May 13, 2019

Brown: Regulators Must Take Action to Address Risks of Leveraged Lending

WASHINGTON, D.C. — U.S. Sen. Sherrod Brown (D-OH) – ranking member of the U.S. Senate Committee on Banking, Housing, and Urban Affairs – sent a letter ahead of the Senate Banking Committee’s May 15th hearing to Federal Reserve Vice Chair Randal Quarles, OCC Comptroller Joseph Otting, FDIC Chair Jelena McWilliams, and NCUA Chair Rodney Hood, requesting that the regulators be prepared to answer how their agencies are responding to the emerging threat of leveraged lending. Despite growing concern from the former Federal Reserve Chair Janet Yellen, and other US officials, analysts and international regulators, members of the Financial Stability Oversight Council (FSOC) have weakened guidance that would protect Americans and their communities from a future economic downturn.
 
“In 2018, leveraged lending increased by 20 percent to $1.1 trillion outstanding, and has continued to increase in the first quarter of 2019.  Lending standards and loan covenants have continued to deteriorate.  Despite more and more evidence of risky corporate debt threatening our financial system, the agencies have not taken action,” wrote Brown.
 
On April 11th, Sen. Brown sent a letter to Sec. Mnuchin and FSOC warning about elevated levels of leveraged lending as a potential risk to the economy. In a response letter to Sen. Brown, Sec. Mnuchin failed to provide adequate answers as to how FSOC would take decisive action to address the heightened risk in the leveraged loan market.  Last week, the Federal Reserve released the Financial Stability Report, which highlights leveraged lending as a vulnerability to the economy.
 
Link to the letter here.
Full text of the letter: 
 
 
May 13, 2019
 
 
Hon. Randal K. Quarles
Vice Chair for Supervision
Board of Governors of the
Federal Reserve System
Constitution Avenue & 20th Street, N.W.
Washington, D.C. 20551
 
Hon. Joseph Otting
Comptroller
Office of the Comptroller of the Currency
400 7th Street, N.W.
Washington, D.C. 20219
 
Hon. Jelena McWilliams
Chair
Federal Deposit Insurance Corporation
550 17th Street, N.W.
Washington, D.C. 20429
 
 
Hon. Rodney E. Hood
Chair
National Credit Union Administration
1775 Duke Street
Alexandria, VA 22314

 
Dear Vice Chair Quarles, Comptroller Otting, Chair McWilliams, and Chair Hood,
 
Banks’ increased exposure to the leveraged loan market continues to concern me.  As you know, earlier this week the Federal Reserve released its Financial Stability Report, which highlighted excessive leverage in corporate lending as a financial system vulnerability.  In 2018, leveraged lending increased by 20 percent to $1.1 trillion outstanding, and has continued to increase in the first quarter of 2019.  Lending standards and loan covenants have continued to deteriorate.  Despite more and more evidence of risky corporate debt threatening our financial system, the agencies have not taken action. 
 
Last month, I asked the Chair of the Financial Stability Oversight Council (FSOC) Treasury Secretary Mnuchin and the members of FSOC to demonstrate how they are responding to this emerging threat.  Chair Mnuchin, however, failed to answer substantively any of the questions in my April 11, 2019 letter. 
 
In light of this inadequate response from Chair Mnuchin, please be prepared to share detailed responses to the questions in my April 11, 2019 letter and provide supporting data to the Committee on these topics as part of your testimony during the Committee on Banking, Housing, and Urban Affairs Hearing on May 15, 2019. 
 
Sincerely,
 
 
 
 
Sherrod Brown
Ranking Member
 
Enclosures
 
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