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Central banks highlight ways to tackle private debt build-up in the wake of the pandemic

  • Private sector borrowing played a key role in supporting economic activity during the pandemic but higher debt could now pose a risk to financial stability and economic growth
  • Emerging vulnerabilities include higher debt among weaker businesses, booming housing markets, and potential misperceptions about the prospects for exceptional policy support that might cause lenders to underprice risks in the future
  • New report from the Committee on the Global Financial System (CGFS) suggests ways that policymakers can tackle debt vulnerabilities in the uncertain post-pandemic macroeconomic environment

A surge in private sector borrowing helped to moderate the severity of the Covid-19 economic downturn. Yet, it also shone a spotlight on the risks that high debt can pose to financial stability and macroeconomic performance, according to a new report.

The report by the Committee on the Global Financial System (CGFS), a central bank forum for examining risks to financial stability, hosted by the Bank for International Settlements, highlights that the rise in private sector debt during the Covid-19 crisis was associated with borrowing by weaker businesses and rapid house price growth. However, it finds that the importance of such debt vulnerabilities differs substantially across countries, depending on factors such as the strength of the economic recovery and the health of the financial system.

During the Covid-19 crisis, unprecedented policy support prevented debt risks from materialising. But misperceptions about the prospects for similar support in future could lead lenders to underprice risk.

The active use of macroprudential policy can help to reduce debt vulnerabilities. This can in turn create more space for monetary and fiscal policies to pursue their core objectives.
Philip Lowe, Chair of the CGFS

This report highlights that, where risks are mounting, borrower-focused macroprudential tools such as limits on debt service-to-income ratios, can help to stem the build-up. Where debt vulnerabilities are already high, or might be exposed by the uncertain macroeconomic environment, policymakers should ensure that financial institutions’ capital buffers remain sufficient to absorb potential losses.


Notes to editors: The CGFS, chaired by Philip Lowe, Governor of the Reserve Bank of Australia, monitors developments in global financial markets for central bank Governors. It has a mandate to identify and assess potential sources of stress in global financial markets, to further the understanding of the structural underpinnings of financial markets, and to promote improvements to the functioning and stability of these markets.

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