The nation’s banks remain highly capitalized as a result of post-crisis regulatory reforms, and “are well positioned to continue lending to households and businesses even in the event of a severe global recession,” the Federal Reserve noted in its monetary policy report to Congress today. The Fed did note, however, that bank profitability has weakened somewhat due to recent interest rate declines, which could “affect their ability to absorb losses or build capital through retained earnings.”
The Federal Reserve also flagged corporate debt as a potential risk to financial stability. The report noted that roughly half of investment-grade debt outstanding is currently rated triple-B—the lowest category of the investment-grade range—creating “the risk that adverse developments, such as a deterioration in economic activity, could lead to a sizable volume of bond downgrades to speculative-grade ratings,” and ultimately result in a sell-off.
