- Former Fed chair Janet Yellen told the Financial Times she is concerned about increasingly lax standards in the market, now valued at about $1.6 trillion.
- “I am worried about the systemic risks associated with these loans,” she said.
- After Trump took office, his appointees told the banking sector that they were going to be less strict about loan leverage.
Former Federal Reserve chair Janet Yellen said she is concerned about increasingly lax standards in the market for leveraged loans, the Financial Times reported.
Yellen echoes warnings from the Fed, the Bank of England, the Reserve Bank of Australia about the corner of the debt market that, according to the Institute of International Finance, has ballooned to $1.6 trillion.
“I am worried about the systemic risks associated with these loans,” the former central banker said in an interview with the FT.
“There has been a huge deterioration in standards; covenants have been loosened in leveraged lending.”
Central banks are starting to worry that the corporate world may have taken on too much debt, and that the stock of risky debt overhanging the global economy might start to behave the way subprime mortgages did before 2008.
The Bank of England recently suggested that leveraged loans might become a bigger problem than subprime mortgages were:
“The Committee is concerned by the rapid growth of leveraged lending, including to UK businesses,” the BOE’s Financial Policy Committee said earlier in October.
“The global leveraged loan market is larger than – and growing as quickly as – the US subprime mortgage market was in 2006.”
In the UK, leveraged loans to British companies have hit a record, at about £40 billion ($52 billion) in 2018 alone, according to the Bank of England. Compare that figure to before the crisis, when new issuances of such loans only totalled £30 billion ($39 billion).
In 2013, the “issuance” of new leveraged loans peaked at $607 billion globally. But regulators under President Obama frowned publicly upon excess leverage, and the market declined through 2015 to a low of $423 billion. After President Trump took office, however, his appointees told the banking sector that they were going to be less strict about loan leverage. In 2017, new loan issuance went back up, to $650 billion – a new record.
Put simply, leveraged loans are given to troubled companies who can’t get access to cheaper credit via a normal loan from a bank or by raising an investment-grade corporate bond.