FOMC: Banks Could Face Increased Stress From Loan Defaults if Economic Recovery Stalls

Small and medium-sized banks could face stress from defaults on loans to small business and commercial real estate if consumers continue to avoid traveling and shopping, the Federal Open Market Committee said today. In minutes from the committee’s mid-September meeting, members said delinquency rates on business loans have risen noticeably in recent months and surveys of credit availability shows that bank lending is tight.

While the risk of another broad economic shutdown was seen by the committee as having passed, members expressed concern that additional virus outbreaks could undermine the recovery. Committee members noted that “such scenarios could result in increases in bankruptcies and defaults, put stress on the financial system, and lead to disruptions in the flow of credit to households and businesses.”

The FOMC noted that the path of the economy depends on the course of the virus and that the ongoing public health crisis would continue to weigh on economic activity, employment, and inflation in the near term and posed considerable risks to the economy’s medium-term outlook. Prospects for a further substantial improvement in the labor market depend on a broad and sustained reopening of businesses, which in turn would depend importantly on how safe individuals felt to reengage in a wide range of activities, the committee said.

FOMC members also noted that their economic outlook “assumed additional fiscal support and that if future fiscal support was significantly smaller or arrived significantly later than they expected, the pace of the recovery could be slower than anticipated.”