Fed Financial Stability Report November 2026: AI Tops the Risk List

The Federal Reserve’s November 2026 Financial Stability Report finds stretched asset prices, record hedge fund leverage, and AI as the risk market contacts name most often. The twice-yearly Financial Stability Report from the Federal Reserve Board reflects data through October 28, 2026, and its most striking pages are a new box on how the data center buildout is being financed.

TLDR

The Fed rates asset valuations as elevated, business and household debt as moderate, financial sector leverage as notable, and funding risks as moderate. Banks and households look solid, while leverage has moved to hedge funds, life insurers and the vehicles that banks lend to. Debt issued to pay for advanced computing passed $680 billion in 2026, and the largest technology firms carry more than $3 trillion of undiscounted leases, guarantees and contract commitments on top of it. In the Fed’s fall survey, 87% of market contacts named artificial intelligence as a risk to financial stability, up from 50% in the spring.

Thoughts

The AI risk this report describes is a credit structure, and the stock prices are the smaller part of it. The box on the data center buildout puts public debt tied to advanced computing at more than $1.1 trillion, then shows that the promises sitting beside that debt are bigger: leases that have not started yet, worth more than $1 trillion, plus take-or-pay contracts and residual value guarantees worth more than $2 trillion. The Fed is careful to say those figures are undiscounted and cannot be set directly against debt. The direction is still clear. A firm with a strong credit rating signs a long lease or guarantees the resale value of chips, and a weaker firm borrows against that signature. We read this as the same job a bank guarantee used to do, performed by technology companies that no bank supervisor examines. The report says the giants may absorb losses in a downturn and cushion everyone else. It also says their true exposure may be much larger than their balance sheets show. Both can be true, and only one of them is priced into a bond spread sitting at the low end of its history.

The survey of market contacts deserves more caution than its headline number invites. The jump from 50% to 87% naming AI comes from 23 people in the fall and 20 in the spring, and the Fed states that the answers are not its own views. What we find more telling is how the worry has changed shape. Respondents no longer describe one risk. They describe three: valuations that depend on earnings arriving, financing that loops between the same firms, and cyberattacks made easier by the models themselves. Some went further and raised damage caused by frontier models with no attacker behind them. Elsewhere the Fed’s own text says reports of agentic systems being involved in cyber events have become more frequent since May. A central bank writing that sentence in a stability report is new ground.

The banking system looks safe in this report partly because the risk has been moved one step away from it. Capital ratios are near record highs and loan delinquencies are falling. Meanwhile hedge fund leverage is the highest since the data began in 2013 and is concentrated in the largest funds, leverage at the biggest life insurers is historically high, and bank credit lines to other financial firms have passed $2.8 trillion. The fastest growing slice of those lines, up nearly 30% in a year, goes to special purpose entities, collateralized loan obligations and asset-backed securities. That is the same family of vehicles the data center box says is funding the buildout. So the bank is one loan removed from the risk, and the report puts the large banks’ combined exposure to the whole chain at close to $1 trillion.

Interest rates are the quiet thread that could pull on all of this. Treasury yields rose markedly over six months and the term premium climbed above its long-run median, yet the extra return investors demand for owning stocks over bonds stayed near the bottom of its historical range. Investors are being paid more to hold safe assets and are asking for almost nothing extra to hold risky ones. That arrangement rarely lasts. If it breaks through higher yields, banks feel it first: their securities were already about $330 billion under water in the second quarter, before the latest rise.

Key Takeaways

The report grades four vulnerabilities: asset valuations are elevated, business and household borrowing is moderate, financial sector leverage is notable, and funding risks are moderate.
Public equities were worth $93.6 trillion in the second quarter of 2026, up 25.3% in a year against an average of 9.5% since 1998. The report says valuations are partly driven by market enthusiasm for what it calls super intelligence.
Treasury yields at 2 and 10 years rose markedly since May, and a model estimate of the term premium moved notably above its historical median of 0.55 percentage points.
Debt issued for advanced computing infrastructure passed $680 billion by October 2026, about five times the $130 billion issued in all of 2023. It now makes up about 31% of investment-grade nonfinancial corporate issuance, up from under 6%.
Seven firms (Amazon, Alphabet, Broadcom, Meta Platforms, Microsoft, Nvidia and Oracle) have future leases above $1 trillion and guarantees and contract commitments above $2 trillion, both undiscounted.
The largest U.S. bank holding companies have close to $1 trillion of exposure to large technology firms, data center developers, related financing vehicles and utilities, which the Fed says it evaluates in the annual stress test.
Private credit is now in the official accounts. Private credit vehicles grew from about $350 billion in 2012 to more than $2.6 trillion in 2025 and hold about $1.5 trillion of loans to U.S. businesses, roughly 6% of nonfinancial business debt.
Hedge fund gross notional leverage reached its highest level since the data began in 2013, and hedge fund gross assets rose from $4 trillion in 2012 to $13 trillion in 2026.
Banks hold capital near historic highs, but the fair value of their securities was roughly $330 billion below book value in the second quarter, and the Fed expects further pressure from higher yields.
Household debt relative to GDP is at levels last seen in the late 1990s. The weak spots are auto loans, where delinquencies sit at the 85th percentile of their history, and Federal Housing Administration mortgages.
Money market funds hold a record of about $7.9 trillion, mostly in government funds. Runnable money-like liabilities total $28.2 trillion, or 87% of GDP.
Stablecoins stayed flat at around $310 billion over the past year, and the GENIUS Act takes effect on January 18, 2027.
In the fall survey of 23 market contacts, 87% cited AI, 52% a correction in risk assets, 48% higher long-term rates, 43% cyberattacks and 43% fiscal debt sustainability.

Detailed Summary

Asset Valuations: Stocks High, Term Premiums Rising

The report says valuations stayed near the upper end of their historical ranges across most markets. The forward price-to-earnings ratio of the S&P 500 remained well above its median of about 16, even after stronger earnings forecasts pulled it down over the past year. Corporate bond and leveraged loan spreads sat at the low end of their history, and bonds issued by the largest investment-grade data center operators topped $150 billion for the year. Commercial real estate prices were stable, though a large volume of commercial mortgage-backed debt matures in late 2026. Home prices stayed high relative to rents, and farmland prices are at historical highs.

Business Debt and Weaker Borrowers

Business debt relative to GDP kept falling slowly but remains in the upper quarter of its historical range. Investment-grade companies, which owe more than 75% of the debt of publicly traded nonfinancial firms, cover their interest comfortably. Lower-rated public firms and some private firms do not, especially those with floating-rate or short-dated debt. In private credit the default rate rose to the upper end of its short history, and the report flags heavy use of payment-in-kind terms, which let a borrower add unpaid interest to the loan. Privately held firms owe roughly 60% of all nonfinancial business debt.

Private Credit and Hedge Funds Enter the Financial Accounts

The September 2026 release of the Fed’s Financial Accounts added three private credit sectors, middle-market collateralized loan obligations and a hedge fund sector. The new tables show where the money comes from. Private debt funds are financed mainly by pension funds (42%), households and nonprofit organizations (23%) and life insurers (14%), while business development companies carry more leverage and a more retail investor base. Households and nonprofits hold 60% of the hedge fund shares the accounts capture, and defined-benefit pension plans hold 25%.

Leverage in the Data Center Buildout

The financing has shifted from mostly corporate bonds to a mix of public and private debt, structured credit and project finance. The Fed compares five hyperscalers (Amazon, Alphabet, Meta Platforms, Microsoft and Oracle) with the telecom industry of the late 1990s and finds capital spending as a share of GDP tracking closely, with the current cycle likely to pass the telecom one relatively soon. Strong cash flow kept hyperscaler borrowing low until this year. Hyperscalers sign long leases that developers borrow against, chip makers guarantee the residual value of processors used as collateral, and equity stakes between the same firms create what the report calls a circular financing dynamic. The riskier tranches end up with high-yield bond funds, life insurers and private debt vehicles.

Households: Solid Overall, Strained at the Edges

Household debt adjusted for inflation has been roughly flat for years, and borrowers with prime credit scores owe most of it. Mortgages are about three-fourths of household debt, delinquencies on conventional loans are near historical lows, and very few mortgages exceed the value of the home. Delinquencies on Federal Housing Administration loans have risen since 2022 and kept rising in 2026. Used car loans are being written at close to record lengths, and credit card delinquencies have settled near their median since 2000. Student loan delinquencies are high following the return of repayments and credit reporting.

Banks, Dealers, Insurers and Hedge Funds

Banks are described as sound and resilient, with lending standards easing and loan performance strong. Broker-dealer leverage is low, their trading profits are near the top of their historical range, and the share of those profits coming from equities rose from one-third to one-half. Life insurer leverage stayed historically high as insurers moved further into risky and illiquid assets. Hedge fund leverage hit a record across equity, relative value and macro strategies even as basis trade activity declined. The report also notes that leveraged and inverse exchange-traded products tied to stocks now hold more than $170 billion, and that their daily rebalancing can amplify price declines.

Funding Risks: Money Funds, Stablecoins and Redemptions

Large banks hold liquid assets at about 120% of the required coverage ratio, and uninsured deposits are well below their 2022 peak. Large banks have leaned more on short-term wholesale funding since 2023, and regional banks more on reciprocal and brokered deposits. Institutional prime money market funds are only about 3% of money fund assets, yet the Fed still calls them the most vulnerable part of that industry. Life insurers’ nontraditional liabilities passed $580 billion. Redemption requests at nontraded business development companies trended lower but stayed elevated, the funds kept limiting withdrawals, and net flows remained negative.

Near-Term Risks and the Fall Survey

The Fed sets out three near-term risks. Disappointing returns on business investment could cut earnings, asset prices and capital spending together, in a year when private fixed investment has been a significant driver of growth. Cyber events could disrupt markets, with attacks on shared service providers hitting many institutions at once. Persistent geopolitical conflict could raise inflation and interest rates and tighten dollar funding abroad. In the survey, cyberattacks and fiscal debt sustainability were seen as having the most severe potential consequences, and fewer respondents cited private credit than in the spring.

Notable Quotes

“Measures of equity valuations have remained high, partly driven by market enthusiasm for super intelligence (SI).”
Federal Reserve Board, in the report’s overview of asset valuations

“These debt financings linking hyperscalers and GPU designers with smaller firms are often supplemented with equity investments by the hyperscalers and GPU designers, which create a “circular financing” dynamic.”
Federal Reserve Board, on how data center projects are funded

“However, it also suggests that these firms’ economic exposure to such a downturn may be substantially larger than suggested by their on-balance-sheet liabilities.”
Federal Reserve Board, on the leases and guarantees of the largest technology firms

“High leverage can lead to spillovers if funds experience material losses or face worsening funding conditions.”
Federal Reserve Board, on record hedge fund leverage

“Reports that agentic systems have been involved in cyber events have increased in frequency since the May report, amid an overall increase in reported cyber events.”
Federal Reserve Board, on cyber risk to the financial system

“Many respondents noted that advances in AI are lowering the barrier to sophisticated attacks by state and non-state actors, while others pointed to the risk of unintended damage caused by frontier AI models themselves.”
Federal Reserve Bank of New York staff, summarizing responses to the fall survey of market contacts

Read the full document here. The figure notes at the back explain how each measure is built.