By Natalie DeCoste

The Federal Reserve has released its latest report detailing the agency’s framework for assessing the resilience of the U.S. financial system.

The 80-page Financial Stability Report reviews the current conditions affecting the stability of the American financial system by analyzing vulnerabilities related to valuation pressures, borrowing by businesses and households, financial leverage, and funding risk.

The report covered the unusual six-month period in which stock prices have risen steadily, “meme stocks” like GameStop have entered the scene, and massive losses have occurred at several banks tied to problems at the hedge fund Archegos Capital Management.

“Vulnerabilities associated with elevated risk appetite are rising. Valuations across a range of asset classes have continued to rise from levels that were already elevated late last year. Equity indices are setting new highs, equity prices relative to forecasts of earnings are near the top of their historical distribution, and the appetite for risk has increased broadly, as the “meme stock” episode demonstrated,” said Lael Brainard, a member of the Fed’s Board of Governors.

The report noted that vulnerabilities from both business and household debt have declined. The decline reflects a slower pace of business borrowing and an improvement in earnings accompanied by government programs that have supported business and household incomes. The debt owed by businesses remained effectively flat in the second half of 2020 and also was at a high level relative to gross domestic product.

Consumer debt saw a positive trend downwards on delinquencies for mortgages and other consumer debt. These delinquencies fell early in the pandemic and remain below their pre-pandemic levels. The report said the decline reflects the government’s support in the form of forbearance and fiscal programs and low-interest rates, all of which have assisted households. Despite the financial assistance, the Fed still reported that businesses and households remain strained.

On the credit front, the report showed 16,640 billion dollars in outstanding total household credit. The figure worked out to 10,935 billion dollars for mortgages, 4,178 billion dollars for consumer credit, which is subdivided into student debt total of 1,707 billion dollars, 1,225 billion dollars for auto loans, and 975 for credit cards.

The report reflects concerns expressed by individuals in the consumer lending market worried about a potential impending downturn when government assistance programs come to an end.

Gary Gensler, the new chairman of the Securities and Exchange Commission (SEC), announced at a House Committee on Financial Services hearing that the SEC is also working on a report covering some of the same issues as the Fed’s report. Specifically, the report will address the GameStop saga from earlier in the year. This report may also be accompanied by new rules for brokerage apps, like Robinhood, that turn stock trading into a game or contest.