David Biggin, a financial services expert at PA Consulting, is quoted in an article asking if the corporate leveraged loans market could be ‘harbouring some dark secrets that threaten to morph into another global financial crisis’. The piece looks at the Financial Stability Board (FSB) and the looming prospect of more regulation for the sector.
The article discusses possible regulatory responses, and David says he sees a number of possible responses.
He says: “One could be for regulators to impose punitive risk weights on investors holding more risky CLOs.”
He adds: “Japan’s Financial Services Agency did so in January by tripling risk weightings for certain CLO products held by Japanese banks.”
The article goes on to explain that the EU has introduced provisions to significantly enhance the amount of information banks have to report around the sale of CLOs and any changes made to them, such as their risk profile.
David continues: “This regulation is currently being phased in and only applies to Europe but this type of initiative could be expanded if the FSB decided to pursue this.”