Fed’s Financial Stability Report Shows It’s Worried About a Crash

May 7, 2021 (EIRNS)—The U.S. Federal Reserve has released its 71-page annual “Financial Stability Report: 2021” on May 6; and to see the degree to which the Fed’s board of governors are worried about the approach of a financial crash centered in corporate stock and bond markets, listen to the release statement by the deputy chair of the Fed, economist Lael Brainard.

Significantly, Brainard points to the Fed’s concern to the still-resounding failure and liquidation of the Archegos hedge fund, which involved liquidation of some $50 billion in stock values on international exchanges and has hit major banks with somewhere between $10 billion and $100 billion in losses.

“The combination of stretched valuations with very high levels of corporate indebtedness bear watching,” she wrote, “because of the potential to amplify the effects of a re-pricing event. The FSR [Financial Stability Report] describes the failure of Archegos Capital Management and the associated losses at a number of large banks. It highlights the potential for nonbank financial institutions such as hedge funds and other leveraged investors to generate large losses in the financial system. The Archegos event illustrates the limited visibility into hedge fund exposures and serves as a reminder that available measures of hedge fund leverage may not be capturing important risks. The potential for material distress at hedge funds to affect broader financial conditions underscores the importance of more granular, higher-frequency disclosures.”

The report itself says that “should risk appetite decline from elevated levels, a broad range of asset prices could be vulnerable to large and sudden declines, which can lead to broader stress to the financial system.”