Warren Raises Concerns that Leveraged Lending Market Could Escalate Risks to Financial System as Coronavirus Outbreak Continues to Rattle Markets
Senator Seeks Answers from Regulators about Risky Loans to Highly Indebted Companies
"Regulators still have not taken meaningful action to mitigate these risks ...the loans (could) fail and ... escalat(e) the effects of an economic downturn across ... millions of already hard-hit families."
Washington, D.C. - United States Senator Elizabeth Warren (D-Mass.), a member of the Senate Banking Committee, sent a letter to Treasury Secretary Steven Mnuchin, who also serves as Chair of the Financial Stability Oversight Council (FSOC), requesting information about the leveraged lending market and the risks these loans pose to the financial system as global financial and economic conditions deteriorate amid the spread of coronavirus disease 2019 (COVID-19). FSOC is tasked with identifying and responding to these risks to financial stability.
Leveraged lending - lending to companies that are already highly indebted - has grown substantially in recent years, and many of these loans are securitized and sold to retail and institutional investors. As a result of this exposure, the poor underwriting standards for these loans, and the lack of protections for lenders and investors, this market presents significant risks to the economy during an economic downturn.
In November 2018, Senator Warren wrote to federal regulators expressing concern about the serious risks to the financial system and economy posed by leveraged lending. These regulators indicated that "the leveraged loan market continues to warrant attention," but that they did not have concerns about broader systemic risk. In her letter today, the senator reiterated her concerns and called for FSOC to explain how it is monitoring and addressing the risks associated with this critical market and provide greater transparency as to which industries are most exposed.
"Now, as we are on the verge of another, potentially deeper, economic crisis, regulators still have not taken meaningful action to mitigate these risks," the senator wrote. "If institutional borrowers are unable to repay their loan balances due to hits to their bottom lines, the loans will fail and spread risk to all the entities that are exposed to them, escalating the effects of an economic downturn across many more institutions and millions of already hard-hit families."
Given the fragile state of the economy, Senator Warren asked Secretary Mnuchin to provide transparency and clarify how the FSOC is addressing risks associated with the leveraged lending market. Specifically, she asked him to:
- Describe how FSOC is monitoring the risks associated with these loans, particularly with respect to the rapidly deteriorating economic conditions;
- Provide FSOC's assessment of risks to the financial system and the economy as a whole related to these loans;
- Provide FSOC's assessment of risks to individual industries that are exposed to these loans and how these industries could be impacted if these loans were to fail; and
- Provide data on the volume and maturity dates of leveraged loan tranches across different institution types and industries.
The senator requested a response to her inquiry by April 02, 2020.
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