St. Louis Fed Financial Stress Index

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The St. Louis Fed Financial Stress Index (STLFSI) is an index measuring the degree of financial stress in markets published by the Federal Reserve Bank of St. Louis.

Contents

History

The STLFSI was first published in early 2010, with data going back to 1993, in an effort to better gauge levels of financial stress in the aftermath of the 2007-2008 financial crisis. It has been updated three times since, with the current version referred to as the STLFSI4. STLFSI3 used the past 90-day average backward looking secured overnight financing rate (SOFR) in two spreads, whereas the latest version uses the 90-day forward looking SOFR [1] [2] [3] [4]

Construction

Numerous ways to determine financial stress exist. Instead of focusing on just one variable at the expense of others, such as default risk or liquidity risk, this index encompasses multiple measures. Unlike the similar but less comprehensive Kansas City Financial Stress Index (KCFSI) from the Federal Reserve Bank of Kansas City that uses only 11 variables, this index uses 18 weekly data series that include seven interest rate series, six yield spreads and five other indicators to capture some element of financial stress:

The units are not seasonally adjusted. The data series are likely to move together as the level of financial stress in the economy changes. It is also updated and published weekly, on each Friday, instead of monthly. The data has a one-week lag. [5] [6] [7] [8]

Interpretation and uses

The average value of the index is designed to be zero to represent normal financial market conditions. A value below zero indicates below-average financial market stress; a value above zero suggests above-average financial market stress. Movements in the index are measured in basis points.

The high and low of this index has varied widely. During times of financial stress, such as the Lehman Brothers or Fannie Mae and Freddie Mac bankruptcies of 2008, the Greek credit crisis of 2010, or the U.S. credit rating downgrade of 2011, the value on the index spiked. [9] It would then subsequently fall as concerns eased. [10] [11]

The all-time high of 5.257 basis points on October 17, 2008, during the height of the financial crisis. It reached an all-time low of -1.602 basis points on February 14, 2020, [12] [13] before rising as fears for the coronavirus became more widely held. [3]

The index also provides a way to analyze global liquidity. Research has determined the index is relevant to cross-border bank flows in 149 countries. Specifically, a 10% increase in the index means the countries receive on average 0.420% less cross-border bank loans. [14]

The St. Louis Federal Reserve provides updates to movement in the index via Twitter. [15]

Related Research Articles

<span class="mw-page-title-main">Federal Reserve</span> Central banking system of the United States of America

The Federal Reserve System is the central banking system of the United States. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a series of financial panics led to the desire for central control of the monetary system in order to alleviate financial crises. Over the years, events such as the Great Depression in the 1930s and the Great Recession during the 2000s have led to the expansion of the roles and responsibilities of the Federal Reserve System.

An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed. The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, the compounding frequency, and the length of time over which it is lent, deposited, or borrowed.

<span class="mw-page-title-main">Monetary policy of the United States</span> Political Policy

The monetary policy of The United States is the set of policies which the Federal Reserve follows to achieve its twin objectives of high employment and stable inflation.

<span class="mw-page-title-main">Yield curve</span> Relationships among bond yields of different maturities

In finance, the yield curve is a graph which depicts how the yields on debt instruments – such as bonds – vary as a function of their years remaining to maturity. Typically, the graph's horizontal or x-axis is a time line of months or years remaining to maturity, with the shortest maturity on the left and progressively longer time periods on the right. The vertical or y-axis depicts the annualized yield to maturity.

An interest rate future is a financial derivative with an interest-bearing instrument as the underlying asset. It is a particular type of interest rate derivative.

Floating rate notes (FRNs) are bonds that have a variable coupon, equal to a money market reference rate, like SOFR or federal funds rate, plus a quoted spread. The spread is a rate that remains constant. Almost all FRNs have quarterly coupons, i.e. they pay out interest every three months. At the beginning of each coupon period, the coupon is calculated by taking the fixing of the reference rate for that day and adding the spread. A typical coupon would look like 3 months USD SOFR +0.20%.

The discount window is an instrument of monetary policy that allows eligible institutions to borrow money from the central bank, usually on a short-term basis, to meet temporary shortages of liquidity caused by internal or external disruptions.

The bond market is a financial market where participants can issue new debt, known as the primary market, or buy and sell debt securities, known as the secondary market. This is usually in the form of bonds, but it may include notes, bills, and so on for public and private expenditures. The bond market has largely been dominated by the United States, which accounts for about 39% of the market. As of 2021, the size of the bond market is estimated to be at $119 trillion worldwide and $46 trillion for the US market, according to the Securities Industry and Financial Markets Association (SIFMA).

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The overnight rate is generally the interest rate that large banks use to borrow and lend from one another in the overnight market. In some countries, the overnight rate may be the rate targeted by the central bank to influence monetary policy. In most countries, the central bank is also a participant on the overnight lending market, and will lend or borrow money to some group of banks.

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See Business Cycle.

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The interbank lending market is a market in which banks lend funds to one another for a specified term. Most interbank loans are for maturities of one week or less, the majority being overnight. Such loans are made at the interbank rate. A sharp decline in transaction volume in this market was a major contributing factor to the collapse of several financial institutions during the financial crisis of 2007–2008.

Secured Overnight Financing Rate (SOFR) is a secured overnight interest rate. SOFR is a reference rate established as an alternative to LIBOR. LIBOR had been published in a number of currencies and underpins financial contracts all over the world. Deeming it prone to manipulation, UK regulators decided to discontinue LIBOR in 2021.

The corporate debt bubble is the large increase in corporate bonds, excluding that of financial institutions, following the financial crisis of 2007–08. Global corporate debt rose from 84% of gross world product in 2009 to 92% in 2019, or about $72 trillion. In the world's eight largest economies—the United States, China, Japan, the United Kingdom, France, Spain, Italy, and Germany—total corporate debt was about $51 trillion in 2019, compared to $34 trillion in 2009. Excluding debt held by financial institutions—which trade debt as mortgages, student loans, and other instruments—the debt owed by non-financial companies in early March 2020 was $13 trillion worldwide, of which about $9.6 trillion was in the U.S.

<span class="mw-page-title-main">2020 stock market crash</span> Financial market reaction to the COVID-19 pandemic

On 20 February 2020, stock markets across the world suddenly crashed after growing instability due to the COVID-19 pandemic. It ended on 7 April 2020.

<span class="mw-page-title-main">Financial market impact of the COVID-19 pandemic</span> Economic turmoil associated with the pandemic

Economic turmoil associated with the COVID-19 pandemic has had wide-ranging and severe impacts upon financial markets, including stock, bond, and commodity markets. Major events included a described Russia–Saudi Arabia oil price war, which after failing to reach an OPEC+ agreement resulted in a collapse of crude oil prices and a stock market crash in March 2020. The effects upon markets are part of the COVID-19 recession and are among the many economic impacts of the pandemic.

<span class="mw-page-title-main">September 2019 events in the U.S. repo market</span> Financial event affecting interest rates

On September 17, 2019, interest rates on overnight repurchase agreements, which are short-term loans between financial institutions, experienced a sudden and unexpected spike. A measure of the interest rate on overnight repos in the United States, the Secured Overnight Financing Rate (SOFR), increased from 2.43 percent on September 16 to 5.25 percent on September 17. During the trading day, interest rates reached as high as 10 percent. The activity also affected the interest rates on unsecured loans between financial institutions, and the Effective Federal Funds Rate (EFFR), which serves as a measure for such interest rates, moved above its target range determined by the Federal Reserve.

References

  1. ↑ "St. Louis Fed Financial Stress Index (DISCONTINUED)". FRED, Federal Reserve Bank of St. Louis. 31 December 1993. Archived from the original on 17 February 2020.
  2. ↑ "St. Louis Fed Financial Stress Index (STLFSI2)". FRED, Federal Reserve Bank of St. Louis. 26 March 2020. Archived from the original on 27 March 2020.
  3. 1 2 "The St. Louis Fed's Financial Stress Index, Version 2.0 | FRED Blog". 26 March 2020. Archived from the original on 27 March 2020. The revised STLFSI, however, has increased sharply—reminiscent of the worst of the financial market turmoil during the Great Recession in 2008-2009—registering a value close to 5.8.
  4. ↑ "The St. Louis Fed's Financial Stress Index, version 4 | FRED Blog" . Retrieved 2023-01-26.
  5. ↑ "St. Louis Fed Financial Stress Index (STLFSI) Key | St. Louis Fed". www.stlouisfed.org. Retrieved 2020-03-08.
  6. ↑ "Measuring Financial Market Stress - January 2010" (PDF).
  7. ↑ "Measuring Financial Market Stress - February 2010" (PDF).
  8. ↑ "What Is the St. Louis Fed Financial Stress Index?". The Big Picture. 2014-06-29. Retrieved 2020-03-08.
  9. ↑ Carney, John (2013-06-25). "Financial Stress Index Hits Scary Level". www.cnbc.com. Retrieved 2020-03-08.
  10. ↑ "Fed Focus: Fin Stress Down; Global Growth Still Worries FOMC | MNI". www.marketnews.com. Retrieved 2020-03-08.
  11. ↑ Udland, Myles. "The Financial Stress Index Just Hit An All-Time Low". Business Insider. Retrieved 2020-03-08.
  12. ↑ "Stress index sinks to new low as Fed sedates markets". Financial Times. 24 January 2020. Retrieved 2020-03-08.
  13. ↑ "Economic View". www.economy.com. Retrieved 2020-03-08.
  14. ↑ "Global Liquidity, Market Sentiment and Financial Stability Indices" (PDF).
  15. ↑ @stlouisfed (June 15, 2023). "St. Louis Fed Financial Stress Index measures -0.65 in the week ended June 9, down from the prior week's -0.38 (0=normal stress). For more on how the index is constructed, see FRED: https://ow.ly/j5eM50OPO5S" (Tweet). Retrieved 2023-06-16– via Twitter.
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