📊 Summary of the November 2025 Financial Stability Report

The Financial Stability Report, published by the Federal Reserve Board in November 2025, provides a comprehensive assessment of the stability of the U.S. financial system. The report aims to increase transparency and accountability regarding the Federal Reserve’s views on financial vulnerabilities and risks, supporting its broader objectives of maximum employment, stable prices, and a safe and sound banking system.

Key Areas of Financial Vulnerability

The report organizes its analysis around four main categories of financial system vulnerabilities:

  1. Asset Valuations 📈
    • Equity and Bond Markets: After significant market volatility in April 2025, demand for higher-risk assets rebounded. Equity prices relative to earnings returned to the high end of their historical range, and the equity risk premium remained well below average. Corporate bond spreads also narrowed to pre-April levels, which are low by historical standards.
    • Real Estate: Home price growth slowed, but the ratio of house prices to rents stayed near record highs. Commercial real estate prices showed signs of stabilization, with vacancy rates and rent growth in the office sector also stabilizing.
    • Liquidity: Treasury and equity market liquidity recovered from the April downturn.
  2. Borrowing by Businesses and Households 💳
    • Debt Levels: Total business and household debt relative to GDP remained stable at 20-year lows, indicating a generally healthy debt environment.
    • Business Debt: Gross leverage of publicly traded firms stayed high, and credit to privately held firms continued to grow. Most large firms could service their debt, but some small businesses and riskier private firms faced declining capacity.
    • Household Debt: Most household debt was held by borrowers with strong credit scores. Mortgage delinquency rates remained low due to high home equity and strong underwriting standards. However, auto and credit card loan delinquencies were slightly above their decade averages.
  3. Leverage in the Financial Sector 🏦
    • Hedge Funds and Insurers: Hedge fund leverage remained high, supporting significant positions in key markets. Life insurers’ leverage was in the top quartile of its historical range.
    • Banking System: U.S. banks remained sound and resilient, with historically high regulatory capital ratios. However, some banks continued to face sizable fair value losses on fixed-rate assets.
    • Dealers: Dealer leverage was low, but their intermediation activity increased to high levels.
  4. Funding Risks 💰
    • Short-Term Funding: Assets in cash-management vehicles, especially government money market funds, continued to grow. These funds are historically less fragile, but structural vulnerabilities persist in other cash-investment vehicles.
    • Bank Funding: Most domestic banks maintained high levels of liquid assets and stable funding. Reliance on uninsured deposits was well below recent peaks, reducing vulnerability to rapid withdrawals.
    • Market Stability: Short-term funding market conditions, including overnight bank funding and repurchase agreement markets, remained stable throughout the year.

Near-Term and International Risks

  • Near-Term Risks: The report highlights that while the financial system weathered significant volatility in April 2025, vulnerabilities remain. Elevated asset valuations could lead to outsized price drops if risk sentiment changes. High leverage in certain sectors could amplify shocks.
  • International Developments: Foreign growth picked up early in 2025, partly due to increased U.S. import demand ahead of expected tariff hikes. However, business confidence and growth prospects weakened in many foreign economies, and several central banks lowered policy rates in response.

Federal Reserve Actions

  • The Federal Reserve continues to monitor vulnerabilities and works with other agencies to mitigate risks. Post-2007–09 crisis reforms, such as higher capital requirements, stress testing, and new liquidity regulations, have strengthened the resilience of large banks.
  • The countercyclical capital buffer (CCyB) remains a tool to increase resilience when risks of above-normal losses are elevated.

Summary 💡

The November 2025 Financial Stability Report finds that the U.S. financial system remains resilient despite recent market volatility and global uncertainty. Asset valuations are high, business and household debt levels are stable, and the banking sector is well-capitalized. However, vulnerabilities persist in areas like hedge fund leverage and certain cash-investment vehicles. The Federal Reserve continues to monitor these risks and stands ready to act to preserve financial stability.

References: 

Financial Stability Report, Federal Reserve

Find out how the Financial Stability Report impacts you and your business.