Middle-Market Public Policy Roundup

A paper released this week by the president of the Federal Reserve Bank of Dallas continues the increased focus on corporate lending levels by policymakers. The paper—which examines leverage risks across the U.S. household, government and corporate sectors—claims that federal deficits are at unsustainable levels and finds that corporate leverage is at pre-2008 Financial Crisis highs.

The U.S. House of Representatives’ Financial Services Subcommittee on Diversity and Inclusion held its first hearing last week, highlighting the goal of House Democrats to increase the representation of minorities and women in the financial services industry, an initiative that also has support from Republicans.

Dallas Fed President Warns of Corporate Debt and Leveraged Lending

In a paper published this week, Federal Reserve Bank of Dallas President Robert Kaplan warned that rising corporate debt levels, leveraged lending and rising U.S. deficits could amplify an economic downturn.

While Kaplan cited encouraging statistics of the average U.S. household, he said the U.S. government has not reduced its leverage, which usually occurs when the economy is strong. He concluded that the expanding deficit was likely unsustainable.

In regards to corporate debt, Kaplan explained that a drop in U.S. financial sector debt levels is encouraging, but that U.S. non-financial sector corporate debt is now higher than the prior peak reached at the end of 2008.

There has been a substantial increase in the number of syndicated leveraged loans, which have doubled from $6 billion to $1.2 trillion over the past 10 years, according to the paper. Kaplan says these loans originated from commercial banks and then moved to nonbank investors, including special-purpose vehicles such as collateralized loan obligations, private equity funds and other stand-alone entities.

The paper points out an increase in direct lending to midsize firms as well, saying the direct lending market for leveraged loans in the U. S. primarily involves nonbank financial organizations, which include private equity firms.

Kaplan underscored the need for continued vigilance on the part of policymakers and regulators, saying, “In the event of an economic downturn, these issues could also contribute to a deterioration in financial conditions which could, in turn, amplify the severity of a growth slowdown in the U.S. economy.”

Leveraged lending has been receiving increased scrutiny by policymakers due to concerns about potential systemic risk. If you are an ACG member interested in sharing feedback related to leveraged lending to help inform ACG’s advocacy efforts, please contact policy@acg.org.

Financial Services Subcommittee on Diversity and Inclusion Holds First Hearing

Last week, the newly formed House Financial Services Subcommittee on Diversity and Inclusion held its first hearing.

Titled “Diversity Trends in the Financial Services Industry,” the hearing examined workforce diversity and inclusion in the financial services industry.

The Diversity and Inclusion Subcommittee was formed this Congress by House Financial Services Committee Chair Maxine Waters, D-Calif., with a focus on the underrepresentation of minorities and women at the management level in the financial services industry.

The hearing specifically centered around a Government Accountability Office report published in November 2017 that examined past inclusion and diversity practices in the financial services industry from 2007 to 2015.

Both Republicans and Democrats agreed the financial services industry needs to improve diversity and inclusion practices in hiring and management overall. Both sides of the aisle also agreed to expand recruitment efforts for financial services away from elite schools.

The only area of disagreement was on the theoretical imposition of incentives or penalties, with Republicans favoring incentives for diversity. Rep. Mooney, R-W.Va, pointed out that one-size-fits-all regulations “may have adverse effects when you try to apply it to every business.”