2. Borrowing by businesses and households

Business-sector debt relative to GDP is historically high amid weak credit standards, whereas debt owed by households remains at a modest level relative to incomes

On balance, vulnerabilities arising from total private-sector credit are at moderate levels. Business debt levels are high compared with either business assets or GDP, with the riskiest firms accounting for most of the increase in debt in recent years. By contrast, household borrowing has advanced more slowly than economic activity and has been heavily concentrated among borrowers with high credit scores.

Table 2 shows the current volume and recent historical growth rates of forms of debt owed by nonfinancial businesses and households. Total outstanding private credit is split equally among businesses and households, with each owing close to $16 trillion.

Table 2. Outstanding Amounts of Business and Household Credit
Item Outstanding (billions of dollars) Growth, 2018:Q2–2019:Q2 (percent) Average annual growth, 1997–2019:Q2 (percent)
Total private nonfinancial credit 31,530 4.1 5.5
Total business credit 15,764 5.1 5.7
Corporate business credit 9,973 4.7 5.1
Bonds and commercial paper 6,499 3.6 5.7
Bank lending 1,409 6.5 2.9
Leveraged loans* 1,137 14.6 15.4
Noncorporate business credit 5,791 5.6 7.2
Commercial real estate 2,431 4.5 6.2
Total household credit 15,766 3.2 5.4
Mortgages 10,415 2.7 5.5
Consumer credit 4,057 5.1 5.2
Student loans 1,607 5.1 9.3
Auto loans 1,173 3.9 5
Credit cards 1,031 4 3.1
Nominal GDP 21,339 4.6 4.2

Note: The data extend through 2019:Q2. Growth rates are measured from Q2 of the year immediately preceding the period through Q2 of the final year of the period. The table reports the main components of corporate business credit, total household credit, and consumer credit. Other, smaller components are not reported. The commercial real estate (CRE) row shows CRE debt owed by both corporate and noncorporate businesses. The total household sector credit includes debt owed by other entities, such as nonprofit organizations. GDP is gross domestic product.

* Leveraged loans included in this table are an estimate of the leveraged loans that are made to nonfinancial businesses only and do not include the small amount of leveraged loans outstanding for financial businesses. The amount outstanding shows institutional leveraged loans and generally excludes loan commitments held by banks. For example, lines of credit are generally excluded from this measure. The average annual growth rate shown for leveraged loans is computed from 2000 to 2019:Q2, as this market was fairly small before 2000.

Source: For leveraged loans, S&P Global, Leveraged Commentary & Data; for GDP, Bureau of Economic Analysis, national income and product accounts; for all other items, Federal Reserve Board, Statistical Release Z.1, "Financial Accounts of the United States."

Total private credit has advanced roughly in line with economic activity...

Over the past several years, total debt owed by businesses and households expanded at a pace similar to that of nominal GDP. As a result, the nonfinancial-sector credit-to-GDP ratio has been broadly stable, similar to its level in mid-2005, the period preceding the most rapid credit growth from 2006 to 2007 (figure 2-1).

2-1. Private Nonfinancial-Sector Credit-to-GDP Ratio
Figure 2-1. Private Nonfinancial-Sector Credit-to-GDP Ratio
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The shaded bars indicate periods of business recession as defined by the National Bureau of Economic Research: January 1980–July 1980, July 1981–November 1982, July 1990–March 1991, March 2001–November 2001, and December 2007–June 2009. GDP is gross domestic product.

Source: Federal Reserve Board staff calculations based on Bureau of Economic Analysis, national income and product accounts, and Federal Reserve Board, Statistical Release Z.1, "Financial Accounts of the United States."

Figure 2-2 shows the credit-to-GDP ratio separately for the household and nonfinancial business sectors (leverage of financial firms is discussed in the next section). Before the crisis, household debt relative to GDP rose steadily to levels far above historical trends. After the crisis, the household debt-to-GDP ratio fell sharply and has leveled off since then. Business borrowing tends to track the economic cycle more closely. After the crisis, the business debt-to-GDP ratio also fell but has expanded significantly over the past several years and is now near its historical high.

2-2. Nonfinancial Business- and Household-Sector Credit-to-GDP Ratios
Figure 2-2. Nonfinancial Business- and Household-Sector Credit-to-GDP
Ratios
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The shaded bars indicate periods of business recession as defined by the National Bureau of Economic Research: January 1980–July 1980, July 1981–November 1982, July 1990–March 1991, March 2001–November 2001, and December 2007–June 2009. GDP is gross domestic product.

Source: Federal Reserve Board staff calculations based on Bureau of Economic Analysis, national income and product accounts, and Federal Reserve Board, Statistical Release Z.1, "Financial Accounts of the United States."

. . . but debt owed by businesses is historically high, and risky debt issuance has remained robust

Having grown faster than GDP through most of the current expansion, total business-sector debt relative to GDP is historically high. Furthermore, growth of this debt remained strong and was above the growth rate of economic output in the first half of 2019 (figure 2-3). The net issuance of riskier forms of business debt—high-yield bonds and institutional leveraged loans—shows some variation in recent quarters but has remained robust, overall, in 2019 (figure 2.4).

2-3. Growth of Real Aggregate Debt of the Business Sector
Figure 2-3. Growth of Real Aggregate Debt of the Business Sector
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Nominal debt growth is seasonally adjusted and is translated into real terms after subtracting the growth rate of the price deflator for core personal consumption expenditures price.

Source: Federal Reserve Board, Statistical Release Z.1, "Financial Accounts of the United States."

2-4. Net Issuance of Risky Business Debt
Figure 2-4. Net Issuance of Risky Business Debt
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Institutional leveraged loans generally exclude loan commitments held by banks.

Source: Mergent, Fixed Income Securities Database; S&P Global, Leveraged Commentary & Data.

In addition, about half of investment-grade debt outstanding is currently rated in the lowest category of the investment-grade range (triple-B)—near an all-time high. The volume of debt downgraded from investment grade to speculative grade in 2019 has been close to the average over the past five years. However, in an economic downturn, widespread downgrades of bonds to speculative-grade ratings could lead investors to sell the downgraded bonds rapidly, increasing market illiquidity and downward price pressures in a segment of the corporate bond market known already to exhibit relatively low liquidity.8

Moreover, credit standards for some business loans remain weak...

In line with the discussion of price terms and risk appetite in section 1, demand for institutional leveraged loans has remained strong and credit standards have remained weak. The share of newly issued loans to large corporations with high leverage—defined as those with ratios of debt to earnings before interest, taxes, depreciation, and amortization greater than 6—exceeds previous peak levels observed in 2007 and 2014 when underwriting quality was poor (figure 2-5). Incoming data point to continued strong issuance of leveraged loans in the third quarter of 2019. However, the credit performance of leveraged loans has been solid so far, with low default rates (figure 2-6).

2-5. Distribution of Institutional Leveraged Loan Volumes, by Debt-to-EBITDA Ratio
Figure 2-5. Distribution of Institutional Leveraged Loan Volumes,
by Debt-to-EBITDA Ratio
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The data for 2019 are quarterly. Volumes are for large corporations with earnings before interest, taxes, depreciation, and amortization (EBITDA) greater than $50 million and exclude existing tranches of add-ons and amendments as well as restatements with no new money. Key identifies bars in order from top to bottom.

Source: S&P Global, Leveraged Commentary & Data.

2-6. Default Rates of Leveraged Loans
Figure 2-6. Default Rates of Leveraged Loans
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The default rate is calculated as the amount in default over the past 12 months divided by the total outstanding volume at the beginning of the 12-month period. The shaded bars indicate periods of business recession as defined by the National Bureau of Economic Research: March 2001–November 2001 and December 2007–June 2009.

Source: S&P Global, Leveraged Commentary & Data.

. . . and balance sheet leverage of businesses is near its highest level over the past two decades

A broad indicator of the leverage of businesses—the ratio of debt to assets for all publicly traded nonfinancial firms—is at its highest level in 20 years (figure 2-7).9 Moreover, the leverage ratio among highly leveraged firms—defined as firms above the 75th percentile of the leverage distribution—is close to a historical high. Despite high balance sheet leverage, historically low interest rates have contributed to keeping the ratio of corporate earnings to interest expenses high for the median firm and near the historical median for riskier firms, which are those in the bottom 25th percentile of the distribution of this ratio (figure 2-8).

2-7. Gross Balance Sheet Leverage of Public Nonfinancial Businesses
Figure 2-7. Gross Balance Sheet Leverage of Public Nonfinancial
Businesses
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Gross leverage is an asset-weighted average of the ratio of firms' book value of total debt to book value of total assets. The 75th percentile is calculated from a sample of the 2,500 largest firms by assets. The dashed line shows the data after the structural break in the seriesdue to the 2019 compliance deadline for Financial Accounting Standards Board rule ASU 2016-02.

Source: Federal Reserve Board staff calculations based on S&P Global, Compustat.

2-8. Interest Coverage Ratios for Public Nonfinancial Businesses
Figure 2-8. Interest Coverage Ratios for Public Nonfinancial
Businesses
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The interest coverage ratio is earnings before interest and taxes over interest payments. Firms with leverage < %5 and interest payments less than $500,000 are excluded.

Source: Compustat.

Borrowing by households, however, has risen in line with incomes and is concentrated among borrowers with low credit risk

Household debt continues to expand in line with income, but debt owed by households with prime ratings accounts for most of the growth. Loan balances owed by borrowers with a prime credit score, who account for about one-half of all borrowers and about two-thirds of all balances, continued to grow in the first half of 2019, surpassing pre-crisis levels (after an adjustment for general price inflation). By contrast, inflation-adjusted loan balances for the remaining one-half of borrowers with near-prime and subprime credit scores have changed little since 2014 (figure 2-9).

2-9. Total Household Loan Balances
Figure 2-9. Total Household Loan Balances
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Near prime are those with an Equifax Risk Score from 620 to 719; prime are greater than 719. Scores are measured contemporaneously. Student loan balances before 2004 are estimated using average growth from 2004 to 2007, by risk score. The data are converted to constant 2019 dollars using the consumer price index.

Source: FRBNY Consumer Credit Panel/Equifax; Bureau of Labor Statistics, consumer price index.

Credit risk of outstanding mortgages remains generally low...

Mortgage debt accounts for roughly two-thirds of total household credit. New mortgage extensions remain skewed toward prime borrowers, consistent with the general shift in the composition of household debt toward less-risky borrowers and in line with stronger underwriting standards relative to the mid-2000s (figure 2-10). Mortgage loan performance has been solid, resulting in low credit losses for lenders. An early indicator of payment difficulties is the rate at which existing mortgages transition into delinquency, and this rate has been low for several years among borrowers with prime and nonprime credit scores and for loans in programs offered by the Federal Housing Administration and the U.S. Department of Veterans Affairs (figure 2-11). Delinquency rates for newly originated mortgages, a gauge of recent underwriting standards, have been low as well. In addition, the ratio of outstanding mortgage debt to home values is now at the level seen in the relatively calm housing market of the late 1990s, suggesting that home mortgages are currently backed by sufficient collateral, thus providing lenders with protection against credit losses (figure 2-12). Also, the share of outstanding mortgages with negative equity—mortgages where the amount owed on a property exceeds its underlying value—has continued to edge down (figure 2-13).

2-10. Estimate of New Mortgage Volume to Households
Figure 2-10. Estimate of New Mortgage Volume to Households
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Year-over-year change in balances for the second quarter of each year among those households whose balance increased over this window. Near prime are those with an Equifax Risk Score from 620 to 719; prime are greater than 719. Scores were measured a year ago. The data are converted to constant 2019 dollars using the consumer price index. Key identifies bars in order from left to right.

Source: FRBNY Consumer Credit Panel/Equifax; Bureau of Labor Statistics, consumer price index.

2-11. Transition Rates into Mortgage Delinquency
Figure 2-11. Transition Rates into Mortgage Delinquency
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Percent of previously current mortgages that transition from being current to being at least 30 days delinquent each month. The data are three-month moving averages. FHA is Federal Housing Administration; VA is U.S. Department of Veterans Affairs. Prime and nonprime are defined among conventional loans.

Source: For prime and FHA/VA, Black Knight McDash Data; for nonprime, CoreLogic.

2-12. Estimates of Housing Leverage
Figure 2-12. Estimates of Housing Leverage
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Housing leverage is estimated as the ratio of the average outstanding mortgage loan balance for owner-occupied homes with a mortgage to (1) current home values using the CoreLogic national house price index and (2) model-implied house prices estimated by a staff model based on rents, interest rates, and a time trend.

Source: FRBNY Consumer Credit Panel/Equifax; CoreLogic; Bureau of Labor Statistics.

2-13. Estimate of Mortgages with Negative Equity
Figure 2-13. Estimate of Mortgages with Negative Equity
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Estimated share of mortgages with negative equity according to CoreLogic and Zillow. For CoreLogic, the data are monthly. For Zillow, the data are quarterly and, for 2017, are available only for the first and fourth quarters.

Source: CoreLogic; Zillow.

. . . although some households are struggling to manage their debt

The remaining one-third of total debt owed by households, commonly referred to as consumer credit, consists mainly of student loans, auto loans, and credit card debt (figure 2-14). Table 2 shows that consumer credit rose 5 percent over the year ending in the first quarter of 2019 and currently stands at about $4 trillion.

2-14. Consumer Credit Balances
Figure 2-14. Consumer Credit Balances
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The data are converted to constant 2019 dollars using the consumer price index.

Source: FRBNY Consumer Credit Panel/Equifax; Bureau of Labor Statistics, consumer price index.

Household balances on student loans continued their upward trajectory in the first half of 2019. Delinquency rates on those loans remain high relative to historical standards, although they have been, on balance, moving sideways in recent years. Although the risks posed to the broader financial system appear limited, as the majority of student loans were issued through government programs, the elevated student loan balances and delinquency rates highlight the challenges associated with debt payments some households continue to face.

Auto loan balances continued to expand moderately (in real terms) through the first half of 2019, but all of that growth accrued to households with prime credit scores (figure 2-15). Despite the economic expansion and low interest rates, delinquency rates for auto loans to subprime borrowers were on the rise for the past several years but have recently stabilized, albeit at a relatively high level (figure 2-16).

2-15. Auto Loan Balances
Figure 2-15. Auto Loan Balances
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Near prime are those with an Equifax Risk Score from 620 to 719; prime are greater than 719. Scores are measured contemporaneously. The data are converted to constant 2019 dollars using the consumer price index.

Source: FRBNY Consumer Credit Panel/Equifax; Bureau of Labor Statistics, consumer price index.

2-16. Auto Loan Delinquency Rates
Figure 2-16. Auto Loan Delinquency Rates
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Delinquency is at least 30 days past due, excluding severe derogatory loans. The data are four-quarter moving averages. Near prime are those with an Equifax Risk Score from 620 to 719; prime are greater than 719. Credit scores are lagged four quarters.

Source: FRBNY Consumer Credit Panel/Equifax.

Household credit card accounts have also increased at a moderate pace this year and stand at about $1 trillion. Adjusted for inflation, credit card balances owed by borrowers with prime credit scores continue to rise modestly relative to balances owed by near-prime and subprime borrowers (figure 2-17). Moreover, the delinquency rate for subprime credit card debt appears to have flattened out recently at a level that is considerably lower than its average over the past 20 years (figure 2-18).

2-17. Credit Card Balances
Figure 2-17. Credit Card Balances
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Near prime are those with an Equifax Risk Score from 620 to 719; prime are greater than 719. Scores are measured contemporaneously. The data are converted to constant 2019 dollars using the consumer price index.

Source: FRBNY Consumer Credit Panel/Equifax; Bureau of Labor Statistics, consumer price index.

2-18. Credit Card Delinquency Rates
Figure 2-18. Credit Card Delinquency Rates
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Delinquency is at least 30 days past due, excluding severe derogatory loans. The data are four-quarter moving averages. Near prime are those with an Equifax Risk Score from 620 to 719; prime are greater than 719. Credit scores are lagged four quarters.

Source: FRBNY Consumer Credit Panel/Equifax.

References

 8. The box "Vulnerabilities Associated with Elevated Business Debt" in the May 2019 report gives a fuller description of risks associated with downgrades of credit ratings. Return to text

 9. The dashed line in the series beginning in the first quarter of 2019 reflects a structural break due to a new accounting standard that requires operating leases, previously considered off-balance-sheet activities, to be included in measures of debt and assets. Return to text

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Last Update: November 21, 2019