SEC Report-U.S. Credit Markets: Interconnectedness and the Effects of the COVID-19 Economic Shock

October 9th | 2020

The Securities and Exchange Commission recently published a staff report titled U.S. Credit Markets: Interconnectedness and the Effects of the COVID-19 Economic Shock, which focuses on the origination, distribution and secondary market flow of credit across U.S. credit markets. The staff report also addresses how the related interconnections in our credit markets operated as the effects of the COVID-19 pandemic took hold. 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.

In addition, SEC staff will host a Roundtable on Interconnectedness and Risk in U.S. Credit Markets to discuss the issues raised in the report on the afternoon of October 14, 2020.

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