Fed Scrutiny of Leveraged Loans Grows Along With Bubble Concern
By Craig Torres, Kristen Haunss and Christine Idzelis Oct 1, 2014
The Federal Reserve is stepping up its oversight of high-risk leveraged loans, shifting to a deal-by-deal review after its previous industry-wide guidelines were largely ignored by banks.
The Fed is now looking at loans each month, according to people who asked not to be identified because the information is private. Supervisors are looking at individual deals and risks such as a borrower’s ability to repay, they said.
“Banks have been scolded and they have been warned, and yet you are seeing a lot of signals that the market is heating up,” said Mayra Rodriguez Valladares, managing principal at MRV Associates in New York, a consultant on regulation to some of the world’s largest banks. “We have seen this bad movie before. The issue now is, will the regulators deploy the rest of the arsenal of tools they have?”
Until now, supervisors collected loan data in an annual survey, and last year told banks they needed better adherence to standards they put forth in guidelines in March 2013. Over the past several weeks, they have shifted tactics and are examining loans as they are made, showing a new urgency in avoiding the kind of overly risky lending that was blamed for igniting the financial crisis.
The $800 billion leveraged-loan market is serving as a test of whether Fed Chair Janet... Read More
If the latest round of heightened scrutiny doesn’t work, regulators have other options. They can change supervisory ratings on banks, which could limit mergers. They could ask boards to sign agreements to make changes, or they could resort to fines.
Yellen Test
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http://www.bloomberg.com/news/2014-10-01/fed-scrutiny-of-leveraged-loans-grows-along-with-bubble-concern.html
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