Federal Reserve Board Chairman Powell Finds That Leveraged Lending Presents No Notable Risks to Financial Stability

Kramer Levin Naftalis & Frankel LLP

Federal Reserve Board of Governors Chairman Jerome H. Powell, in remarks made yesterday in Amelia Island, Florida, at the 24th Annual Financial Markets Conference, sponsored by the Federal Reserve Bank of Atlanta, stated that leveraged lending “does not appear to present notable risks to financial stability.” Chairman Powell further noted that “[t]he debt-to-GDP ratio has moved up at a steady pace, in line with other previous expansions, and [is] neither fueled by nor fueling an asset bubble. Moreover, banks and other of financial institutions have sizable loss-absorbing buffers. The growth in business debt does not rely on short-term funding and overall funding risk in the financial system is moderate.”

Powell did indicate that the Federal Reserve Board is seeking to better monitor unregulated leveraged lending market participants, particularly those dealing in collateralized loan obligations: “We cannot be satisfied with our current knowledge about these markets, particularly the vulnerability of financial institutions to potential losses and the possible strains on market liquidity and prices should investors exit investment vehicles holding leveraged loans. We are committed to better understanding the areas where our information is incomplete. This commitment includes coordination with other domestic and international agencies to understand who is participating in business lending and how their behavior could potentially amplify stress events.”

The full text of Chairman Powell’s remarks can be found here.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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