Steven Mnuchin, U.S. Treasury secretary, speaks during a television interview outside the White House in Washington, D.C., U.S. (Photographer: Andrew Harrer/Bloomberg)

Leveraged-Loan Peril Demands Action by Mnuchin, Key Senator Says

(Bloomberg) -- Treasury Secretary Steven Mnuchin should deploy the government’s chief risk watchdogs to examine the dangers of highly leveraged corporate lending, the top Democrat on the Senate Banking Committee urged in a Thursday letter.

Ohio Senator Sherrod Brown said the members of the Financial Stability Oversight Council -- a panel of regulators led by Mnuchin -- have not only “failed to take any decisive action,” but have backed away from earlier standards that constrained so-called leveraged lending. Brown said the group of regulators needs to assess whether workers and the economy are benefiting from such financing, which amounts to more than $1 trillion in loans often associated with the mergers and acquisitions of extremely indebted companies.

Leveraged-Loan Peril Demands Action by Mnuchin, Key Senator Says

Key Details

  • “International regulators have raised concern that poor underwriting standards, rapid growth and increased risk-taking in the leveraged loan market mirrors subprime mortgage lending and might have far-reaching economic consequences,” Brown said in the letter, dated April 11.
  • “The council should not wait to see what happens when the music stops,” Brown said of the FSOC, whose membership includes the heads of the Federal Reserve, Securities and Exchange Commission and Office of the Comptroller of the Currency.
  • In November, Senator Elizabeth Warren, a Democrat on the banking committee who is running for her party’s 2020 presidential nomination, confronted Fed Vice Chairman for Supervision Randal Quarles about risks from leveraged lending. Warren also wrote a letter to FSOC members.
  • Fed Chairman Jerome Powell said recently that leveraged loans aren’t yet threatening the U.S. banking system, but the market does pose “a macroeconomic risk” if the economy sours.
  • Mnuchin said at the end of 2018 that he’d noted some of the warnings from regulators, but he said he didn’t “have the same concern at the moment.”

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