Here are some initial, important questions I recommend that bank and financial regulators ask about leveraged lending and collateralized loan obligations. Legislators need to make sure regulators have the necessary tools to get data. Waiting until the next economic downturn will be too late.
, should be an important moment for legislators to publicly identify risks of leveraged loans and collateralized loan obligations . Subsequently, legislators should figure out how to work with regulators and market participants to mitigate these risks before the next economic or market downturn.
Of your total loans and credit facilities, how much do you lend to private equity firms, business development companies, or other non-banks that originate leveraged loans or which invest in CLOs? What percent of the loans are to domestic and foreign non-banks. How do you hedge against credit risk to those institutions.
How precisely are auditors and compliance officers involved in how you underwriting leveraged loans and how you invest in CLOs? How do you measure the credit and interest rate risks of leveraged loans? How often do you update those measurements?How much do you hold in CLOs, by CLO vehicle and by credit rating?
Are you stress testing your leveraged loan and CLO portfolios? Are you sufficiently capitalized to sustain unexpected losses? Can bank regulators and the Financial Stability Oversight Council , through the Office of Financial Research , get data to determine how much banks are holding in leveraged loans and in collateralized loan obligations ?How do banks measure the risk of leveraged loans and CLOs?Are these measurements affecting their risk-weighted assets and the level of capital that they allocate for them to sustain unexpected losses?How much of the data that bank regulators and/or FSOC can obtain, can be made...
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