2. Borrowing by Businesses and Households

Vulnerabilities from business and household debt have continued to fall, reflecting ample government support and strong business earnings

Key measures of vulnerabilities arising from business debt including debt-to-GDP, gross leverage, and interest coverage ratios have largely returned to pre-pandemic levels. After jumping in mid-2020, business debt has since decreased on net. This decrease, combined with the continued recovery of earnings, the low level of interest rates, support from the Paycheck Protection Program (PPP), and fiscal stimulus, has helped restore the balance sheets of businesses. Nonetheless, risks to the economic outlook remain, particularly for industries most affected by the pandemic and for small businesses. Key measures of household vulnerability have also largely returned to pre-pandemic levels. A combination of extensions in borrower relief programs, fiscal stimulus, and high personal savings rates have helped the recovery of household balance sheets. However, uncertainty over the course of the pandemic and the expiration of relief programs may pose significant risks to household balance sheets.

Table 2 shows the amounts outstanding and recent historical growth rates of forms of debt owed by nonfinancial businesses and households as of the second quarter of 2021. Total outstanding private credit was split about evenly between businesses and households, with businesses owing $18 trillion and households owing $17.3 trillion.

Table 2. Outstanding Amounts of Nonfinancial Business and Household Credit
Item Outstanding
(billions of dollars)
Growth,
2020:Q2–2021:Q2
(percent)
Average annual growth,
1997–2021:Q2
(percent)
Total private nonfinancial credit 35,235 4 5.5
Total nonfinancial business credit 17,978 1.5 5.8
Corporate business credit 11,238 0.4 5.1
Bonds and commercial paper 7,328 2.1 5.7
Bank lending 1,440 −17.2 2.6
Leveraged loans* 1,195 6.2 14.2
Noncorporate business credit 6,739 3.3 7.2
Commercial real estate credit 2,686 4.5 6.1
Total household credit 17,257 6.8 5.3
Mortgages 11,270 6.1 5.5
Consumer credit 4,267 4.1 5
Student loans 1,732 3.1 8.5
Auto loans 1,280 6.9 5.1
Credit cards 952 −.1 2.6
Nominal GDP 22,731 5.2 4.2

Note: The data extend through 2021: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 2021:Q2, as this market was fairly small before 2000.

Source: For leveraged loans, S&P Global Market Intelligence, 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."

The ratio of business and household debt to gross domestic product fell significantly during the first half of 2021, returning closer to historical trends

Before the onset of the pandemic, the combined total debt of nonfinancial businesses and households grew roughly in line with nominal GDP, leaving the debt-to-GDP ratio essentially flat. In the first half of 2020, strong business borrowing and a precipitous drop in GDP pushed the debt-to-GDP ratio to historical highs. After that surge, the ratio declined in the second half of 2020—a decline that has continued in the first half of this year (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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Note: The shaded bars with top caps 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, ­December 2007–June 2009, and February 2020–April 2020. GDP is gross domestic product.

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

The ratio of business debt to GDP decreased in the first half of 2021 as GDP growth outpaced the growth of business debt (figure 2-2). Business debt grew modestly as outstanding bank loans declined. In addition, the level of business debt adjusted for inflation fell in the second quarter of this year (figure 2-3). The decline in the ratio of business debt to GDP was accompanied by reduced outlays, a strong recovery in profits, and a slower pace of share repurchases that contributed to an increase in the cash buffers of firms. Moreover, low interest rates continued to mitigate investor concerns about default risk arising from high leverage. Meanwhile, the net issuance of risky business debt—high-yield bonds and institutional leveraged loans—surged in the second and third quarters of this year (figure 2-4).

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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Note: The shaded bars with top caps 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, December 2007–June 2009, and February 2020–April 2020. GDP is gross domestic product.

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

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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Note: Nominal debt growth is seasonally adjusted and is translated into real terms after subtracting the growth rate of the price deflator for the 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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Note: Institutional leveraged loans generally exclude loan commitments held by banks.

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

Key indicators point to a reduction in vulnerabilities from business debt

Gross leverage of large businesses—the ratio of debt to assets for all publicly traded nonfinancial firms—declined to pre-pandemic levels in the first half of 2021 (figure 2-5). For large firms in industries most affected by the pandemic, such as airlines, hospitality and leisure, and restaurants, gross leverage is still high, but net leverage—the ratio of debt less cash to total assets—has dropped to levels last seen in 2018, driven by large cash buffers.

2-5. Gross Balance Sheet Leverage of Public Nonfinancial Businesses
Figure 2-5. Gross Balance Sheet Leverage of Public Nonfinancial
Businesses

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Note: 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 sections of the lines in the first quarter of 2019 reflect the structural break in the series due to the 2019 compliance deadline for Financial Accounting Standards Board rule Accounting Standards Update 2016-02. The new accounting standard requires operating leases, previously considered off-balance-sheet activities, to be included in measures of debt and assets.

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

As earnings among large firms continued to recover and interest rates remained low, the ratio of earnings to interest expenses (the interest coverage ratio) moved up over the first half of this year, suggesting large firms were better able to service debt. The median interest coverage ratio among these firms rose to levels last seen in 2018 (figure 2-6). The share of firms with a negative ratio, which could stem from negative earnings, declined significantly. Coverage ratios for firms in the lowest quartile of interest coverage were below pre-pandemic levels in the second quarter of 2021. These firms were typically in the industries most affected by the pandemic.

2-6. Interest Coverage Ratios for Public Nonfinancial Businesses
Figure 2-6. Interest Coverage Ratios for Public Nonfinancial
Businesses

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Note: The interest coverage ratio is earnings before interest and taxes divided by interest payments. Firms with leverage less than 5 percent and interest payments less than $500,000 are excluded.

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

An important caveat to these improvements in leverage and interest coverage ratios is that comprehensive data are only available for publicly traded firms.7 These firms tend to be large and have better access to capital markets, allowing them to more easily weather the disruptions associated with the pandemic. By contrast, smaller middle-market firms that are privately held tend to have higher leverage than public firms and primarily borrow from banks, private credit and equity funds, and sophisticated investors. Privately held firms, however, likely are also finding it easier to borrow because the commercial lending standards of banks have largely returned to pre-pandemic levels and because of recent regulatory changes for privately held firms.8

Credit quality, which deteriorated after the onset of the pandemic, has continued to improve in the first half of 2021. The rate of corporate bond downgrades remained low in the first half of this year. The fraction of nonfinancial corporate bonds that are high yield—the higher-risk segment of the market—is little changed since the May report. Expected one-year-ahead bond defaults have continued to decline and are now well below their long-run medians. Moreover, risky firms will need to roll over only about 3 percent of outstanding speculative-grade bonds within one year, as firms have continued to refinance existing debt with longer-maturity bonds at low interest rates.

Default rates on leveraged loans have fallen, even as underwriting standards have weakened. The default rate on leveraged loans increased rapidly early in the pandemic but has declined to below pre-pandemic levels in the first half of this year (figure 2-7). Additionally, the average credit quality of outstanding leveraged loans has continued to improve over the same period.9 However, 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—has exceeded the historical highs reached in recent years (figure 2-8).

2-7. Default Rates of Leveraged Loans
Figure 2-7. Default Rates of Leveraged Loans

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Note: The data begin in December 1998. 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 with top caps indicate periods of business recession as defined by the National Bureau of Economic Research: March 2001–­November 2001, December 2007–June 2009, and February 2020–April 2020.

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

2-8. Distribution of Large Institutional Leveraged Loan Volumes, by Debt-to-EBITDA Ratio
Figure 2-8. Distribution of Large Institutional Leveraged Loan
Volumes, by Debt-to-EBITDA Ratio

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Note: 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. The key identifies bars in order from top to bottom.

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

Vulnerabilities from debt owed by small businesses have improved, but many small businesses could be affected by a worsening of the pandemic

While many small businesses closed or significantly scaled back their operations as a result of the pandemic, credit quality for small businesses that have continued operating or reopened has stabilized further in the first half of this year. Loan delinquencies have declined significantly in the first half of the year. Loans extended under the PPP provided financial support to many small businesses. However, even though the outlook for small businesses has steadily improved in the first half of the year, the Census Bureau's Overall Sentiment Index for small businesses indicates that, more recently, the improvements have stopped, likely reflecting the rise of the Delta variant.

Although conditions for many households have improved, the expiration of assistance programs may cause additional financial stress for some households

The financial position of many households has continued to improve since the previous Financial Stability Report, supported by pandemic stimulus programs, a recovering economy, and rising house prices. Still, some households remain financially strained and more vulnerable to future shocks. These vulnerabilities may be increased by the expiration of expanded unemployment programs, loan forbearance, and eviction moratoria as well as by a potential worsening of the public health situation, especially for low-income households.

Borrowing by households picked up in the second quarter

Household debt growth picked up in the second quarter of this year. Debt owed by the roughly one-half of households with prime credit scores continued to account for all the growth, driven by increases in mortgage, credit card, and automobile debt. However, accounting for inflation, household debt only edged up slightly and the ratio of household debt to GDP declined. The increase in mortgage and automobile debt reflects a surge in demand for housing and automobiles as well as substantial price growth in those categories. Furthermore, the growth in credit card balances may reflect a return to pre-pandemic spending patterns. By contrast, loan balances for borrowers with near-prime and subprime credit scores declined in real terms (figure 2-9). This decrease may be attributable to relatively tight lending standards for such borrowers and to a decline in the share of borrowers with low credit scores. Subprime debt balances may increase with the expiration of expanded unemployment programs, loan forbearance, and eviction moratoria or with a potential worsening of the public health situation.

2-9. Total Household Loan Balances
Figure 2-9. Total Household Loan Balances

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Note: Subprime are those with an Equifax Risk Score below 620; near prime are 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 2021 dollars using the consumer price index.

Source: Federal Reserve Bank of New York Consumer Credit Panel/Equifax; Bureau of Labor Statistics, consumer price index via Haver Analytics.

The share of mortgages either delinquent or in loss mitigation has fallen well below pre-pandemic levels

Mortgage debt accounts for roughly two-thirds of total household debt, with new mortgage extensions skewed toward prime borrowers in recent years (figure 2-10). Mortgage forbearance programs have helped significantly reduce the effect of the pandemic on mortgage delinquencies (figure 2-11). The share of mortgages that are either delinquent or in a loss mitigation program, including forbearance, was slightly above 4 percent in August 2021, down from its peak of 8.9 percent in May 2020.

2-10. Estimates of New Mortgage Volumes to Households
Figure 2-10. Estimates of New Mortgage Volumes to Households

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Note: Year-over-year change in balances for the second quarter of each year among those households whose balance increased over this window. Subprime are those with an Equifax Risk Score below 620; near prime are from 620 to 719; prime are greater than 719. Scores were measured one year ago. The data are converted to constant 2021 dollars using the consumer price index. The key identifies bars in order from left to right.

Source: Federal Reserve Bank of New York Consumer Credit Panel/Equifax; Bureau of Labor Statistics, consumer price index via Haver Analytics.

2-11. Mortgage Loss Mitigation and Delinquency
Figure 2-11. Mortgage Loss Mitigation and Delinquency

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Note: Loss mitigation includes tradelines that have a narrative code of forbearance, natural disaster, payment deferral (including partial), loan modification (including federal government plans), or loans with no scheduled payment and a nonzero balance. Delinquent includes loans reported to the credit bureau at least 30 days past due. The line break represents the data transitioning from quarterly to monthly beginning January 2020.

Source: Federal Reserve Bank of New York Consumer Credit Panel/Equifax.

Borrowers still in forbearance may be vulnerable to the increased payments associated with the end of forbearance programs. Borrowers who received forbearance were more likely to have been delinquent before the pandemic, have low incomes, and have subprime credit scores.10 Those borrowers that have remained in forbearance are even more likely to have subprime credit scores.11 Survey evidence also suggests that these borrowers are more likely to be employed in industries hard hit by the pandemic, to have suffered income losses in the past year, and to be delinquent or in forbearance on other forms of debt.12

Borrowers exiting forbearance are expected to resume making payments, and servicers are expected to work with these borrowers to modify their mortgages to achieve manageable payment plans. Should borrowers be unable to resume making payments even under a modified payment plan, a home sale could be a viable option, especially because the recent robust house price increases have put many borrowers in a strong equity position (figures 2-12 and 2-13).13 Estimates suggest that, as one would expect in a time of rapidly rising house prices, only a small fraction of borrowers currently in forbearance have equity cushions of less than 10 percent.14 The implications of such sales for aggregate house prices would likely be minor. As of September 21, there were about 1.5 million residential properties in forbearance; should those properties all be put on the market simultaneously—an unlikely event—they would add roughly two to three months of housing supply. Even so, with housing demand currently strong, such an increase in supply would likely not be enough to cause a drop in aggregate house prices.

2-12. Estimates of Mortgages with Negative Equity
Figure 2-12. Estimates of Mortgages with Negative Equity

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Source: CoreLogic, Inc., Real Estate Data.

2-13. Estimates of Housing Leverage
Figure 2-13. Estimates of Housing Leverage

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Note: 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 Zillow 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: Federal Reserve Bank of New York Consumer Credit Panel/Equifax; Zillow, Inc., Zillow Real Estate Data; Bureau of Labor Statistics via Haver Analytics.

Consumer delinquencies declined further as conditions for households continued to improve and forbearance on student loans was extended again through the end of January 2022

Most of the remaining one-third of household debt is consumer credit, which consists primarily of student loans, auto loans, and credit card debt (table 2). Inflation-adjusted consumer credit edged down in 2021, as student and auto debt were flat and credit card debt declined in real terms (figure 2-14). Auto loan balances expanded moderately, on net, in 2021, driven primarily by borrowers with prime and near-prime credit scores (figure 2-15).

2-14. Consumer Credit Balances
Figure 2-14. Consumer Credit Balances

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Note: The data are converted to constant 2021 dollars using the consumer price index. Student loan data begin in 2005.

Source: Federal Reserve Bank of New York Consumer Credit Panel/Equifax; Bureau of Labor Statistics, consumer price index via Haver Analytics.

2-15. Auto Loan Balances
Figure 2-15. Auto Loan Balances

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Note: Subprime are those with an Equifax Risk Score below 620; near prime are from 620 to 719; prime are greater than 719. Scores are measured contemporaneously. The data are converted to constant 2021 dollars using the consumer price index.

Source: Federal Reserve Bank of New York Consumer Credit Panel/Equifax; Bureau of Labor Statistics, consumer price index via Haver Analytics.

The share of auto loans that were either delinquent or in loss mitigation declined further to about 3 percent by August of this year, with outright delinquency rates reaching 2 percent (figure 2-16). However, delinquencies in auto loans have increased significantly in the subprime category and may accelerate with the expiration of stimulus programs—state and federal expanded unemployment programs and eviction moratoria—or if economic growth stalls as a result of the pandemic. High automobile prices due to pandemic-related shortages may mitigate potential adverse effects of such delinquencies on financial institutions.

2-16. Auto Loss Mitigation and Delinquency
Figure 2-16. Auto Loss Mitigation and Delinquency

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Note: Loss mitigation includes tradelines that have a narrative code of forbearance, natural disaster, payment deferral (including partial), loan modification (including federal government plans), or loans with no scheduled payment and a nonzero balance. Delinquent includes loans reported to the credit bureau as at least 30 days past due. The line break represents the data transitioning from quarterly to monthly beginning in January 2020. The data for auto loans are reported semiannually by Risk Assessment, Data Analysis and Research until 2017, after which they are reported quarterly until 2020. The data for delinquent/loss mitigation begin in Q1 of 2001.

Source: Federal Reserve Bank of New York Consumer Credit Panel/Equifax.

The risk that student loan debt poses to the financial system appears limited at this time. Most of the loans were issued through government programs and are owed by households in the top 40 percent of the income distribution. Moreover, protections originally in the Coronavirus Aid, Relief, and Economic Security Act—later extended by the Department of Education—currently guarantee payment forbearance and stop interest accrual through January 2022 for most federal student loans.

Consumer credit card balances have contracted, on net, since the onset of the pandemic (figure 2-17). Delinquency rates were roughly flat for borrowers with prime credit scores, decreased moderately for near-prime borrowers, and dropped steeply for subprime borrowers in the first half of this year (figure 2-18). Delinquency rates may increase going forward as spending levels pick up or if the economic growth stalls as a result of the pandemic. Additionally, credit card delinquencies for subprime and near-prime borrowers may be adversely affected by the expiration of stimulus programs.

2-17. Credit Card Balances
Figure 2-17. Credit Card Balances

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Note: Subprime are those with an Equifax Risk Score below 620; near prime are from 620 to 719; prime are greater than 719. Scores are measured contemporaneously. The data are converted to constant 2021 dollars using the consumer price index.

Source: Federal Reserve Bank of New York Consumer Credit Panel/Equifax; Bureau of Labor Statistics, consumer price index via Haver Analytics.

2-18. Credit Card Delinquency Rates
Figure 2-18. Credit Card Delinquency Rates

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Note: Delinquency is at least 30 days past due, excluding severe derogatory loans. The data are four-quarter moving averages. Subprime are those with an Equifax Risk Score below 620; near prime are from 620 to 719; prime are greater than 719. Credit scores are lagged four quarters.

Source: Federal Reserve Bank of New York Consumer Credit Panel/Equifax.

 

References

 

 7. It is important to note, however, that the credit aggregates shown in figures 2-1, 2-2, and 2-3 include debt from both public and private firms. Return to text

 8. See Securities and Exchange Commission (2020), "SEC Harmonizes and Improves ‘Patchwork' Exempt Offering Framework," press release, November2, https://www.sec.gov/news/press-release/2020-273Return to text

 9. According to S&P Leveraged Commentary and Data, the share of outstanding leveraged loans rated B or worse has decreased significantly through October of this year. Return to text

 10. See Andrew Haughwout, Donghoon Lee, Joelle Scally, and Wilbert van der Klaauw (2021), "Keeping Borrowers Current in a Pandemic," Federal Reserve Bank of New York, Liberty Street Economics (blog), May 19, https://libertystreeteconomics.newyorkfed.org/2021/05/keeping-borrowers-current-in-a-pandemicReturn to text

 11. See Andrew Haughwout, Donghoon Lee, Joelle Scally, and Wilbert van der Klaauw (2021), "Forbearance Participation Declines as Programs' End Nears," Federal Reserve Bank of New York, Liberty Street Economics (blog), August 3, https://libertystreeteconomics.newyorkfed.org/2021/08/forbearance-participation-declines-as-programs-end-nearsReturn to text

 12. See Lauren Lambie-Hanson, James Vickery, and Tom Akana (2021), "Recent Data on Mortgage Forbearance: Borrower Uptake and Understanding of Lender Accommodations," brief (Philadelphia: Federal Reserve Bank of Philadelphia, March 4), https://www.philadelphiafed.org/consumer-finance/mortgage-markets/recent-data-on-mortgage-forbearance-borrower-uptake-and-understanding-of-lender-accommodationsReturn to text

 13. The significant growth in house prices over the past year, noted earlier in this report, has contributed to the very low estimated share of outstanding mortgages with negative equity (figure 2-12). Consistent with higher house prices, the ratio of outstanding mortgage debt to home values continued to fall in the first half of this year and remains at a modest level (figure 2-13). Return to text

 14. See Black Knight (2021), "Tappable Equity Rises $1 Trillion in Q2 2021 Alone to Hit All-Time High of $9.1 Trillion; Quarter Also Sees Largest Volume of Cash-Out Refis in 15 Years," press release, September 8, https://www.blackknightinc.com/black-knights-july-2021-mortgage-monitor. Return to text

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Last Update: November 16, 2021