NEW YORK (MaceNews) – Boston Fed President Eric Rosengren Wednesday warned of a possible credit crunch as small- and medium-sized lenders see rising non-performing loans as a second wave of the Covid-19 pandemic strikes and more business go bankrupt.
Rosengren, in remarks for delivery to the Boston Economic Club, warned of “more substantial headwinds” for the economy if small- and medium-sized banks cut lending as they are hit by non-performing loans in commercial real estate and business failures.
Rosengren’s worries reflect his sense that needed fiscal support for the US economy now seems “increasingly unlikely” and that a second wave of Covid-19 infections is likely in the fall and winter.
“First, I am concerned that a second wave of COVID-19 infections this fall and winter is likely, which could cause some states to impose new restrictions on mobility and face-to-face interactions,” he said.
“Even without added restrictions, the added risk of infection from a second wave could sap some of the willingness of consumers and businesses to spend and invest,” he said.
“Second, additional support from fiscal policy, which I believe is very much needed, seems increasingly unlikely to materialize any time soon.”
Rosengren warned of a rise in non-performing loans and a possible credit crunch if the second wave occurs.
“A structural shock, like the pandemic, can result in a significant increase in the number of nonperforming loans, eventually impinging the ability of banks and insurance companies to continue to make credit available to borrowers,” he said.
“Hence, I am especially worried about a “second shoe dropping” that will particularly affect small and medium-sized banks, which provide a large share of commercial real estate loans and small business loans. A curtailment of credit resulting from such problems has caused serious headwinds to recoveries in the past, and may be a serious problem going forward.”
Rosengren warned of more disruption to the labor market and a slower recovery as more firms close as the pandemic continues. Fiscal policy could moderate the hit to the labor market, he said. The Fed’s Main Street lending program is another key support to help firms make it through the pandemic, Rosengren said.