Vulnerabilities historically have often been associated with conditions where asset prices are higher than what economic fundamentals support, often because of elevated risk appetite, potentially leading to much larger-than-expected losses should a sharp correction occur.
Separately, we track leverage in the financial system for signs that banks and other financial intermediaries potentially have inadequate buffers of capital to absorb adverse shocks, increasing the risk of their distress and possible spillovers to the financial system. We also monitor funding risk in the financial system.