Major points from the report (Headlines via Reuters):
- business debt has risen sharply; reduction in economic activity has weakened ability to service debt
- household loan defaults may rise
- banks continue to be well-capitalized, though challenging conditions remain
- strains in household, business sectors mitigated by government lending, relief and low interest rates
- protracted slowdown could harm finances of even households with high credit scores, leading to defaults
- sources of vulnerability in household, business sectors unevenly distributed
- Fed includes climate change risks in financial stability report for first time
- climate risks could result in more frequent, severe financial shocks
- disruptions in global dollar funding markets are ‘important risk’ to financial system
- fiscal stimulus, lower interest rates, emergency lending facilities and asset purchases supported stronger-than-expected economic recovery
- uncertainty remains high and investor risk sentiment could shift quickly if recovery proves less promising or efforts to contain coronavirus disappoint
- most banks’ common equity tier 1 (cet1) ratio recovered to pre-pandemic levels in the second quarter as demand for bank credit waned and earlier drawdowns were repaid
- yields on corporate bonds dropped to historically low levels but remain elevated for airlines, energy and leisure industries heavily affected by pandemic
- true status of bank loan credit quality is not reflected in loan delinquencies because of loss-mitigation programs, government stimulus payments, and ppp loans
- delinquency rates on commercial mortgage-backed securities have spiked
- as programs expire, some accounts in loss mitigation could result in higher bank delinquency rates later this year and early next year, followed by higher charge-off rates and losses
- all told, a great deal of uncertainty about the future path of these losses remains
- strength in housing sector reflects robust demand from households but downside risks remain, given unusually large number of mortgage loans in forbearance programs
- leverage is at historically low levels at broker-dealers but is at post-2008 highs at life insurance companies
- leverage remains elevated at hedge funds relative to past five years
- funding strains on mortgage servicers eased after policy actions, but uncertainties remain
- money markets have stabilized but would be vulnerable without the emergency facilities in place
- outflows from long-term mutual funds that hold less liquid assets have mostly reversed
- redemption waves had run-like characteristics that highlighted significant structural vulnerabilities in the sector
- collateralized loan obligation fundamentals have improved but are still weak compared with pre-pandemic levels