateralized loan obligations for corporate debt, private-label commercial
mortgage-backed securities for commercial real estate (CRE), and private-label residential
mortgage-backed securities and asset-backed securities (ABS) backed by autos, credit cards,
consumer loans, and student loans for other ABS. Illiquid corporate debt includes private place-
ments, bank and syndicated loans, and high-yield bonds. Alternative investments include assets
filed under Schedule BA. P&C is property and casualty. The key identifies bars in order from top
to bottom.
Figure 4.10. Life insurers continued to use nontraditional liabilities for funding
The data are converted to constant 2023 dollars using the consumer price index. FHLB is Federal
Home Loan Bank. The data are annual from 2006 to 2010 and quarterly thereafter. The key iden-
tifies bars in order from top to bottom.
Box 5.1. Survey of Salient Risks to Financial Stability
Figure A. Spring 2024: Most cited potential risks over the next 12 to 18 months
Responses are to the following question: “Over the next 12–18 months, which shocks, if
realized, do you think would have the greatest negative effect on the functioning of the U.S.
financial system?”
Figure B. Fall 2023: Most cited potential risks over the next 12 to 18 months
Responses are to the following question: “Over the next 12–18 months, which shocks, if
realized, do you think would have the greatest negative effect on the functioning of the U.S.
financial system?”
Find other Federal Reserve Board publications at www.federalreserve.gov/publications/default.htm,
or visit our website to learn more about the Board and how to connect with us on social media.
www.federalreserve.gov
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Financial Stability Report

The Federal Reserve

To learn more about us, visit www.federalreserve.gov/aboutthefed.htm.

Purpose and Framework. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v

2 Borrowing by Businesses and Households . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

3 Leverage in the Financial Sector. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

5 Near-Term Risks to the Financial System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

Appendix: Figure Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

Purpose and Framework

A financial system is considered stable when

Consistent with this view of financial stabil- The website includes:

2. Excessive borrowing by businesses and households exposes the borrowers to distress if

Federal Reserve actions to promote the resilience of the

Overview of financial system vulnerabilities

Borrowing by businesses Leverage in the

2. Borrowing by businesses and households. The balance sheets of nonfinancial

Survey of salient risks to the financial system

Persistent inflation; Policy Commercial and Banking-sector Fiscal debt

April 72% 60% 56% 44% 40%

October 72% 24% 72% 56% 44%

Asset valuations increased to elevated levels relative to

Treasury yields decreased slightly and remain high relative to the

Table 1.1. Size of selected asset markets

Growth, Average annual growth,

Price growth (real)

Percent, annual rate

1999 2004 2009 2014 2019 2024

Percentage points Basis points

Measures of equity market valuations rose further from already

remained in the lower quarter of its historical

Percentage points Percentage points

Figure 1.10. Spreads on leveraged loans declined modestly

Millions of dollars Millions of dollars

Millions of dollars Millions of dollars

Figure 1.13. A measure of liquidity in equity markets remained below average

Market depth (number of contracts)

Commercial real estate prices declined but remained high relative

Net percentage of banks reporting

Residential real estate valuations remained high relative to rents as

Figure 1.17. House prices continued to increase in recent months

12-month percent change

Jan. 2010 = 100

Farmland valuations remained high relative to farm income

Figure 1.20. Farmland prices increased to near-historical highs

2022 dollars per acre

Median = $3,433.33 4000

Figure 1.21. Farmland prices grew faster than rents

2 Borrowing by Businesses and

Vulnerabilities from business and household debt remained moderate

Business debt vulnerabilities remain moderate relative to

Table 2.1. Outstanding amounts of nonfinancial business and household credit

Growth, Average annual growth,

Figure 2.2. Both business and household debt-to-GDP ratios decreased

fourth quarter of 2023 and subdued in the

Figure 2.4. Net issuance of risky debt remained subdued

Overall, firms remained well placed to service

Delinquencies at small businesses edged up

Vulnerabilities from household debt remained moderate

Mortgage credit risk remained generally low