In the latest Financial Stability Report released on April 25, the Federal Reserve conducted a comprehensive survey of potential risks to the U.S. financial system for the first time since Trump returned to the White House. The survey results indicated that global trade risks, overall policy uncertainty, and U.S. debt sustainability ranked as the top three concerns. Additionally, the operation of the U.S. Treasury market, foreign divestment from U.S. assets, and fluctuations in the dollar's value have also significantly risen. Although liquidity in the equity and bond markets is under pressure and emerging vulnerabilities such as credit allocation to non-bank institutions and high leverage among hedge funds are concerning, the overall capital adequacy and resilience of the U.S. banking system remain intact. While the report points out the accumulation of risks, it also emphasizes the stability of certain markets and institutions, providing important references for future policy-making and risk prevention.
I. Report Overview
Release date and background
The report, published on April 25, 2025, is the first semi-annual Financial Stability Report since Trump returned to the White House, with most surveys completed before April 2.
Survey subjects
Participants included 22 scholars, investors, and financial market professionals, with major feedback coming from policymakers, banks, and non-bank financial institutions.
II. Main Risk Indicators
1. Global Trade Risks
Highest concern: 73% of respondents listed it as the most worrying risk, more than doubling from 33% in November of last year.
Driving factors: Escalation of tariff measures and heightened trade war risks may lead to disruptions in the flow of goods, rising inflation, and slowed growth.
2. Overall Policy Uncertainty
Ranked second: 50% of respondents believe that policy uncertainty is the most concerning issue, which is an increase compared to the same period last year.
Coverage: Includes changes in government spending priorities, shifts in foreign policy orientations, and political risks related to elections.
3. U.S. Debt Sustainability
Third in concern: 33% of respondents expressed worries about the U.S. fiscal deficit and national debt levels.
Potential impact: If the debt burden continues to increase, it may lead to rising interest rates, an increase in sovereign risk premiums, and a decline in demand for newly issued bonds.
4. Operation of the Treasury Market
Significant increase: 27% of respondents are concerned about the liquidity and pricing mechanisms of the U.S. Treasury market, a notable rise from 17% last autumn.
Background note: Earlier liquidity tightening events have exposed issues of insufficient depth in the secondary market and decreased risk tolerance among market makers.
5. Foreign divestment and dollar value
Rising concern: The report mentions the accelerated withdrawal of foreign capital from U.S. products and assets, as well as the potential disruption to global capital flows due to significant fluctuations in the dollar exchange rate.
III. Other Important Findings
1. Tight liquidity in the equity and bond markets
Liquidity is at historical lows: Bid-ask spreads in the stock and Treasury markets have widened, and trading volumes in some markets have declined.
Risk warning: Limited liquidity may amplify price fluctuations during sudden sell-offs, thereby affecting market confidence.
2. Resilience of the banking system
Capital adequacy and stable liquidity: Most banks maintain sufficient capital buffers and available liquidity, with no signs of systemic liquidity risk.
Credit allocation favors non-banks: Credit commitments to non-bank financial institutions continue to grow, which may trigger contagion effects in stressful scenarios.
3. Leverage of hedge funds and non-bank institutions
High leverage levels: The leverage ratio of large hedge funds is close to or exceeds historical highs; although there was a decline in early April due to liquidation, systemic risk cannot be ignored.
Potential threat: If asset prices adjust sharply, forced liquidations and margin calls will exacerbate market turbulence.
IV. Conclusions and Outlook
The report warns that global trade frictions and policy fluctuations are exacerbating uncertainty in financial markets. If not effectively mitigated, this could lead to broader risk spillovers. However, the overall stability of the U.S. banking system, despite some asset valuations being high, has not shown signs of systemic collapse, demonstrating a certain degree of resilience.
Of course, the greatest instability comes from Trump's unpredictable mindset.