MNI BRIEF: Fed Flags High Financial Sector Leverage

High levels of debt in the U.S. financial sector pose a potential risk to stability as asset valuations remain elevated, although household and business balance sheets remain sound as does the broader banking system, the Federal Reserve said Friday.

"Vulnerabilities associated with financial leverage remained notable. Over the past few years, hedge funds’ leverage has steadily increased across a broad range of strategies, including those involving Treasury securities, interest rate derivatives, and equities," the Fed said in its biannual Financial Stability Report. "Leverage at life insurers was in the top quartile of its historical distribution. The banking sector remained sound and resilient overall, and most banks continued to report
capital levels well above regulatory requirements."

At the same time, the report added, "vulnerabilities from business and household debt remained moderate."

The report also contained a nod to the recent bankruptcies of auto-sector firms First Brands and Tricolor, downplaying concerns of broader contagion. 

"The recent bankruptcies of two privately held firms, an auto parts supplier and a subprime auto lender, so far appear to
be isolated events. However, these examples highlight that unexpected losses could arise from opaque off-balance-sheet funding arrangements that may be used by certain privately held firms."