A new government report to Congress warns of rising threats to U.S. financial stability, including the looming risk of surging corporate loan defaults. While big banks and other systemically important financial institutions have been steadily reducing their risks since the financial crisis, debt among nonfinancial companies is at an historic high relative to U.S. gross domestic product, the Office of Financial Research, an independent unit of the U.S. Treasury Department, said in its annual report to Congress Wednesday.
Slowing economic growth, therefore, could hurt companies’ ability to repay their loans and lead to a tidal wave of defaults, warned the OFR, which was mandated by the Dodd-Frank Act to study financial stability following the financial crisis. This, in turn, could hurt banks, which are already seeing loans to energy companies sour due to severe declines in oil prices.
In its fourth annual report to Congress, the OFR warned of other looming threats to the financial system, including concerns that persistently low interests rates could prompt investors to seek out riskier investments, which “may encourage excessive borrowing.” The U.S. economy has remained largely resilient to the global slowdown so far, OFR said. “But continued or magnified problems overseas could harm future growth and financial stability in the United States.” “Profits are declining, debt levels are high, and the ability to pay down or pay off their debts is declining,” the research agency warned.
