FEDS Paper: Beyond Financial Conditions: Measuring Structural Vulnerabilities in the U.S. Financial System

Federal Reserve economists Michele Modugno, Benjamin Roscoe, and Sarah Zoi have introduced the Financial Vulnerability Index (FVI), a new indicator intended to measure structural financial vulnerabilities in the U.S. financial system. The paper, published in the Finance and Economics Discussion Series in September 2026, distinguishes the FVI from traditional financial condition indices, which measure current credit market conditions and spike during periods of financial turmoil. By contrast, the FVI is designed to display the gradual build-up of structural financial weaknesses and to decline as such episodes materialize.

The authors demonstrate that the FVI exhibits properties consistent with theoretical mechanisms of financial vulnerabilities. According to the abstract, when the index is high, adverse shocks are substantially amplified, generating larger declines in consumption and investment. The research also provides new empirical evidence that monetary tightening is associated with gradual declines in the FVI, with this effect substantially delayed and taking a few years to fully materialize. The paper is available through the Federal Reserve's working paper series, and the authors note that the views expressed are their own and do not indicate concurrence by other members of the Board's staff or by the Board of Governors.

The findings carry a notable policy implication: monetary policy transmission to prices depends on the state of financial vulnerabilities, with significantly stronger effects when vulnerabilities are low. This suggests that the FVI could help policymakers assess how structural weaknesses may amplify or dampen the impact of monetary policy actions over time. The index's focus on gradual build-up rather than immediate market stress offers a complementary lens to existing financial condition measures.

What remains unknown is how the FVI would perform in real-time monitoring or whether it would reliably signal future episodes of financial stress before they occur. The paper is preliminary and circulated to stimulate discussion and critical comment, and the authors do not provide evidence in the abstract on the index's out-of-sample predictive accuracy or its behavior across different historical crisis periods. Further research would be needed to assess the FVI's practical usefulness for policymakers and market participants.