Fed index: Bitcoin rally and rising financial vulnerabilities

The Federal Reserve’s working paper introduces a Financial Vulnerability Index (FVI) that measures the financial system’s capacity to amplify shocks. The paper reports an aggregate FVI reading of 0.65 and describes the index as tracking slow-building vulnerabilities rather than coincident market stress.

The paper breaks the index into components. Valuation pressure is reported at 0.77 and funding risk at 0.62, each labeled in the authors’ “notable” range. The financial-leverage component is 0.83, placed in the paper’s “elevated” band. Household and business borrowing are much lower at 0.26. The authors note that several estimation samples and the dataset end in 2025:Q4 and caution against assigning later observation dates to the quarter labels in one figure.

Bitcoin’s price rose sharply the week of Sept. 21. Bitcoin touched roughly $86,000 on Sept. 21, more than 10% above the prior Sunday close, after spot taker flows turned positive and a wave of short liquidations. Derivatives indicators showed high engagement: futures open interest and funding paid by long positions moved above the authors’ historical high bands, options open interest was near $41 billion, and options were pricing less movement than markets later produced.

The paper and related analyses identify potential links between traditional funding markets and crypto. A June study cited by the authors estimated that large hedge funds held about $4 trillion in gross U.S. Treasury exposure and $3 trillion in repo borrowing as of September 2025, including roughly $830 billion in cash-futures basis trades and $305 billion in swap-spread trades. Separately, reviewers of government bond-backed repo markets highlighted features such as short-term funding, dealer intermediation, collateral reuse and low haircuts that can allow stress to spread across funding, cash and derivatives markets.

The authors outline a hypothetical transmission path: higher margin calls or reduced dealer capacity could force sales of liquid assets, reduce institutional spot demand for cryptocurrencies and trigger liquidations of leveraged Bitcoin positions. The paper states that the full sequence has not been observed in the cited evidence and presents the chain as a potential risk scenario rather than a documented event.

The working paper’s historical model shows that in periods with a high FVI reading, a comparable business-cycle shock produced larger modeled declines in consumption and long-term investment than in low-FVI periods. The paper clarifies that the FVI is intended as an amplifier gauge that estimates how an initial shock might translate into broader economic effects. The working paper reflects the authors’ analysis and does not indicate concurrence by the Federal Reserve Board.