Fed’s Leveraged-Lending Stress Test Is a Start to Easing Fears
The central bank sends a message to Wall Street, but don’t expect any significant revelations.
Banks need to cram.
Photographer: Michael Nagle/Bloomberg
Ask just about anyone on Wall Street what worries them the most, and corporate leverage will most likely rank among their top fears. In August, Bank of America Corp. surveyed 224 fund managers with a combined $553 billion in assets and found that a record 50% of them were concerned about excessive debt on company balance sheets.
It’s not hard to see why that’s the case. For one, a growing number of well-known U.S. companies are now rated triple-B, potentially just one economic downturn from becoming junk and facing a spike in borrowing costs. But at least that’s more or less out in the open. More ominous is the explosive growth in the market for leveraged loans and collateralized loan obligations. Global regulators haven’t found a way to quantify the threat they may pose to the financial system in a worst-case scenario. At least not yet.