Fed Stability Report Warns About Risks From Private Credit and Stablecoins

Trade and tariffs may be the dominant risks to banks and corporates, but in the Federal Reserve’s latest “Financial Stability Report,” nonbank firms, leveraged debt and stablecoins are on the list of threats to the financial system in the United States.

Runnables, which are short-term, relatively liquid holdings that support businesses, governments and financial institutions, are vital to the function of any economy, according to the report.

“Most of these runnable vehicles have grown steadily over the past decade, and many experienced notable stresses during crises,” the report said. “More recently, innovation in short-term funding markets has given rise to new forms of runnables, particularly stablecoins. As financial innovations continue, the list of runnables will likely expand further.”

Stablecoin assets “continued to grow,” the report said. “By early April, the total market capitalization of stablecoins reached approximately $235 billion, above the previous high observed in April 2022 before Terra’s collapse.”

As a result, runnables may spur runs in which “investors stop providing funding by redeeming shares, withdrawing deposits, or refusing to roll over short-term debts,” the report said. “Such runs have contributed to several episodes of financial stress over the past two decades.”

Overall, leverage is notable, and bank credit commitments to nonbank financial institutions (NBFIs) continued to increase, per the report. Bank lending to nonbank financial institutions continued to grow in 2024 and now stands at $2.3 trillion, backing investment funds and other lenders that, in turn, may see some stressors in covering the interest payments that are due to traditional financial institutions that extended the loans to the nonbanks in the first place.

“Overall, bank lending to NBFIs is not significantly concentrated in any one sector, most commitments are rated investment grade, and these loans traditionally have had delinquency rates lower than loans to nonfinancial businesses,” the report said.

“Indicators of business leverage remained elevated relative to historical levels, and private credit arrangements continued to grow,” the report added. “Nonetheless, measures of the ability of businesses to service their debt have been stable and within typical ranges, though a sustained decline in earnings could put some vulnerable business borrowers at risk.”

Corporate borrowers in small- or middle-market segments have “less access to capital markets and primarily borrow from banks, private credit funds, and other sophisticated investors (such as insurance companies),” and may not be as well positioned to weather shocks.

Last fall, private credit stress and nonbank financial institution stress were not on a list of “most cited potential shocks over the next 12 to 18 months,” per the report. Now, however, private credit stress was cited by roughly 20% of the Fed’s market contacts, and nonbank risks were cited in the mid-teen percentage of respondents, indicating that these two avenues of financial shock are increasingly on the radar.

The Fed report echoes concerns raised in a separate stability report last week from the International Monetary Fund.

“It is crucial to strengthen policies that mitigate nonbank leverage and other vulnerabilities,” the report’s executive summary said. “Enhanced nonbank reporting requirements could help supervisors develop a systemwide and cross-sectoral perspective of risks and distinguish poorly governed and excessive risk-taking institutions from those that contribute more positively to financial intermediation.”

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