While corporate debt is at near-record levels and recent growth has been concentrated in riskier segments, “business debt does not appear to present notable risks to financial stability,” Federal Reserve Chairman Jerome Powell said today in Florida. Business debt does not seem to pose a similar risk as subprime mortgage debt did prior to the financial crisis, in large part because “banks at the core of the financial system are fundamentally stronger and more resilient,” he explained.
Like other top regulators in recent remarks, Powell highlighted leveraged lending as an area of concern, noting that the riskier class of debt is “funded principally by nonbank lenders.” His concerns aligned with comments from American Bankers Association Senior Economist Curtis Dubay in a recent ABA Data Bank post that pointed out that banks face limited exposure to leveraged loans, which are primarily funded by collateralized loan obligations.
In his speech, Powell added that the regulator are working together through the Financial Stability Oversight Council and with foreign peers through the Financial Stability Board to deepen understanding of the CLO sector. “Through the FSB, we are focused on determining the size of the global leveraged loan market and the holders of the loans as an important step toward a better understanding of the underlying risks,” he said.