In an April 11 letter to Treasury Secretary Mnuchin, in his capacity as chair of the Financial Stability Oversight Council (FSOC), U.S. Sen. Sherrod Brown (D-Ohio), the ranking member of the U.S. Senate Committee on Banking, Housing and Urban Affairs, called on the FSOC to take decisive action to address heightened risk in the leveraged loan market. Brown wrote that “[t]he marked increase in the volume of leveraged loans originated by financial institutions has been accompanied by a notable decrease in underwriting standards.” In addition, Brown stated that the FSOC must consider whether this additional risk to the banking system serves as a public benefit to the real economy. “For example, leveraged loans are often used to fund risky private equity transactions, many of which struggle and fail under unsustainable debt loads, causing harm to local and regional economies. These types of transactions can cause booms and busts that harm workers and the environment, facilitate the concentration or even dissolution of important democratic institutions like local newspapers, make housing less accessible and more costly, or even undermine the provision of the most basic and critical government services.”
Brown requested that the FSOC provide to him no later than April 23:
Any analyses of the leveraged lending market that the council and its member agencies have performed in the past two years.
Any other council documents discussing the risks of leveraged lending and staff recommendations to address those risks.
A list of all council meetings where leveraged lending was discussed, including the dates of, attendees in and materials presented at those meetings.
A list of supervisory or other actions that the council and its member agencies have taken at regulated institutions in order to address risks in the leveraged lending market, especially with regard to weak underwriting standards.
A description of how the FSOC is monitoring leveraged lending markets and what actions it plans to take to protect the economy from threats in credit and lending markets.
Brown’s full letter can be read here.