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Federal Reserve warned that the coronavirus pandemic will lead to losses for US banks and put pressure on their finance, in its semi-annual Financial Stability Report published on Friday.

  • Banks could book material losses from their lending to both household and corporate borrowers, who are negatively impacted by the virus.
  • Corporate debt level has been high at the beginning of the year, and reduction in revenue can lead to a widespread credit risk repricing. Issuance of high-yield bonds and leveraged loans could also be hindered.
  • The pandemic also hit households financially, limiting their ability to make repayment to the banks.

The Fed added the top 25 hedge funds accounted for half of the industry’s borrowing, as of the second quarter of last year, it can be a cause for concern if a few large hedge funds with high leverage level are under pressure and have to sell large amount of assets to meet margin calls, it can have an outsized effect on the market.

Source:

Federal Reserve warns of potential ‘strains’ on US banks – FT

Financial Stability Report (May 2020) – Federal Reserve

 

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