Stanley Fischer, vice chairman of the U.S. Federal Reserve
Rising valuations in the stock market and elsewhere are partly explained by a brighter economic outlook but also by rising risk appetite, Federal Reserve Vice Chairman Stanley Fischer said Tuesday.
Speaking at an International Monetary Fund event on financial stability, Fischer didn’t sound greatly concerned as he examined leverage, borrowing by households and non-financial firms, liquidity and maturity transformation, and asset valuations in the financial system.
“There is no doubt the soundness and resilience of our financial system has improved since the 2007-09 crisis. We have a better capitalized and more liquid banking system, less run-prone money markets, and more robust resolution mechanisms for large financial institutions. However, it would be foolish to think we have eliminated all risks,” Fischer said.
Fischer pointed out that price-to-earnings ratios in the stock market now stand in the top quintiles of their historical distributions, while corporate bond spreads are near their post-crisis lows.
Prices of commercial real estate have grown faster than rents for some time,and measures of the amount of operating income relative to the sale price of commercial properties–the capitalization rate–have reached historical lows, he said.
Fischer said valuation pressures in residential housing are “at most, modest,” as price-to-rent ratios are only slightly higher than their long-run trend.
The vice chairman said regulatory capital at large banks is now at multidecade highs, household borrowing subdued outside of auto and student loans, and that banks have shifted away from more run-prone short-term wholesales sources of funds. Fischer did note concerns about elevated levels of corporate borrowing, but pointed out that leverage has declined slightly since its peak a year ago, and firms with high debt growth appear relatively healthy.
He also said the Fed has limited insight into parts of the shadow banking system and uncertainty remains over short-term funding markets after money funds reform.