Rising corporate debts especially leveraged lending may bring about potential risks in the United States, according to former Federal Reserve chairperson Janet Yellen.
Speaking at a dialogue at City University of New York on Monday, Yellen said that she worried about leveraged lending as corporate indebtedness now is quite high.
Yellen said it is a danger that if something else caused a downturn, highly leveraged corporate debts could prolong the downturn and lead to a lot of bankruptcies in the non-financial sector.
The amount of corporate debts has totaled around 9.1 trillion U.S. dollars, up from 4.7 trillion U.S. dollars in 2007, according to Securities Industry and Financial Market Association.
"Investors may have not realized how risk the loans are...but there is much less leverage now as far as I can see relative to that before the financial crisis," Yellen said.
A far lower percentage of the assets of U.S. domestic institutions are composed of leveraged lending and financial institutions are selling them off to other investors, principally CLOs, said Randal Quarles, vice chairman of Federal Reserve recently.
"But at least the best information that we have is that they're not evolving in a way that would be a particular problem", Quarles said.
Still, Quarles added that the CLO structures were not particular contributors to the last crisis, which doesn't mean that logically that they can't be to the next crisis.
There are gigantic holes in the financial system though things have improved and the tools that are available to deal with emerging problems are not great in the United States, according to Yellen.
World's new issuance of leveraged loans hit a record 788 billion U.S. dollars in 2017, surpassing the pre-crisis high of 762 billion U.S. dollars in 2007. The United States was by far the largest market last year, accounting for 564 billion dollars of new loans, according to a recent report by International Monetary Fund in mid-November.
Institutions now hold about 1.1 trillion dollars of leveraged loans in the United States, almost double the pre-crisis level, said the report.
