UPDATED: Financial vulnerabilities at ‘moderate level,’ though business debt loads at all-time high, Fed leader tells committee

'Not there yet' on joint CRA reg reform proposal

The overall level of vulnerabilities facing the financial system remains at a moderate level and the core of the financial sector appears resilient – although debt loads of businesses are at all-time highs, the nation’s top central banker said Wednesday.

In testimony before the Joint Economic Committee of the U.S. Congress, Federal Reserve Board Chair Jerome H. (“Jay”) Powell said investor appetite for risk “appears to be within a normal range, although it is elevated in some asset classes.”

And while he noted the historic high levels of business debt, Powell added that the ratio of household borrowing to income “is low relative to its pre-crisis level and has been gradually declining in recent years.”

“The core of the financial sector appears resilient, with leverage low and funding risk limited relative to the levels of recent decades,” Powell told the committee, made up of members of both the Senate and House.

(In a press conference late last month, Powell acknowledged that “historically high” leveraged lending is being closely watched by the central bank. But he added that corporate debt is just one part of a larger framework that the Fed considers when gauging financial stability. However, he also said “it is something that we are paying quite a bit of attention to. It’s been part of the last couple of shared national credit exams. We’ve been monitoring it carefully and taking appropriate action.”)

In other remarks, Powell said the Fed would release its third Financial Stability report this week, which he noted shares the Fed’s detailed assessment of the resilience of the U.S. financial system.

During questions and answers with committee members, Powell remarked about efforts among the three federal banking regulators to develop a joint proposal to reform regulations implementing the anti-redlining Community Reinvestment Act (CRA). Powell said it would be “better for everyone” if all three regulators acted together on reforming the rules, but “we haven’t quite gotten there yet.”

On Tuesday, Comptroller of the Currency Joseph Otting reportedly said the Office of the Comptroller of the Currency (OCC) will have a CRA regulatory reform proposal ready by year’s end. He also indicated that the other federal banking agencies may not be ready to join his agency’s proposal then.

Chair Jerome H. Powell: “The Economic Outlook” (before the Joint Economic Committee, U.S. Congress, Washington, D.C.)

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