Quarles Downplays Leveraged Lending Risks to Banks

In the wake of the Federal Reserve’s biennial financial stability report released yesterday, which flagged leveraged loans as a risk factor, Fed Vice Chairman for Supervision Randal Quarles suggested that media reports overplayed the scale of the risk, especially to banks. Leveraged lending “is not really a direct analogue to the subprime lending” that contributed to the financial crisis, Quarles explained during a Q&A in New Haven, Conn., today.

While business debt is high, he added, it “hasn’t grown to a level that is inconsistent with historical precedent for this point in an expansion.” Meanwhile, he explained, banks are not keeping leveraged loans on their books but rather selling them to the “more stable holding structures” known as collateralized loan obligations, which “you wouldn’t expect . . . to be systemically destabilizing.”

In his remarks, Quarles also called for a finer distinction between rules and guidance. “We do need to have thought through very carefully what it is that we mean by supervision and what it is that we mean by regulation,” he explained. “I don’t think we have it right currently, but I do think we can get it right and that that’s a task we need to take on.”