While the U.S. economy is showing positive signs that a recovery is underway, Federal Reserve Vice Chairman for Supervision Randal Quarles today cautioned that “risks remain weighted to the downside.” Among those downside risks is strain in the businesses sector, as may businesses entered the COVID-19 crisis already highly leveraged. Quarles noted, however that the strength of the banking industry has aided the pandemic response.
“Many corporate bonds and leveraged syndicated loans were downgraded between March and June, and default rates on corporate bonds rose significantly over that period as well,” Quarles said. “However, corporate defaults have slowed in the past couple of months, and, so far, delinquency rates on business loans at banks have increased only marginally. This development, in part, highlights banks’ ability to work with borrowers that have been hurt by the COVID event as laid out in supervisory guidance provided by the federal banking agencies.”
Quarles added that the commercial real estate sector—which was an area of concern for regulators even before the outbreak of COVID-19—also presents a downside risk, as vacancy rates have risen significantly over the last several months. In addition, nonbank financial firms “experienced acute strains in March,” prompting Quarles—in his role as Financial Stability Board chairman—to undertake a thorough review of these strains and develop a work plan to address vulnerabilities in the nonbank financial sector.
