NEW YORK – Risks to the US financial system have eased considerably compared to the previous year, the Federal Reserve said on Monday.
The central bank noted that as the economy recovers from the recession caused by the pandemic, the balance sheets of U.S. individuals and businesses continue to strengthen.
However, the Fed has cited the significant rise in asset prices – especially house and stock prices – as well as the rise in volatile trading in so-called âmemeâ stocks as potential risks to the financial system.
There is also a risk that the coronavirus pandemic will worsen again, which in turn would impact stock prices and exacerbate supply chain issues that reverberate throughout the global economy, said the Fed.
âDespite recent improvements, increased uncertainty during the pandemic could pose risks to asset markets, financial institutions and borrowers in the United States and globally,â the Fed said.
The observations came from the Fed’s biannual financial stability report on ongoing trends in trade, investment as well as major economic issues. The report is not an economic forecast, nor does it attempt to predict the next risk to the financial system. But he tries to highlight the areas of concern of central bankers.
Overall, the financial system is in better shape than it was a year ago and even six months ago, the Fed said. US personal and corporate borrowing continues to return to pre-pandemic levels. Low interest rates have made it easier to deal with higher debt levels. Banks are posting record profits and their balance sheets are almost back to what they were before the pandemic.
The Fed noted the rise in asset prices a year earlier, and how asset prices ranging from stocks to homes are at levels above historical norms. The central bank said in its report, however, that it had not seen a decline in credit quality for mortgages, which was the root cause of the 2008 financial crisis and the Great Recession.
If investors were to decrease their risk appetite, or if interest rates were to rise significantly, these high asset prices could drop significantly, posing a risk to the financial system, the Fed said.
One notable element of the report is the Fed’s attention to âmemeâ stocks such as GameStop, AMC Entertainment, and others. These companies have seen extremely volatile trading this year, in large part due to a standoff between Wall Street hedge fund managers and a predominantly online group of retail investors who are collectively strategizing on the media. social.
The Fed noted that the combination of companies charging extremely low or zero commissions for buying or selling stocks, as well as social media, makes it easier for individual investors to influence the price of a particular company’s stock. Retail investors are now using advanced forms of trading such as options or leverage, which could put additional pressure on a stock in one way or another.
The Fed also appeared to be concerned about how these online trading platforms are making stock trading look like a video game.
While the Fed said in its report that it does not believe that GameStop or AMC individually would have caused problems for the economy or the financial system, it notes that it would not be difficult for another company to become a target. like GameStop if the conditions were right.
âSocial media can contribute to an ‘echo chamber’ in which retail investors find themselves communicating more often with others with similar interests and views, thereby reinforcing their views, even if these views are speculative or biased, âthe Fed said.
There are also concerns that these retail investors – who are typically much younger – may not be able to financially manage a significant drop in stock prices.