After the Fed told banks it was OK to lend to riskier companies, that’s exactly what they did. Now, underwriting standards have fallen so far that Fed officials want the banks to pullback. Bloomberg’s Craig Torres and Lisa Lee report:
U.S. regulators told banks and investors that it was OK to make riskier loans to companies. Now they’re having trouble reining in the excesses that resulted.
In the first quarter, banks and investors helped bring some of the highest debt levels of this decade to leveraged buyouts and other acquisitions. Lenders are letting companies aggressively massage measures of their profits when posting them for credit investors. And more and more lender protections are being watered down.
Those trends have some regulators worried. In December, Federal Reserve Governor Lael Brainard called out “a notable deterioration in underwriting standards” for borrowings at junk-rated companies known as leveraged loans, noting that corporations with the riskiest balance sheets “have been increasing their debt loads the most.” In October, Todd Vermilyea, the Fed’s head of risk surveillance and data, told bankers at a conference that lenders appear to be chasing
increasingly dangerous deals and forgoing protections against borrowers going bust.
Read more here.