The Bank for International Settlements (BIS) has sent out a warning about the rise in corporate borrowing, saying it could be a danger to the global financial system, according to The Guardian. In fact, BIS said the boost in borrowing in recent years by businesses with low credit scores could cause a crisis like the one that led to the 2008 banking crash.
BIS, which represents the world’s central banks, revealed the increase in the sale of collateralized loan obligations (CLOs) — collections of low-grade corporate debts packaged for sale to investors — was like the rise in collateralized debt obligations, which “amplified the subprime crisis.”
“Perhaps the most visible symptom of potential overheating is the remarkable growth of the leveraged loan market, which has reached some [$3 trillion],” said Agustín Carstens, the BIS’ general manager, according to The Guardian. “While firms in the U.S. — and, to a lesser extent, the U.K. — have accounted for the bulk of the issuance, holdings are spread out more widely. There is most concern about corporate debt, more than the household or sovereign sectors.”
He added that investor demand for higher returns led financial institutions to approve loans to firms with poor credit scores.
“For quite some time, credit standards have been deteriorating, supported by buoyant demand as investors have searched for yield,” he said.
In addition, Carstens said wage increases probably won’t be high enough to lead to an increase in inflation.
“Even though we have seen higher wages recently, they have not translated into higher prices. Fiscal policies can be refashioned to be growth friendly,” he told the publication.
As a result, the BIS has requested that regulators do more to limit the potential impact from a slowdown, while governments need to respond to the slowing global economy by increasing investment spending, and supporting business and tax reforms.
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