A very interesting article about financial stability by brookings.edu

How leveraged are American homeowners?

A lot less than they were a few years ago as house prices have rebounded. Measuring mortgage debt against home values, leverage is at what the Fed describes as “the moderate level seen in the relatively calm housing markets of the late 1990s.” One line here shows mortgages against the market value of homes, as measured by the CoreLogic home price index; the other shows mortgages against what a Fed staff model suggests houses are worth based on rents and interest rates. The big gap in the 2000s reflects the housing bubble that burst so painfully in 2006.

How leveraged are banks’ business borrowers?

More than they used to be or, as the Fed put it, “The leverage of borrowers who are receiving C&I [commercial and industrial] loans from the largest banks has been trending up in recent years….” based on loan-level data provided by the largest banks for the Fed’s stress tests. It’s hard to tell from this data how much of the leveraged loan business—loans to the most financially fragile companies—are ending up on bank balance sheets.

The Federal Reserve’s inaugural reports on Financial Stability and Supervision & Regulation offer a useful peek into Fed thinking and underscore the Fed’s responsibilities for more than inflation and unemployment. The reports didn’t get much attention because they didn’t seem to say much new, didn’t shout about some otherwise unnoticed risk, and were written cautiously. Instead, they focused on identifying and measuring vulnerabilities that—if elevated—could lead to problems for […]

Click here to view original web page at www.brookings.edu