The US Federal Reserve said the country’s banking system remains “sound and resilient” even as it warned that rising leverage across parts of the financial sector poses potential risks, Bloomberg reported.

The semi-annual report, based on regulatory data and a survey of market participants, highlighted that asset valuations had returned to the higher end of their normal range since April’s volatility spike. Concerns related to business and household debt, as well as short-term funding pressures, were described as “moderate.”

However, the Fed noted that hedge fund borrowing had reached its highest level in more than a decade, with leverage increasing across multiple trading strategies. The report noted that although banks and broker-dealers maintained solid capital positions, leverage among other financial entities, including hedge funds and life insurers, remained elevated compared with historical levels.

The central bank concluded that the overall level of vulnerability from financial-sector leverage was “notable,” even though the broader system continues to show resilience.