Leveraged loans

Fresh data from the Fed, FDIC and Bank of England shows that, directly or indirectly, banks are taking on more leveraged loans. But whether this puts their loan and securities portfolios at risk remains open for debate.

“Rating agencies have been complacent and allowed debt/Ebitda and debt/equity ratios to deteriorate without a corresponding reduction in credit ratings,” Einhorn said in the July 25 letter.

The Democratic presidential candidate argued in a blog post that the U.S. could avoid a recession by canceling most student debt and authorizing regulators to more aggressively monitor leveraged lending.

Banks may be exposed to a shakeout in the $1.3 trillion leveraged-loan market even though they mostly own the safest portions of debt, according to the Bank for International Settlements.

Federal Reserve Chairman Jerome Powell says the agency is closely monitoring leveraged lending risks, but suggests further regulations on banks aren’t warranted.

The U.S. economy is on solid footing except for one potential trouble spot, according to Bank of America Corp.’s Chief Executive Officer Brian Moynihan: leveraged loans -- a business the bank has dominated for a decade.

Lawmakers waded into a growing debate about the threat posed by corporate credit risk.

Although higher corporate debt could hurt the economy, Federal Reserve Chair Jerome Powell argued changes made since the last crisis will guard against a meltdown.

The ranking Democrat on the Senate Banking Committee says he wants answers from the Financial Stability Oversight Council on efforts to address corporate debt risks.

Amid widespread concern about their exposure to leveraged lending, the debt rating agency says banks have sufficient earnings and capital cushions to continue investing in the sector.