Fed Watching Leveraged Loan Growth for Systemic Risk

The Federal Reserve is watching growth in the leveraged loan sector with an eye to its systemic implications, Federal Reserve Vice Chairman for Supervision Randal Quarles told the Senate Banking Committee today. His comments came in response to questions from Sen. Elizabeth Warren (D-Mass.) raising concerns about record levels of leveraged lending.

Quarles pushed back on the notion that the total volume of leveraged loans is the prime concern. “The amount itself is not what’s critical,” he told Warren. “What’s critical is: Are they being held in vulnerable structures? Do we understand how the system is evolving? We’re actually quite athletically looking at that.”

Warren yesterday wrote to financial regulators flagging her concerns about leveraged lending, which reached $1.1 trillion in the first nine months of 2018. The banking agencies’ 2013 guidance on the topic, which has not been rescinded but which Quarles emphasized is not being enforced as regulation, is said to have steered more leveraged loans outside of the banking sector. A senior Fed official recently warned about “material loosening” of terms on leveraged loans.