FSB’s Quarles calls for closer scrutiny of leveraged loan market

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

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

Just a few global banks, mostly in the United States and the European Union, account for 86% of collateralized loan obligations (CLOs) issued, Quarles told Reuters as the FSB released an industry review.

Quarles said the FSB report was a balance sheet and the next step was for regulators in each jurisdiction to determine whether action was needed based on that 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 global leveraged loan and CLO market, the remaining $106 billion is held by insurers and investment firms where the data is too thin to give away. a clear picture, the FSB said.

Non-banks tend to hold the riskiest loans and there is little information about the links between them and global banks, the FSB said, adding that while open-end funds have invested in such loans , there are no signs of takeovers causing tensions.

“I consider this a glass 86% full to 14% empty,” said Quarles, who is also the Federal Reserve’s chief financial supervisor.

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

“It would be premature to say what the final conclusion might be. We want to make sure we have the data,” Quarles said.

The Fed and other U.S. regulators have already taken a closer look at easing loan underwriting standards “to make sure the erosion doesn’t continue,” Quarles said.

“We pushed that back,” he added.

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

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Reporting by Huw Jones; Editing by Alexander Smith

Priscilla C. Carnegie