Business debt no subprime crisis, but still merits reflection: Powell

ATLANTA, May 21 (Reuters): Federal Reserve Chairman Jerome Powell dismissed comparisons between the rise of business debt to record levels in recent years and the conditions in US mortgage markets that preceded the 2007-to-2009 economic crisis, but even so said caution was warranted.

Comparisons to the years before the financial crisis are "not fully convincing" Powell said at an Atlanta Federal Reserve bank conference on financial markets, since the growth of debt seems in line with economic growth, debt service costs remain low, and the financial system is better positioned to absorb losses.

Despite that, he pointed to the lack of transparency about the funding sources and ultimate holders of corporate debt, and to risks that any economic downturn could worsen if indebted borrowers begin to fail as reasons for caution.

"Business debt has clearly reached a level that should give businesses and investors reason to pause and reflect," Powell said, with corporate borrowing at a record level of around 35 per cent of corporate assets.

Though growth in corporate debt has slowed lately, "another sharp increase...could increase vulnerabilities appreciably," Powell said.

That concern is another reason the Fed may be reluctant to cut interest rates, since lower borrowing costs could prompt firms to take on more debt.

High levels of corporate debt, along with the pace of lending to the riskiest borrowers, have emerged in recent months as the Fed's chief financial stability concern.

It is something that the central bank has at once tried to flag as troubling if an economic downturn causes the most indebted borrowers to fail. Yet it has also tried to keep the risks in context. Powell said he does not see business debt as the same sort of systemic threat that the subprime mortgage market proved to be.

"As of now business debt does not present the kind of elevated risks to the stability of the financial system that would lead to broad harm," he said.

Nevertheless, comparisons with the mortgage market have been inevitable, driven by the popularity of collateralised loan obligations that pool corporate loans into securities.