Coronavirus pandemic poses 'biggest test' for US financial system, Fed's Quarles warns

The lockdown measures put into place to mitigate the spread of the deadly coronavirus pose the biggest challenge for the U.S. financial system in more than a decade, Federal Reserve Vice Chair of Supervision Randy Quarles said Tuesday.

"The containment measures of the COVID-19 event represent the biggest test that the financial system has faced since the global financial crisis of 2007 to 2008," Quarles said during an event in Washington. "After years of reforms, we now face a real-life stress test even more severe than those previously hypothesized."

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While Quarles, who also serves as the Financial Stability Board chair, said markets are working well after the turmoil in March, when the stock market had dropped about 29 percent from its Feb. 19 peak, he said there's more trouble to come.

"We know that the financial system will face more challenges," Quarles said. "The corporate sector entered the crisis with high levels of debt and has necessarily borrowed more during the event."

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Corporate indebtedness has exploded in recent years, with companies that are outside the financial sector now owing a $9.6 trillion debt load in the U.S. compared to just $4.9 trillion in 2007. Globally, outstanding corporate debt issued by nonfinancial companies is $13 trillion, according to the Organization for Economic Cooperation and Development.

If companies are struggling to make debt payments as a result of a coronavirus-triggered recession, they may be more likely to lay off workers or cut costs, possibly deepening the downturn.

Still, Quarles said that a number of stress tests carried out recently have "confirmed that banks are able to continue lending even in the face of this extreme shock."

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