The SEC’s staff released its Report on U.S. Credit Market Interconnectedness and the Effects of the COVID-19 Economic Shock on Oct. 5. The agency hosted a roundtable to discuss the report on Oct. 14.
Key takeaways from the report are:
- The U.S credit markets, in size, structure and function have changed significantly since the 2008 global financial crisis.
- The credit markets are highly interconnected, which can both accelerate risk transmission and facilitate risk absorption.
- The ability of intermediaries (e.g., "market makers") to absorb significant, rapid shifts in investor sentiment (e.g., a "dash for cash") 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 our credit markets and the size and scope of the COVID-19 shock, it was insightful, prudent and, perhaps, essential that the actions of the Federal Reserve and the CARES Act were multi-faceted and immediate. Those actions were instrumental in ameliorating stress in the credit markets, particularly the short-term funding markets.
- The combination of the Federal Reserve’s intervention and the CARES Act also was extremely important in stabilizing prices (e.g., housing prices) and sustaining economic activity (e.g., consumer spending), which in turn added stability to the credit markets.
- Banks and the banking system have been resilient to the COVID-19 shock to date notwithstanding their exposure to several trillions of dollars of residential and commercial mortgages and leveraged loans to corporations.