On October 5th, the SEC published a staff report entitled “US Credit Markets: Interconnectedness and the Effects of the COVID-19 Economic Shock”. This report focuses on the origination, distribution, and secondary market flow of credit across the US credit markets. In addition, the report addresses the manner in which the related interconnections in the credit markets operated given the impact of the COVID-19 pandemic. Along with releasing the report, SEC staff will host a roundtable on Interconnectedness and Risk in US Credit Markets to explore these and other related issues on the afternoon of October 14th.
The principal purpose of the recently released report is to identify and contextualize key structural- and flow-related interdependencies in the US credit markets, as well as areas of stress revealed by the effects of COVID-19. This is done with the intention of informing policymakers as they seek to improve the functioning and resilience of our financial markets. The report does not make policy recommendations.
The interconnections among banking and non-banking entities and intermediaries in the US credit markets are essential for the functioning of said markets, the provision of credit, and the distribution of risk. These interconnections, which are complex and intricate, can transmit and amplify risks in times of stress. The report identifies these interconnections and, with that framework, discusses how the COVID-19 economic turmoil influenced the credit markets in March and April 2020. It broadly tracks approximately $54 trillion of credit that was issued and outstanding in the US financial system at the end of 2019 through various intermediaries and prior holders to the ultimate holders of the credit at that time. The report subsequently takes a deeper look at interconnections across six key US credit markets, emphasizing their function during and after the COVID-19 outbreak in the spring. These six markets – short-term funding, corporate bonds, leveraged loans/CLO, residential and commercial real estate, and municipal securities – account for more than $40 trillion in outstanding credit.
The report discusses the following key points:
- The US credit markets have changed significantly since the 2008 global financial crisis in size, structure and function.
- The credit markets are highly interconnected, and this can both accelerate risk transmission and facilitate risk absorption.
- The ability of intermediaries to absorb significant, rapid shifts in investor sentiment is limited in absolute terms and may become more limited as spreads widen and volatility increases during periods of stress and uncertainty.
- Due to the interconnected nature of US credit markets, as well as the size and scope of the COVID-19 turmoil, the multi-faceted and immediate actions of the Federal Reserve and the CARES Act were prudent and instrumental in ameliorating stress in the credit markets.
- The combination of the Federal Reserve’s intervention and the CARES Act also was extremely important in stabilizing prices and sustaining economic activity, which in turn added stability to the credit markets.
- Banks and the banking system have been resilient to the impacts of COVID-19 thus far, notwithstanding their exposure to several trillions of dollars of residential and commercial mortgages and leveraged loans to corporations.
Roundtable on Interconnectedness and Risk in U.S. Credit Markets
Planned for October 14th, the roundtable will bring together US and international regulators as well as other experts to discuss the interconnections within our capital markets and the impact of the COVID-19 economic shock. The roundtable agenda is as follows:
| 1:00 p.m. |
Welcome and Introduction |
| 1:10 p.m. |
First Panel: Market Perspective
The economic impact of COVID-19 on the liquidity and price volatility in US capital markets will be explored. In addition, the panel will review some of the changes that have taken place since the 2008 global financial crisis, including regulatory reforms, changes in market structure, and the growth of credit. This panel will focus on six credit markets that comprise over $40 trillion of outstanding debt, including the short-term funding, corporate bond, leveraged loan, residential and commercial real estate, and municipal securities markets. |
| 2:10 p.m. |
Break |
| 2:20 p.m. |
Fireside Chat
This section will focus on the US credit markets and how banking and non-banking entities and intermediaries are intricately interconnected. The impact of the COVID-19 economic shock will be discussed, as well as other issues. |
3:20 p.m. |
Break |
| 3:30 p.m. |
Second Panel: Regulatory Perspective
COVID-19 has tested the resilience of the US and international financial markets. This panel will assess the effects of monetary interventions and fiscal measures in jurisdictions around the globe, exploring what areas of the markets functioned well, which areas showed signs of stress, and where there may still be vulnerabilities. |
| 4:30 p.m. |
Closing Remarks |
The event will be streamed on the SEC’s website and will be freely available to the public. Members of the public who wish to provide opinions on the issues raised in the report may submit such views electronically to Credit_Market_Interconnectedness@sec.gov or use the internet submission form. Comments may be submitted either in advance of or after the roundtable. Commenters should take note that submitted information will be posted on the SEC’s website without change or redaction of private information.
Sources:
SEC Staff Releases Report on U.S. Credit Market Interconnectedness and the Effects of the COVID-19 Economic Shock (sec.gov)
U.S. Credit Markets: Interconnectedness and the Effects of the COVID-19 Economic Shock (sec.gov)
Report Summary Letter from Chairman Jay Clayton and Chief Economist S.P. Kothari (sec.gov)
Roundtable on Interconnectedness and Risk in U.S. Credit Markets (sec.gov)
