As leverage rises, systemic stress may also be lurking: Fitch

The surge in global borrowing that accompanied the onset of the Covid-19 pandemic may spell increased stress for the financial system in the years ahead, warns Fitch Ratings.

In a new research note, the rating agency reported a “marked rise” in leverage across many economies.

Fitch also pointed to its macro-prudential indicator (MPI) scores, which “suggest moderate or high vulnerability” to banking system stress in 17 developed economies, up from nine a year ago.

“This is the most since 2013, although still below the peak of 30 in early 2008,” the research note said.

Fitch said that increased borrowing in response to a temporary shock is “less likely to be a sign that credit bubbles are forming,” as leverage ratios should return to pre-pandemic levels as income markets and economies recover — however, credit troubles may yet materialize, the rating agency cautioned.

“Lending during the pandemic went into weakened economies and much of it was channelled towards the worst-hit sectors and borrowers. Policy tightening as well as a stuttering, uneven recovery could test some borrowers’ ability to repay debt taken on to survive the pandemic,” Fitch said.

Additionally, extremely low interest rates and extensive fiscal support measures have led to surging housing markets in many economies, which “may be another sign of greater financial system vulnerability.”

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.