The US Central Bank points the finger at excess leverage among operators, starting with hedge funds. The diagnosis of the banking system, however, is more calm
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The Federal Reserve, i.e. the US central bank, is sounding the alarm: there are “considerable” vulnerabilities in the financial markets, while the stress that hit the banking sector a year ago has dissipated considerably. The central bankers’ index focuses on the high level of debt, or financial leverage, which increases risks in the financial markets.
The Fed then also recalled that share prices are at historic highs. In short: a market full of debts (contracted when rates were low thanks to the Fed’s own policy) and with prices at highs. This is why the Fed talks about “vulnerability.”
The Fed says hedge fund leverage has stabilized, but at very high levels. While life insurers find themselves in a situation where they are increasingly dependent on non-traditional sources of funding. At the same time, although the banking system’s sources of supply remain liquid and stable, funding costs have risen significantly. However, the Fed reassures on this front: “The banking system is strong and resilient” and “acute stress has decreased since last spring”. The curious aspect is that in the last monetary policy meeting the Fed had removed from the press release, for the first time in months, the phrase: “The banking system is solid and resilient”. Now, however, he reiterates the concept.