BPInsights: June 7, 2019

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.

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.

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.

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.

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.

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.

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.

BPI Announces John Court as General Counsel