Middle-Market Public Policy Roundup

Leveraged lending continues to take the spotlight this week as lawmakers and regulators discussed actions that included easing Volcker Rule restrictions. In other developments, a bill written by the architects of the original opportunity zones program was recently introduced to Congress. The proposed legislation would increase data collection and oversight of opportunity zones, providing an avenue for Democrats to address potential concerns about the new program.

Bank Regulators Testify Before Congress

As previewed in last week’s policy roundup, key overseers of the Federal Reserve, FDIC, Office of the Comptroller of the Currency, and National Credit Union Association testified before Congress. The hearings touched on a significant number of issues under the jurisdiction of the various agencies, at times becoming contentious along partisan lines.

Leveraged Lending

As foreshadowed by the letter submitted to regulators in advance of the hearing, ranking member Sherrod Brown, D-Ohio, expressed concern that the current expansion of leveraged loans was similar to the subprime mortgage boom largely responsible for the financial crisis of 2008.

Federal Reserve Board Vice Chair for Supervision Randal Quarles said the responses by federal agencies are appropriate, agreeing with Sen. Pat Toomey, R-Pa., that financial stability is further enhanced by a large portion of the loans being held off of the balance sheets of banks.

Quarles expanded on this in the House the next day, noting that there isn’t a risk of a financially destabilizing “run” on institutions that hold leveraged loans. He also said it’s important to examine whether repricing of the assets that collateralized loan obligations hold—such as those caused by loan defaults—would magnify an economic downturn’s effects on businesses.

Comptroller of the Currency Joseph Otting said regulators were looking at the effects of a reduction in the liquidity of collateralized loan obligations. Additionally, Otting said the agency is asking banks to look at the set of businesses surrounding the companies they loan to—for instance, ensuring that the suppliers of a company receiving a loan are not overleveraged. These thoughts were repeated and further expanded in the Office of the Comptroller of the Currency’s Semiannual Risk Perspective this week.

FDIC Chair Jelena McWilliams said the agency is talking with the SEC about collateralized loan obligations in nonbanks and monitoring small banks’ exposure to the financial tool. Rep. Garcia, D-Ill., made a point to argue that private equity firms were responsible for the Toys ‘R’ Us bankruptcy through the use of excessive leverage.

Volcker Rule

In the House of Representative hearing, Fed Vice Chair Quarles was also asked about the Volcker Rule. Quarles said that the regulators will likely be able to respond to the many comment letters they received in response to the original rule over the summer, proposed with the intention of easing the restrictions of the Rule.

Quarles said there will be an additional proposal with regards to the “covered funds” issue. In our comment letter to the original rulemaking, ACG called for revisiting the issue of banks being barred from investing in covered funds, which include private equity funds.

Opportunity Zones Data Collection Bill Introduced

Sen. Cory Booker, D-N.J.; Maggie Hassan, D-N.H.; Tim Scott, R-S.C.; and Todd Young, R-Ind., have introduced Senate Bill 1344, which would require the U.S. Department of the Treasury to collect data on the opportunity zones program created with the 2017 Tax Cuts and Jobs Act.

The original opportunity zones legislation included reporting requirements, but because the data reporting measures were not budget and tax-oriented, they had to be removed so that the tax bill could pass through the Senate with a simple majority.

The bill would increase reporting requirements on opportunity zone funds by requiring the Treasury to track investment specifics, such as the total dollar amount and date of investment, type of investment and business activity supported, as well as approximate number of full-time employees (for businesses) or total square footage and number of residential units (for properties).

The Treasury would also be required to track the number of qualified opportunity funds, assets held by funds, the composition of asset classes of fund investments, percentage of designated opportunity zones receiving funding and the impacts on economic indicators such as job creation and poverty reduction for areas receiving opportunity zone funding.

The legislation would require that the Secretary of the Treasury begin reporting to Congress the previously-mentioned data five years after the enactment of the act. This bill comes on the heels of calls for action by some Democrats to ensure that the opportunity zones program is best utilized to increase economic prosperity, and not lead to an increase in gentrification.