TOP OF THE AGENDA
Wait – Isn’t It Actually A Leveraged Borrowing Problem, Not A Leveraged Lending Problem?
Some have attributed leveraged lending as a source of macroeconomic risk and perhaps a potential future crisis. As the story goes, many American companies are overleveraged – that is, their debt levels exceed their net income by unhealthy amounts. As a result, the next recession will see more defaults than ordinary, with greater job losses and other economic effects. But if this is the problem, it is a borrowing problem, not a lending problem. Leaving aside whether that diagnosis is correct (and there are many reasons to believe it is not), the prescriptions being offered appear wildly inappropriate for the diagnosis. On June 4, the House Financial Service Committee Consumer Protection and Financial Institutions Subcommittee held a hearing on leveraged lending.
In addition, other trade associations have also provided analysis of the leverage lending market impact, available here and here.
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5 Stories Driving the Week
1. Federal Reserve Releases Stress Test Schedule
The Federal Reserve announced that it will release the results for the supervisory stress tests conducted as part of the Dodd Frank Act on June 21, and on June 27, it will release the results for the Comprehensive Capital Analysis Review. As a reminder, BPI previously published a blog showing that the Federal Reserve’s stress test scenario is much more severe than the 2007-2009 financial crisis.
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2. Financial Stability Board Issues Report on Market Fragmentation
On June 4, the Financial Stability Board (FSB) released its much-anticipated report on market fragmentation, which examines instances of market fragmentation arising from supervisory and regulatory policies and identifies areas for further FSB study and work. The report seeks to define several areas where better international cooperation could lead to a more efficient and stable financial system, including cross-border capital and liquidity management and trading and clearing of over-the-counter derivatives, as well as supervisory data sharing, and lays out potential mechanisms to reach this goal. Of note, on June 3 the FSB also issued two papers regarding GSIB resolution for public consultation, one on solvent winddown for broker-dealer subsidiaries and another on resolution public disclosures.
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3. Quarles Outlines Next Steps for LIBOR Transition
On June 3, Federal Reserve Vice Chairman for Supervision Randal Quarles, delivered a speech on “The Next Stage in the LIBOR transition.” The Vice Chairman emphasized that LIBOR can only be relied upon to exist through 2021 and that the Alternative Reference Rates Committee (ARRC) has provided tools to switch to a new benchmark rate – the Secured Overnight Financing Rate (SOFR). Further, Quarles said that the Federal Reserve expects to see an appropriate level of preparedness for the transition at the banks it supervises. Quarles noted that choosing to link loans to SOFR rather than LIBOR will not result in lowers projections of net interest income in the Fed’s annual stress tests.
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4. Waters Outlines Flood Insurance Reform Priorities
In a June 5 speech, House Financial Services Chairwoman Maxine Waters outlined her priorities for long-term reauthorization of the National Flood Insurance Program (NFIP). Chairwoman Waters said her main priority for reauthorization is affordability. In addition, she noted the “single most important thing we can do to fix the NFIP and bring relief to policyholders is to forgive the NFIB’s debt.” The flood insurance program authorization is set to expire on June 14.
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5. Senate Confirms Tarbert to Lead CFTC
The Senate on June 6 confirmed Heath Tarbert to serve as the next chairman of the Commodity Futures Trading Commission. The lawmakers approved his appointment in a 84-9 vote. Tarbert, who is leaving a senior international economic post at the Treasury Department, will succeed Christopher Giancarlo as CFTC chairman on July 15.
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In Case You Missed It
| BPI Announces John Court as General Counsel |
| BPI announced that John Court will be taking over as BPI’s General Counsel, heading the regulatory affairs team. BPI President and CEO Greg Baer said John “has been a bedrock part of TCH (The Clearing House) and BPI for over seven years; he is an exceptional lawyer in his own right, a thought leader in cross-border and resolution policies, and a known and trusted advocate to our members.” Jeremy Newell, BPI’s Executive Vice President, General Counsel, and Chief Operating Officer, will be leaving to become a Partner at Covington and Burling, joining the firm’s financial services practice. |
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| BPI, SIFMA Host Prudential Regulation Conference |
| On June 4, BPI and SIFMA hosted the 6th Annual Prudential Regulation Conference. This year’s conference assessed how the post-crisis prudential regulatory framework is affecting the capital markets, including market liquidity, capital formation and innovation. Speakers included Mark Van Der Weide, Federal Reserve Board General Counsel; Hester Peirce, Securities and Exchange Commissioner; and Brian Quintenz, Commissioner for the Commodity Futures Trading Commission. |
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| BPI Announces John Court as General Counsel |
| BPI announced that John Court will be taking over as BPI’s General Counsel, heading the regulatory affairs team. BPI President and CEO Greg Baer said John “has been a bedrock part of TCH (The Clearing House) and BPI for over seven years; he is an exceptional lawyer in his own right, a thought leader in cross-border and resolution policies, and a known and trusted advocate to our members.” Jeremy Newell, BPI’s Executive Vice President, General Counsel, and Chief Operating Officer, will be leaving to become a Partner at Covington and Burling, joining the firm’s financial services practice. |
| BPI, SIFMA Host Prudential Regulation Conference |
| On June 4, BPI and SIFMA hosted the 6th Annual Prudential Regulation Conference. This year’s conference assessed how the post-crisis prudential regulatory framework is affecting the capital markets, including market liquidity, capital formation and innovation. Speakers included Mark Van Der Weide, Federal Reserve Board General Counsel; Hester Peirce, Securities and Exchange Commissioner; and Brian Quintenz, Commissioner for the Commodity Futures Trading Commission. |
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| On June 6, the FSB issued a report that considers potential implications of decentralized financial technologies such as distributed ledgers, online peer-to-peer, or user-matching lending platforms. From a financial stability point of view, they argue that while decentralization could reduce the systemic importance of some current agents, other risks may appear: concentration of ownership; control of key infrastructure; greater degree of procyclicality. The FSB finds that the new technologies likely increase the need for activity-based, as opposed to institution-based, supervision and regulation. |
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| Top Banks Push Ahead with Digital Coins for 2020 |
| Thirteen of the world’s largest banks are preparing to launch digital currencies in 2020 following years of research that convinced institutions that it could make trading less risky and cheaper, according to a report from the Financial Times. UBS-led research on a “utility settlement coin” (ESC) has been in development since 2015 when banks began investigating whether wholesale banks should deploy the technology. |
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Events
| 6/11/2019 — House Subcommittee Convenes Student Loans Hearing |
| 6/11/2019 — House Financial Services Committee Holds Markup |
| 6/12/2019 — Cato Hosts Financial Regulation Conference, FDIC Chairman McWilliams Speaks |
| 6/20/2019 — House Subcommittee Holds Hearing on Proposals to Strengthen Securities Enforcement |
| 6/20/2019 — House Financial Services Holds Board Diversity Hearing |
| 11/19/2019 – 11/21/2019 — The Clearing House + BPI 2019 Annual Conference |
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