The Federal Reserve (EDF) and other banking regulators are warning of a new warning sign for the US economy: Businesses devastated by Covid-19 have trillion-dollar debt and a high percentage are at risk of bankruptcy.
Watchdogs noted that 29.2% of complex corporate loans faced problems in 2020, up from 13.5% in 2019, according to a report released by the Fed and other agencies.
Real estate, entertainment, transportation, oil and gas, and retail were mentioned as particularly problem areas. Regulators added that a “disproportionate share” of the riskiest loans was in the hands of non-bank entities, such as investment funds engaged in leveraged loans, insurance companies and pension funds.
“While risk has increased, many agent banks have strengthened their risk management systems since the previous recession and are better equipped to measure and mitigate risks associated with lending in today’s environment,” said the Fed, Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency in a statement accompanying the launch of their National Shared Credit Review. Still, banks’ share of weaker loans has also risen and some of their holdings, particularly those associated with oil and gas, face credit rating downgrades during the pandemic, according to the report. The percentage of bank loans deemed below the standards preferred by regulators increased to 45%, up from 35% the previous year.
Real estate, entertainment, transportation, oil and gas, and retail accounted for 21.6% of the loans that regulators examined.
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