Fed's Cook Sees Signs of Stress in Subprime Borrowers

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00:00Generally, business and household finances are in solid shape.

00:04Most households are able to service their debt, and overall household debt relative to GDP has declined over the past five years.

00:12While we are seeing some stress among low to moderate income borrowers and those with subprime credit scores,

00:18the risks posed by the overall household borrowing sector remain moderate.

00:24Stable balance sheets and solid income have supported the ability of most non-financial businesses to service their debt.

00:32At the same time, smaller and riskier businesses, which tend to have lower debt service capacity,

00:41measured by the interest coverage ratio, are sensitive to income shocks.

00:46Most households are able to service their debt, and overall household debt relative to GDP has declined over the past five years.

00:54While vulnerabilities posed by overall household borrowing remain moderate,

00:59we are seeing some signs of stress among borrowers with subprime credit scores,

01:04which include many low and moderate income households.

01:07For instance, auto and credit card delinquency rates for borrowers with subprime credit scores increased substantially in 2022 and 2023

01:16and are at or near the highest levels since the financial crisis.

01:22More generally, a sufficiently large income shock could strain the debt servicing capacity of a broader group of households

01:31and push up delinquency and default rates, resulting in a more substantial loss for lenders.