The coronavirus pandemic has created a fragile financial system that could last “some time,” the Federal Reserve said Friday.
“The strains on households and business balance sheets from the economic and financial shocks since March will likely create fragilities that last for some time,” the central bank said in its latest semi-annual report on the financial sector
As a result, banks and other financial institutions “may experience strains as a result.”
Fed officials said how long those circumstances would last depended on the speed of the economic recovery.
Fed Chairman Jerome Powell said earlier this week that a lengthy downturn could turn liquidity problems into solvency issues.
There is a risk from asset prices
SPX,
if the pandemic were to take an unexpected course, the report said.
Businesses have a weakened ability to repay debt obligations that were at historic highs right before the pandemic hit the economy.
The study found that broker-dealers struggled to provide intermediation services during the acute phase of the financial crisis. In contrast, banks have been able to meet surging demand for draws on credit lines.
Some hedge funds appear to have been severely affected by the large asset-price declines and increased volatility in February and March, the Fed said.
All in all, “the prospect for losses at financial institutions to create pressures over the medium term appears elevated.