Yahoo Finance - FDIC Chair: We Need to be Preparing for the Next Downturn

Article by Brian Cheung in Yahoo Finance

One of the nation’s top banking regulators said Monday that she is staying vigilant for the next downturn and echoed concerns with leveraged lending.

“Things are looking good. Having said that, it is times like this that we need to be looking ahead and preparing for the next downturn,” McWilliams said.

McWilliams is closely watching leveraged lending, the business of large and risky business loans that has the attention of regulators and lawmakers on Capitol Hill. Last week, the Federal Reserve released a report flagging growth in nonfinancial leveraged loans and warned that credit standards “appear to have deteriorated over the past six months.”

The Office of the Comptroller of the Currency, the third major bank regulator, similarly reported that leveraged lending has suffered from “eased underwriting standards” and warned banks to be mindful of their direct and indirect exposure to corporate debt markets.

McWilliams noted that community banks have “really high” collateralized loan obligation holdings. CLOs were particularly popular securities for banks searching for yield during the period of zero-bound interest rates.

“We need to be constantly monitoring what’s happening in the marketplace and how are banks positioned,” McWilliams said. “Do banks hold enough capital against debt?”

Between 2015 and 2016, McWilliams said, there was a dip corporate leverage but said recent data shows levels at post-crisis highs.

The challenge for McWilliams, the Fed, and the OCC lies in identifying risk at nonbank institutions that they do not regulate; if mutual funds experience stress, the bank regulators may not be able to do much. McWilliams has also flagged another type of nonbank risk in the past: mortgages shifting from banks to large online lenders.

To read this article in Yahoo Finance in its entirety, click here.