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Corporate debt is rising, but does not pose a threat to the system, says Fed Chair Powell



Federal Reserve Chairman Jerome Powell said the rising level of corporate debt needs to be looked at, but so far does not pose a threat to the financial system.

On Monday, the Governor spoke at the Financial Markets Conference in Amelia Island, Florida, assessing the risk to the financial system a decade after the end of the financial crisis, causing the economy to sink into its worst downturn since the Great Depression.

"Business debt does not present the type of increased risks to the stability of the financial system that will cause great harm to households and businesses if conditions deteriorate," Powell said in prepared remarks. "At the same time, the level of debt can safely stress borrowers if the economy deteriorates."

The problem with corporate debt has arisen as companies continue to use the low prices the Fed has given to increase their balance.

Particular concern has been raised about companies whose bonds are rated near junk and will have difficulty rolling over that debt, interest rates should continue to rise.

Powell said the Fed "continues to assess the potential reinforcement of such strains on borrowers", but called these risks "moderate" at this point.

His speech focused only on risk to the financial system and did not die in monetary policy and Fed's intentions on interest rates.

Instead, he discussed whether debt initiation could pose the type of danger to the system as the implication of the subprime mortgage industry came back in 2008, when the investment bank Lehman Brothers collapsed and set off a liquidity drought such as stunted Wall Street and the rest of the financial work.

At around $ 6.2 trillion, unpaid corporate debt is around record levels. Powell noted that some businesses that have saved up are facing financial risk. But, he said, total debt to GDP has risen at a rate consistent with other extensions and does not pose a threat to a bubble.

"Furthermore, banks and other financial institutions have significant loss-absorbing buffers," he said. "Growth in corporate debt is not dependent on short-term funding, and the overall financing risk in the financial system is moderate."

Debt is also well paid, he said. A low level of security commitments, which are used to bind corporate bonds for sale to investors, is held by the largest US banks ̵

1; $ 90 billion of the $ 700 billion outstanding.


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