NEW YORK (MaceNews) – The U.S. needs more steps to limit financial stability risk in a continuing low interest rate environment, Boston Fed President Eric Rosengren said Thursday.
Rosengren, in remarks for delivery to Marquette University, warned that excessive leverage has magnified the current downturn and poses a threat of additional job losses.
“The increased risk build-up, such as the reaching-for-yield behavior in commercial real estate or increased corporate leverage, make economic downturns including this one more severe,” Rosengren said.
The U.S. lacks “a cohesive set of regulatory and supervisory tools to moderate risk build-ups as the UK has, Rosengren said.
“If we expect to remain in a low-interest-rate environment for a protracted period of time, we need to take more precautions against financial stability risks for when the next economic shock hits.”
Rosengren, repeating a theme of his recent remarks, warned that small- and medium-sized lenders, with a relatively large concentration of commercial real estate loans to highly-leveraged firms, may be forced to cut back on lending as loan losses mount. As the pandemic continues for longer than expected, borrowers and lenders face more risk, and bankruptcies may rise, with potentially dire effects on employment, he said.
Data show late, non-performing real estate loans have turned up, but “not yet dramatically,” Rosengren said. These data lag, and many banks have granted forbearance to real estate borrowers.
“Because of the forbearance, borrowers are meeting current contractual arrangements, but are likely to struggle once the forbearance ends if economic activity remains suppressed by the pandemic,” Rosengren said.
Rosengren warned that the current downturn and job losses may be more severe because of an excessive build-up of risk before the pandemic.
“If the costs for taking on the extra risk were borne only by investors knowingly taking that risk, it might not be so problematic. … [But] a leveraged business is more likely to declare bankruptcy, permanently severing its many formal and informal contracts with customers, suppliers, and employees. … Excessive leverage can exacerbate job losses from temporary demand shocks, and make the recovery process slower and more painful than it would have been without the leverage.”
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