Elevated corporate debt and high interest rates amid heightened uncertainty will test global economic resilience. Moreover, the increasing role of nonbank financial institutions in credit intermediation raises concerns about the potential amplification of financial risks. This column explores emerging corporate vulnerabilities and financial stability risks in an environment of elevated debt and persistently high-interest rates. While some central banks have started easing monetary policy, interest rates are expected to stay above pre-pandemic levels. This underscores the urgent need to improve data on nonbanks, continue monitoring corporate sector risks, and design and implement policies to prevent and mitigate corporate sector risks.
The unprecedented policy support deployed during the COVID-19 pandemic allowed nonfinancial corporations in many jurisdictions to navigate the pandemic shock relatively well. At the same time, the synchronised global monetary policy tightening cycle that started in early-2022 (recently reversed by several central banks) does not seem to have significantly affected corporates’ financial performance. Nevertheless, the risk of being complacent with elevated corporate debt levels in a world of high interest rates may bring about significant financial stability and economic costs for the world economy.
Corporate debt levels have increased or, at the very least, have remained very high in many countries, underscoring important vulnerabilities in the corporate sector (Demmou et al. 2021). In a new paper, we argue that corporate sector vulnerabilities have been rising, posing risks to the ongoing global recovery (Abbas et al. 2025). Firms with substantial refinancing needs—the so-called ‘maturity wall’ — face heightened challenges in rolling over debt as interest rates remain elevated, potentially straining their financial performance. In particular, corporations in the lower-rated segment, and in the real estate sector, have struggled with rising rates amid higher costs and falling real estate prices. Should interest rates remain higher than currently projected, corporate defaults could surge significantly, posing critical financial stability risks, particularly in emerging markets and countries with less developed banking systems. Moreover, the growing role of nonbanks in corporate credit intermediation brings about new and unexplored financial stability risks. Finally, we document important progress in insolvency and restructuring frameworks since the pandemic but conclude that significant gaps remain. These shortcomings could hinder the ability of countries to swiftly resolve firms in scenarios of intensified corporate distress.
Refinancing of maturing corporate debt will take place at much higher rates
At the beginning of 2022, several central banks pivoted and aggressively started tightening monetary policy to get inflation back on target. This synchronised action effectively ended a prolonged period of extremely low interest rates, including the extraordinary easing of financial conditions during the pandemic. The swift rise of interest rates has increased rollover risks as firms struggle to refinance their debt at much higher rates than those prevailing before the COVID-19 crisis. Despite recent policy rate cuts by several central banks and a modest narrowing of bond spreads since 2023, corporate funding costs remain elevated: corporate bond yields are still well above pre-pandemic levels (Figure 1). Moreover, challenges in some sectors, such as Commercial Real Estate (CRE), remain elevated. Higher interest rates coupled with structural changes have substantially affected the commercial real estate market, leading to declining property values and higher refinancing risks for highly leveraged firms. The strains in the commercial real estate market could put further pressure on financial institutions heavily exposed to the sector.
Figure 1 Global corporate bond yields and spreads
Firms with substantial refinancing needs — the maturity wall — face increased challenges in rolling over debt in this high-interest rate environment, adding strains on firms’ financial performance. To be sure, the bulk of the corporate debt maturing in 2025 will be done at significantly higher rates relative to 2019 (Figure 2). Moreover, we document in the paper that floating-rate corporate debt represents a considerable share of overall corporate debt in some countries, creating additional challenges to firms’ debt servicing capacity. High levels of economic and policy uncertainty could further compound risks in the corporate sector as investors reprice risky assets, potentially leading to a sharp equity valuation correction, or negative rating events. Downgraded firms would face considerably higher funding costs.
Figure 2 Additional cost of refinancing versus maturing corporate bonds for the year
Notes: The size of bubble indicates the amount in billions of US dollars of corporate debt outstanding denominated in each currency. The y-axis is in percentage points.
Firms with greater rollover needs could see their financial performance weaken should monetary policy tighten further. Persistent inflation above target — stemming from a resurgence in consumer prices — has heightened the likelihood of tighter monetary policy for longer. We provide empirical evidence for this claim by using balance sheet data on nonfinancial firms for a large panel of countries. In our empirical specification, we assess the response of firms to contractionary monetary policy shocks by exploiting the preexisting debt maturity structure of firms. Specifically, we compare the financial performance of firms with a high share of debt to roll over against similar firms that have lower debt rollover needs. This empirical specification controls for firm-specific balance sheet characteristics and a rich set of fixed effects to allow us to compare firms that differ only in the portion of debt that needs to be rolled over.
We find that, following a monetary policy tightening, firms with high rollover needs tend to experience sharper declines in investment and debt, alongside greater increases in borrowing costs, compared to firms with lower rollover needs. In periods of higher interest rates, firms with significant refinancing needs may be forced to cut costs by reducing investment, borrowing less, or a combination of both, to offset the rising cost of debt. These findings highlight that firms with high debt rollover needs, including firms with healthy balance sheets, may react more strongly to interest rate increases because of differences in the debt structure. Overall, this underscores the importance of assessing corporate vulnerabilities along several dimensions that go beyond looking at metrics that capture firms’ financial distress.
Figure 3 Differential effect of monetary policy shocks on firms facing high debt rollover risks
Notes: Cumulative impulse responses for firms with high rollover debt needs relative to other firms to a monetary policy shock that increases the country-specific one-year sovereign bond yield by 100 basis points. The blue line represents the average point estimate, and the dark (light) grey area refers to the 68% (90%) confidence bands.
A wave of corporate defaults in a stressed scenario may substantially erode bank capital
While the anticipated surge in corporate insolvencies during the COVID-19 crisis did not materialise — primarily due to unprecedented fiscal and monetary interventions — the current economic landscape of elevated debt and higher interest rates presents distinct challenges. We use a corporate sector stress test model from Tressel and Ding (2021) for a large set of countries to quantify the potential losses to creditors from corporate defaults under an adverse macroeconomic scenario. The scenario combines negative demand shocks and elevated interest rates that trigger a rapid and substantial rise in corporate defaults.
Our stress-test simulations suggest that corporate defaults could strain the capital buffers banks accumulated during the pandemic. The resulting financial stability risks would be especially pronounced in emerging markets and countries with less developed banking systems.
Rising nonbank corporate credit intermediation adds to financial stability risks
The growing role of nonbank financial institutions in corporate credit intermediation, particularly in advanced economies, may amplify financial stability risks. Figure 4 shows that the presence of nonbanks in the global syndicated loan market has increased substantially over the last two decades, standing at roughly 40% of all originated loans in 2022. This share is higher for more developed markets, especially in the US. Recent data show that this upward trend has continued, in line with the Financial Stability Board report that points to an increasing footprint of nonbanks to 49% of global financial assets in 2023, up from 43% in 2008 (FSB 2024).
The migration of credit to the less-regulated sector raises significant concerns about how risks from a potential corporate default cycle might spread across the financial system. The heightened financial stability risks stem from several vulnerabilities associated with nonbanks. Nonbanks are typically more exposed to financially weaker firms and to the less productive segment of the economy, including zombie firms and non-tradable firms; they also rely more heavily on unstable funding sources, and are characterised by significant data gaps in their balance sheets, hindering a comprehensive assessment of underlying risks. Against this background, it is paramount to address data gaps on nonbanks, while extending the regulatory perimeter to include nonbanks, thereby enhancing the overall resilience of the financial sector.
Figure 4 Share of global syndicated loans to nonfinancial firms originated by nonbanks
Notes: Share of syndicated loans intermediated by nonbanks, as a share of total outstanding originated loans, for selected borrower countries.
Significant gaps persist in insolvency and restructuring frameworks despite the progress since the pandemic
The paper includes an updated version of the crisis preparedness indicator, first developed in Araujo et al. (2022), reflecting a comprehensive analysis of insolvency frameworks across 60 jurisdictions. The indicator reveals substantial heterogeneity in the robustness of national insolvency frameworks. Advanced economies generally maintain more sophisticated systems, while emerging markets and developing economies face considerable institutional constraints and lack adequate tools for restructuring, particularly in times of crisis. Notably, we provide empirical analysis in the paper that companies operating in jurisdictions with less developed insolvency and restructuring frameworks exhibit heightened sensitivity to monetary policy tightening, resulting in more substantial reductions in investment and elevated borrowing costs.
There are positive developments in insolvency practices, including the increased adoption of hybrid restructuring mechanisms and technological innovation in the conduct of insolvency proceedings. However, persistent deficiencies remain, particularly in out-of-court restructuring mechanisms and liquidation regimes. In countries with weaker insolvency frameworks, distressed firms may linger longer, potentially becoming zombie firms (Laeven et al. 2020). This delays the essential process of creative destruction, ultimately harming healthy firms within the same sector by misallocating capital and causing crowding-out effects (Albuquerque and Iyer 2024, Albuquerque and Mao 2024).
Our research suggests that continued enhancement of insolvency frameworks is imperative, with particular emphasis on strengthening judicial systems in charge of insolvency and developing more comprehensive data collection methodologies. Furthermore, the expanding role of nonbank financial institutions and sector-specific vulnerabilities, particularly in commercial real estate, warrant a targeted policy response. These could encompass the design of restructuring mechanisms that include bondholders and not only banks, and the strengthening of enforcement mechanisms for commercial mortgages.
Discussion
Higher funding costs for many firms compared to pre-pandemic levels appear to be a lasting challenge, exposing vulnerabilities in certain sectors. Worsening credit quality in corporate loans could further strain the financial system, raising concerns about the extent of systemic risk, which lenders would be most exposed, and how best to manage this risk. Corporate debt risks will continue to weigh on global financial stability as firms grapple with higher and volatile interest rates, rising input costs, slowing economic activity, and tighter lending conditions.
While some progress has been made in insolvency and restructuring frameworks since the pandemic, further reforms are needed. Many countries still lack effective out-of-court mechanisms, and improvements in liquidation regimes and insolvency regulations remain limited. Strengthening crisis preparedness will be key to mitigating corporate distress.
Source : VOXeu
