Fed challenged over view that leveraged loans won’t cause crisis

Bloomberg

A top Democratic lawmaker questioned whether Federal Reserve Vice Chairman Randal Quarles can be trusted when he says leveraged lending isn’t a current threat to the financial system, pointing to his failure to foresee similar dangers before the credit crisis a decade earlier.
Senator Sherrod Brown of Ohio, at a Banking Committee hearing, quoted a series of recent remarks by Quarles alongside similar assurances he’d expressed as a senior Treasury Department official in 2006 before the subprime mortgage meltdown.
“How should I know whether the economy is safe, or you’re just bad at making economic predictions?” Brown, the committee’s ranking Democrat, asked Quarles, who is the Fed’s supervision chief.
The leveraged lending market — a subset of almost $1.2 trillion in borrowing that often funds mergers and acquisitions involving heavily indebted companies — grew 20% last year. The Fed, in a report, pointed to decreasing protections for lenders, with the risk typically passed on to investors in the form of collateralised loan obligations.
“We are concerned — and appropriately so — about what is the right regulatory response to developments in the underwriting of leveraged loans that could affect a business downturn in the future,” Quarles said at the hearing. Despite the view of the Fed and other regulators that the market isn’t likely to endanger the financial system, he said it could still amplify a downturn.