Warren says leveraged lending lapses invite new crisis

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Sen. Elizabeth Warren said regulators are failing to respond to what she thinks could be a new meltdown in the making: the trillion-dollar market for leveraged loans.

"The large leveraged lending market exhibits many of the characteristics of the pre-2008 subprime mortgage market," the Massachusetts Democrat wrote to Treasury Secretary Steven Mnuchin, Federal Reserve Chairman Jerome Powell and other regulators in a letter dated Wednesday. "These loans are generally poorly underwritten and include few protections for lenders and investors."

Warren, who is widely considered to be a contender for the 2020 presidential race, accused regulators appointed by President Donald Trump of a "lack of appropriate response" to rapid growth and weakening standards in the market for loans to highly indebted companies.

She requested a rundown of what's being done by individual agencies and by the Financial Stability Oversight Council, the panel of regulators set up after the 2008 crisis to watch for systemic threats.

Despite warnings from prominent former officials — including ex-Fed Chair Janet Yellen and former Fed Governor Daniel Tarullo — regulators such as Comptroller of the Currency Joseph Otting have said they're comfortable with the banking industry's participation in the market.

"I fear that continued growth in leveraged lending — along with the steady degradation in loan terms — creates significant risk to the financial system," Warren said in her letter. She said regulators may even be making things worse, pointing to the agencies' plan for revising Volcker Rule trading limits and suggesting that it may encourage more bank exposure to collateralized loan obligations, or CLOs, in which the loans are often packaged.

Warren, a member of the Senate Banking Committee, will get a chance to question one key regulator in person on Thursday, when Fed Vice Chairman for Supervision Randal Quarles appears before the panel.

Bloomberg News