(Bloomberg) -- The US government’s debt load is now seen as the biggest risk to financial stability, outweighing persistent inflation in a Federal Reserve survey.

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“Concerns surrounding US fiscal debt sustainability were atop the list this survey, followed by escalating tensions in the Middle East and policy uncertainty,” the Fed said in its semi-annual financial stability report. The survey was conducted from late August to late October by New York Fed staff.

In addition to the results of the survey of financial-market contacts, the report includes the central bank’s assessment of developing risks in four main areas, including asset valuations, borrowing by businesses and households, leverage in the financial sector and funding risks.

While the banking sector remained “sound and resilient overall,” the report said leverage across hedge funds was at or near the highest level observed since data became available in 2013.

Taking a look at households, the Fed said delinquency rates for credit cards and auto loans were above average, especially among those with lower credit scores. Overall, they judged vulnerabilities related to household and business debt as “moderate.”

“These borrowers hold a relatively small share of aggregate debt, and their high delinquency rates reportedly reflect, in part, increased borrowing by some households during and after the pandemic, rather than an abrupt broad-based weakening in households’ ability to repay,” the report said.

The central bank said funding risks have decreased but remain “notable.” The report flagged that stablecoin assets “grew substantially” since the prior report and had a total market capitalization of more than $170 billion by the beginning of November — a notch below a record high seen in April 2022.

“These digital assets are structurally vulnerable to runs and lack a comprehensive federal prudential regulatory framework,” the Fed said.

--With assistance from Vildana Hajric and Ye Xie.

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