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Federal Reserve Chairman Jerome Powell said rising levels of corporate debt need watching but so far do not pose a threat to the financial system.
The central bank chief spoke Monday at the Financial Markets Conference in Amelia Island, Florida, on assessing risks to the financial system a decade after the end of the financial crisis that caused the economy to sink into its worst downturn since the Great Depression.
“Business debt does not present the kind of elevated risks to the stability of the financial system that would lead to broad harm to households and businesses should conditions deteriorate,” Powell said in prepared remarks. “At the same time, the level of debt certainly could stress borrowers if the economy weakens.”
The issue of corporate debt has surfaced as companies continue to use the low rates the Fed has provided to lever up their balance sheets.
Particular concern has been raised about companies whose bonds are rated close to junk and would have trouble rolling over that debt should rates continue to rise.
Powell said the Fed “continues to assess the potential amplification of such stresses on borrowers” but called those risks “moderate” at this point.
His speech focused solely on risks to the financial system and did not delve into monetary policy and the Fed’s intentions regarding interest rates.
Instead, he discussed whether the run-up of debt could pose the type of danger to the system that the implosion of the subprime mortgage industry did back in 2008, when investment bank Lehman Brothers collapsed and set off a drought of liquidity that crippled Wall Street and the rest of the financial works.
At around $6.2 trillion, nonfinancial corporate debt is around record levels. Powell noted that individual businesses that have levered up do face risks of financial strain. But, he said, overall debt-to-GDP has risen at a rate consistent with other expansions and is not posing the threat of a bubble.
“Moreover, banks and other financial institutions have sizable loss-absorbing buffers,” he said. “The growth in business debt does not rely on short-term funding, and overall funding risk in the financial system is moderate.”
Debt is also well disbursed, he said. A low level of collateralized debt obligations, which are used to bundle corporate bonds for sale to investors, is held by the largest U.S. banks — with $90 billion of the roughly $700 billion outstanding.