FSB's Quarles calls for more scrutiny of leveraged loan market

By Huw Jones and Pete Schroeder

LONDON/WASHINGTON (Reuters) – Regulators need to get a fuller picture of the growing market for loans to highly-indebted companies, Financial Stability Board (FSB) Chair Randal Quarles said on Thursday.

Bank of England Governor Mark Carney, who Quarles succeeded at the FSB, has likened the market to subprime mortgages that defaulted a decade ago, triggering a global financial crisis.

Just a few global banks, mainly in the United States and the European Union, account for 86% of collateralized loan obligations (CLO) issued, Quarles told Reuters as the FSB published a review of the sector.

Quarles said the FSB report was a stock take and the next step was for regulators in each jurisdiction to consider whether action is needed on the basis of this agreed data.

With no single definition of a leveraged loan, the FSB estimated that a year ago the overall market was worth between $1.4 trillion and $3.2 trillion.

But while regulators have data on most of the world’s leveraged loan and CLO market, the remaining $106 billion is held by insurers and investment firms where data is too thin to give a clear picture, the FSB said.

Non-banks tend to hold the riskiest loans and there is little information on the links between them and global banks, the FSB said, adding that while open-ended funds have invested in such loans there is no sign of redemptions causing strain.

“I view this as a glass 86% full as opposed to 14% empty,” said Quarles, who is also the top financial supervisor at the Federal Reserve.

(FSB Graphic – https://fingfx.thomsonreuters.com/gfx/mkt/12/10169/10080/FSBCLOGraphic2.png)

Quarles said leveraged loans are not a threat to U.S. financial stability, and that banks hold far more capital and liquidity than they did before the financial crisis when many were bailed out by taxpayers.

“It would be premature to draw any view about what the final conclusion might be. We want to make sure we have got the data,” Quarles said

The Fed and other U.S. regulators have already taken a closer look at softening loan underwriting standards “to ensure that erosion doesn’t continue” Quarles said.

“We have pushed back against that,” he added.

The FSB said market supervisors in many jurisdictions have already launched data collections.

(FSB Graphic – https://fingfx.thomsonreuters.com/gfx/mkt/12/10168/10079/FSBCLOGrahpic.png)

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