Fed: Pandemic’s Length Presents Significant Risks To Financial System

The ultimate scope and length of the pandemic are still among the “most significant risks to the financial system,” according to a Financial Stability Report from the Federal Reserve, which said that positive vaccine-related news, better-than-forecasted economic data, further fiscal support and accommodative monetary policy have fostered favorable financial conditions and increased prices of risky assets.

“The realization of this risk continues to depend largely on the success of public health measures and the vaccination campaign, on the steps households and businesses take to resume economic activity, and on the support provided by economic policy and the remaining government lending and relief programs,” the Fed said in the report.

In the event the coronavirus health crisis lasts longer than expected, the Fed said, downward pressure on the American economy could upset the continuing recovery. That scenario could bring about sizable decreases in asset prices, household finances could become worse and nonfinancial companies that are highly leveraged could see their bottom lines weaken.

And, in emerging market economies (EMEs), challenges keeping the virus in check, waning fiscal capacity and a potential additional increase in long-term interest rates present risks to financial stability over the short haul. Ongoing and broad EME stress has the potential to have effects for the United States, according to the report.

“While faced with more challenging global market conditions, U.S. financial institutions would be subject to heightened risks from both their direct exposures to stressed EME firms and sovereigns as well as their indirect exposures through U.S. businesses with strong links to EMEs,” the report stated.

In addition, the report noted that European financial institutions (FIs) have an important function in international financial intermediation and have significant economic and financial connections to the U.S.

“Therefore, financial stress in Europe stemming from the adverse consequences of a lingering pandemic could negatively affect the United States,” the report said.

However, as PYMNTS previously reported, sizable economic powers, such as Europe and the U.S., have good-sized chances at recouping lost ground from the pandemic by the close of this year.