Jerome H Powell: Business debt and our dynamic financial system

Speech by Mr Jerome H Powell, Chair of the Board of Governors of the Federal Reserve System, at "Mapping the Financial Frontier: What Does the Next Decade Hold?" 24th Annual Financial Markets Conference, sponsored by the Federal Reserve Bank of Atlanta, Amelia Island, Florida, 20 May 2019.

The views expressed in this speech are those of the speaker and not the view of the BIS.

It is a pleasure to be here at this important annual event sponsored and organized by the Federal Reserve Bank of Atlanta's Center for Financial Innovation and Stability. The risks in our financial system are constantly evolving. Fifteen years ago, everyone was talking about whether households were borrowing too much. Today everyone is talking about whether businesses are borrowing too much. This evening, I will focus on the implications of the increase in business debt over the past decade and review the steps the Federal Reserve and other agencies are taking to understand and limit the associated risks.

In public discussion of this issue, views seem to range from "This is a rerun of the subprime mortgage crisis" to "Nothing to worry about here." At the moment, the truth is likely somewhere in the middle. To preview my conclusions, as of now, business debt does not present the kind of elevated risks to the stability of the financial system that would lead to broad harm to households and businesses should conditions deteriorate. At the same time, the level of debt certainly could stress borrowers if the economy weakens. The Federal Reserve continues to assess the potential amplification of such stresses on borrowers to the broader economy through possible vulnerabilities in the financial system, and I currently see such risks as moderate.

Discussion

Many commentators have observed with a sense of déjà vu the buildup of risky business debt over the past few years.