Fed stability report warns against growing corporate debt

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The U.S. central bank warned Monday of persistent risks to the financial system posed by elevated stock prices and historically high corporate debt loads as well as the impact of President Donald Trump's trade wars.

But major banks and insurance companies appear healthy, and there is a low risk they would face a cash crunch during a run by panicked investors, the Federal Reserve said in its latest report on financial stability.

One growing concern highlighted in the report was the rapid uptick in leveraged loans in 2018. Lines of credit given to companies already under high levels of corporate debt increased by 20.1 percent last year, reaching 1.1 trillion U.S. dollars.

The report said that the risks associated with leveraged loans "had intensified," with a larger proportion of such credit going to companies with low credit ratings and already high debt levels.

In the event of an economic downturn, the Fed warned in its report that increasing leveraged loans could "boost default rates and lead to credit-related contractions to employment and investment among these businesses."

Despite this warning, the Fed said conditions had changed little since its last assessment made in November, noting a large appetite for risk has kept stock prices relative to expected earnings above their average of the last 30 years, although the situation has eased somewhat.

After a rout in December, the S&P 500, a broad market index comprising the largest U.S. corporations, has now risen more than 15 percent since the start of the year, touching new record heights.

Meanwhile, outreach to market players and experts showed persistent worries about trade and slowing global growth, with a possible "no-deal" Brexit and Italian fiscal woes among the key concerns.

"Trade tensions were the preeminent risk for respondents in the first quarter of 2019," the report said, adding that, while U.S.-China trade frictions were a major concern, Fed contacts also worried about Trump's threat to slap tariffs on auto imports.

(With inputs from AFP)