Tags: Federal Reserve | Banks | Capital Charges | Leveraged Loans

Fed Said to Warn Banks About Capital Charges on Leveraged Loans

Tuesday, 23 Sep 2014 04:49 PM

Federal Reserve officials are warning banks that rising levels of high-risk, high-yield loans on their balance sheets may require more capital held against them, according to a person familiar with the conversations.

Regulators have beefed up scrutiny of the market after guidance issued in 2013 by the Fed, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. didn’t slow deal volume or declining credit standards.

Banks have arranged about $411 billion of leveraged loans sold to investors such as mutual funds this year, compared with a record $696 billion in all of 2013, according to data compiled by Bloomberg.

“Covenant-lite” loans, which lack requirements that can help protect lenders, are on pace to exceed 70 percent of total issuance this year, according to a Barclays Plc research report dated Sept. 5.

“It appears that many banks have not fully implemented standards set forth in the interagency guidance,” Todd Vermilyea, senior associate director for banking supervision and regulation at the Fed Board, said in May.

Fed officials haven’t announced the focus of the 2015 stress-test cycle. Last year’s instructions included a scenario of rising yields of high-risk, high-yield bonds and leveraged loans.

Continued high underwriting volumes and declining loan quality standards in the leveraged-loan market are emerging as a key test for regulators who favor using supervisory tools to halt bubbles as the Fed keeps interest rates near zero to spur the economy.

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Federal Reserve officials are warning banks that rising levels of high-risk, high-yield loans on their balance sheets may require more capital held against them, according to a person familiar with the conversations.
Federal Reserve, Banks, Capital Charges, Leveraged Loans
237
2014-49-23
Tuesday, 23 Sep 2014 04:49 PM
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