US, WASHINGTON (ORDO NEWS) — Assets in stock markets could collapse again, the US Federal Reserve warned. The main risk she associated with commercial real estate: its value before the crisis was overpriced, and now, due to the crisis, it is especially vulnerable to volatility.
Securities markets could collapse again, the US Federal Reserve (Fed) warned in its semi-annual financial stability report . The threat remains, despite the growth of quotations in recent weeks, which is partly due to the efforts of the regulator to support financial markets, the Fed said.
“The value of assets remains vulnerable to a significant drop if the pandemic goes according to an unpredictable scenario, the economic downturn is even more unfavorable or new problems arise in the financial system,” the Fed said. In her opinion, commercial real estate is most prone to falling quotes: the cost of space before the crisis was significantly overstated, and now, after a serious decline in economic activity in the services and retail sectors, it will fall.
Banks bear the risk of losses from the crisis, and they can adversely affect the financial situation of credit organizations, the regulator believes. Business debts were at a historically high level relative to GDP already at the beginning of 2020, even before the crisis, with the most risky companies having the fastest loan growth.
A decrease in revenue and a significant reduction in economic activity reduced the ability of the business to fulfill these and other obligations. At the same time, the situation of households worsened: if before the crisis their debts were at a relatively low level, now the problems of financial families can result in material losses to creditors, the Fed calculated.
“A significant early intervention was effective in reducing stress in liquidity, but we will closely monitor the solvency problems among borrowers that can grow as long as the pandemic continues coronavirus”, – quotes the Financial Times the Board of Governors of the Federal Reserve System Lael Brainard.
Although the reforms undertaken after the financial crisis of 2008-2009 increased the stability of the financial sector, the system still remains vulnerable and risks will remain high in the near future, the Fed said. Stock markets in March turned out to be stronger than during the previous crisis, but significant tension still arose, reports The New York Times. One of the reasons could be hedge funds, the Fed believes: they could sell huge volumes of assets in order to achieve the required performance or reduce risks, which could contribute to the creation of negative liquidity conditions in the financial markets in March.
To maintain the economy, the Fed lowered its key rate to almost zero and bought about $ 2 trillion worth of securities on the market, and also announced nine assistance programs, recalls Bloomberg. In addition, the regulator softened some rules to motivate banks to increase lending to households and businesses affected by the pandemic.
The Fed report is a new signal from the regulator that recovering from a coronavirus pandemic will be difficult, Reuters said . “No one from hedge funds to the largest banks and households will be protected from the risk of default on debts, forced sale of assets, bankruptcy, or loss of value of assets,” the agency writes.
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