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Governments throughout history have used their banking systems to channel credit for political purposes to favored firms and industries. In China, for example, government-owned banks routinely channel credit to government-owned enterprises. Many of these enterprises are inefficient loss centers. They use bank credit to fund operations to artificially maintain employment and meet centrally planned output targets. At the turn of the millennium, this system required Chinese banks to write off hundreds of billions of dollars in bad loans. Today, as Chinese borrowing rates rise, so does the risk of new massive Chinese bank losses.
The Chinese case is not unique. History includes many examples where government-directed lending policies caused financial crisis. Prior to the mid-1990s, Mexico used banks to fund inefficient government-favored enterprises to sustain employment. These loans generated large bank losses that were disguised for years by unconventional Mexican accounting rules, but were finally revealed by the 1994 Mexican peso crisis.
In their new book on politics and banking crisis, Fragile by Design, professors Charles Calomiris and Stephen Haber show that history is replete with examples of government-directed lending that leads to bank losses and banking crisis, including the US financial crisis of 2008. Without proper checks and balances, governments invariably choose to use their financial systems to carry out favored social and political goals, often financed through private banks, off the government budget.
By definition, government-directed bank lending policies are politically popular. They offer benefits to targeted constituencies and appear to be costless in the short run. Eventually, however, these programs end up costing taxpayers dearly, as loans made to satisfy political goals rarely make economic sense without an explicit government subsidy somewhere in their life cycle. These lending policies place a virtual tax on bank revenues, but the tax is invisible until loans sour and taxpayers must cover the losses. Directed lending policies create an unfavorable financial environment that pushes resources out of the financial sector, reducing business and consumer access to credit and limiting economic growth.
US Government Lending Policies after the Financial Crisis
After the recent financial crisis, politicians moved quickly to implement financial reforms. New regulations were drafted before the true causes of the crisis were understood. “Never waste a good crisis,” a quote attributed to Rahm Emanuel, was the mantra of many legislators. They crafted new far-reaching legislation that extended regulatory powers over the financial system.
Politicians marketed the Dodd-Frank Act (DFA) as new comprehensive regulations needed to ensure financial-sector stability. In practice, the DFA ignores many needed financial reforms and instead grants new regulatory powers that increase substantially the government’s ability to carry out social policies off the government balance sheet through banks and other financial institutions. Serious problems were created by long-standing government policies to promote the growth of consumer mortgage debt. While the flaws in these policies were revealed in the financial crisis more than six years ago, a myriad of government policies still promote the growth of mortgage credit.
The root cause of the financial crisis was overleveraged consumers. Consumers’ ability to overleverage was facilitated by government housing policies that seriously weakened national mortgage underwriting standards, and yet government housing policy today remains firmly focused on stimulating consumer mortgage borrowing, including borrowing by households with subprime credit quality.
Since the onset of the crisis, government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac have been the repository of most US mortgage market risk. Following conservatorship in 2008, the government fully controls these GSEs’ operations through the Federal Housing Finance Agency (FHFA). The crisis required nearly $200 billion in government support to keep the GSEs operating. But this $200 billion government investment is the gift that keeps on giving. As real estate markets have stabilized and GSE losses subsided, the GSEs’ profits will provide resources that the government can channel into new politically favored housing finance subsidies without legislation by using FHFA powers over GSE operations.
In addition to the mortgage market life support provided by the GSEs, the Federal Reserve has purchased more than $1.5 trillion in mortgage-backed securities through its quantitative easing (QE) program to reduce mortgage interest rates and stimulate mortgage borrowing. Thus far, the government’s strategy to repair a deflated mortgage bubble has been to increase government mortgage subsidies and try to get consumers to take on new mortgage debt. Because these policies promote the recovery of home values, they have populist appeal, especially in the short run. However, the financial crisis clearly demonstrated that such policies do not promote long-term financial stability.
Postcrisis Regulations Create a New Consumer Credit Entitlement
Postcrisis GSE and QE policies offer carrots to entice new consumer mortgage borrowing. In contrast, postcrisis financial regulatory reforms use regulatory “sticks” to encourage bank lending. Armed with virtually unlimited authority from the DFA and fortified by public hostility toward bankers, regulators are increasingly using their new powers to direct bank lending.
One new regulatory tool for directing bank credit is the threat of government charges of loan discrimination. Regulators have decided to enforce anti–loan-discrimination statutes using a controversial approach where statistical analysis compares the characteristics of an institution’s borrowers to the characteristics of the institution’s potential borrowers. If the characteristics of a bank’s actual borrowers differ from the characteristics of its potential borrowers, the government can threaten litigation based on so-called disparate impact. The threat of disparate impact litigation has already forced banks to restructure their auto and mortgage lending processes.
When bank loan underwriting standards based on objective financial criteria produce an “unbalanced” distribution of credit, lenders can be accused of lending discrimination. In disparate impact cases, plaintiffs need not establish evidence of lenders’ intent to discriminate. The loan underwriting standards can be completely blind to race, gender, ethnicity, and other protected characteristics. Yet if they do not approve loans in a pattern that mirrors the market population characteristics, the bank may be found in violation of the fair-lending regulations.
Suppose a bank makes loans using a single “facially neutral” underwriting process that uses sound financial practices to assess a borrower’s ability to service a loan. A discrimination case can be brought when statistical analysis shows that the share of loans that are approved using this underwriting standard disproportionately and adversely affect access to credit by a protected characteristic. Once a plaintiff shows evidence of “statistical discrimination” in lending outcomes, the bank is assumed to be guilty and assigned the burden of proving its own innocence. The disparate impact standard for fair-lending enforcement seeks to create a new entitlement for protected characteristics: access to bank credit regardless of borrower credit quality.
But how is the disparate impact standard likely to work in practice? Finance theory suggests that banks could serve an underrepresented segment of their population by adding a risk premium to compensate for the expected losses attached to riskier loans. However, this economically sound potential solution could itself easily bring charges of lending discrimination if protected characteristics disproportionally pay higher loan rates.
Absent risk pricing, banks seemingly have three possible options to avoid charges of disparate impact. One option is reverse discrimination. Banks can reduce the credit they grant to nonprotected classes until their overall approval ratios balance. Alternatively, banks can extend loans on unfavorable terms to borrowers in protected classes that do not meet the bank’s neutral underwriting standard and, whenever possible, increase loan rates on well-qualified borrowers to cross-subsidize higher-risk loans. A third option is to combine both strategies.
Because the extension of poorly underwritten and underpriced credits lowers expected bank profits, disparate impact enforcement is more likely to constrain the availability of consumer credit to borrowers who are well-qualified but lack protected characteristics.
The Qualified Mortgage Rule Provides No Protection for Banks or Consumers
The Dodd-Frank Act added the Qualified Mortgage (or QM) rule to the repertoire of regulatory instruments. The legislative intent behind the QM rule is preventing predatory mortgage lending. If banks underwrite mortgages that comply with QM standards, borrowers will presumably have the ability to repay the mortgage and bankers will be given safe harbor from predatory lending lawsuits.
In practice, the final form of the QM rule issued by regulators is a remarkably lax government standard for mortgage underwriting. It will neither protect borrowers from receiving loans that they cannot afford nor provide banks with safe harbor from allegations of predatory lending or lending discrimination unless they sharply curtail the availability of mortgage credit.
The final QM rule has been designed to help government programs that are supporting the housing market by minimizing QM-related constraints on borrowers’ ability to qualify for a home mortgage. The QM rule stretches underwriting standards to allow overextended consumers to continue purchasing houses that would otherwise be unaffordable. Borrowers can satisfy QM standards with only a 3 percent down payment and a subprime (580 FICO) credit score. It is doubtful that the QM rule offers borrowers much protection against predatory lending. Regulatory estimates show that, of the GSE mortgages guaranteed between 2005 and 2008, 23 percent of those that meet current QM standards defaulted or became seriously delinquent.
The QM rule on its own does not seem to force a particular lending outcome. A bank can impose underwriting rules stricter than those specified in the QM rule and underwrite only high-quality mortgages. The problem with this strategy is that such an underwriting rule risks fair-lending legal challenges.
A bank can originate mortgages that comply with the QM rule, and regulators may still take fair-lending actions against a bank should targeted constituencies fail to receive their credit “entitlement.” Bank industry associations have raised concerns that even consistent application of the lax QM rule limits may, in some cases, lead to lending outcomes that are inconsistent with Department of Housing and Urban Development and Consumer Financial Protection Bureau disparate-impact fair-lending rules.
The regulators’ response to industry concerns is that institutions are not restricted to originating only QM loans. In other words, the QM rule does not change a bank’s fair-lending calculus. To satisfy fair-lending laws, banks will still need to reverse discriminate, or make non-QM loans to underqualified borrowers and risk predatory lending legal claims, or adopt some combination of these strategies.
While the United States has certainly not reached levels of government-directed lending common in China or once common in Mexico, these new US rules greatly increase the mandate for private bankers to incorporate government redistribution policies into their lending decisions.
Systemic-Risk Powers Used to Restrict New Business Credit
Instead of expanding business borrowing opportunities, new regulations are being used to restrict bank lending to businesses. Recent reports suggest that regulators stopped some large banks from making specific “leveraged loans.” Regulators objected to leveraged loan deals being originated by JPMorgan Chase, Bank of America, and Citigroup on the grounds that they violated new regulatory safety and soundness guidelines issued in March 2013.
Citigroup reportedly was forbidden to make loans associated with a KKR and Co. buyout of Brickman Group Ltd., and Bank of America and JPMorgan reportedly were pressured to pass on originating loan funding for a Carlyle Group acquisition of a Johnson and Johnson subsidiary. Press accounts estimate these regulatory actions cost Citibank $10 million and JPMorgan and Bank of America more than $20 million each in lost fee income.
These deal-specific regulatory lending prohibitions took many market participants by surprise. In the past, an individual bank might receive a blanket prohibition against certain types of business transactions if regulatory examinations revealed material weaknesses in a bank’s risk management or controls. Typically, prohibitions are articulated in a memorandum of understanding between the bank and its regulator. Certain new activities may be banned until specific bank safety and soundness issues are remedied. In the past, it would have been highly unusual for US regulators to prohibit specific loans and approve others—this has typically been the banker’s job.
Leveraged loans are a long-standing core banking business involving loans to sub–investment-grade firms. Loan shares typically are syndicated to a group of banks and other financial institutions. Like many other types of bank loans, leveraged loans are risky, and some default. Still, as an asset class, regulatory data show that bank-leveraged loans outperformed bank mortgages, construction and development loans and sub–investment-grade bonds throughout the recent financial crisis.
Bank regulators issued new regulatory guidelines for leveraged lending in March 2013. These guidelines include new specific thresholds for commonly used debt-service coverage ratios that will be used by regulators to flag deals that create “excessive” leverage. The new regulations also include vague and far-reaching discretion that allows regulators to prohibit loans even if they pose no immediate risk to the originating bank.
Under the new guidance, regulators need argue only that a loan is poorly underwritten and may become a risk to the ultimate investors, and it can be prohibited. The new regulatory discretion to prohibit loans that create “systemic risk” is especially troubling because systemic risk has never been clearly defined. Still, regulators are increasingly making use of this new systemic-risk power including to quash the specific leverage loan deals mentioned in January 2014 press reports. Regulators did not stop these deals because they posed safety and soundness risks to the originating banks, but rather, because regulators think these deals are fueling a bubble in high-yield mutual funds.
The demand for leveraged loans was strong in 2013, driven by strong refinancing demand as corporations locked in favorable spreads. As far back as March 2013, the Federal Reserve voiced concerns of a “bubble” in the leveraged loan market. More recent statements by a senior deputy comptroller of the Office of the Comptroller of the Currency (OCC) specifically mentioned the possibility of a bubble in the market for junk-rated credit. The OCC official argued that financial-sector stability could be at risk if banks continue to work with asset managers to originate leverage loan deals and transfer this loan risk to mutual funds.
Regulators’ use of the systemic-risk clause to prohibit leverage loans destined for mutual fund portfolios echoes arguments recently made in the Office of Financial Research’s report Asset Management and Financial Stability. The September report identified mutual fund “reach for yield,” “herding,” and the potential for “fire sales” as sources of systemic risk. The Financial Stability Oversight Council (FSOC) has also expressed the view that money market and close substitute higher-yielding funds pose a continuing threat to financial stability.
DFA “Systemic-Risk” Powers Extend the Reach of Bank Regulators
The exercise of bank regulators’ new systemic-risk powers is not limited to banks. Through the very subjective process of systemically important financial institution (SIFI) designation, the FSOC may designate large nonbank financial institutions as “systemically important.” The DFA enumerates the designation criterion that the FSOC must consider but gives the FSOC discretion to determine the thresholds needed to achieve SIFI status for each DFA criteria.
If a designated institution does not agree with the SIFI designation, it can appeal the decision to the FSOC. If the FSOC does not rescind its designation, the institution has the right of judicial appeal. However, in practice there is little to gain from a judicial appeal. The vagaries of the designation criterion in the DFA make it very unlikely that the courts would overturn an FSOC designation. Perhaps the only way to place limits on the regulators’ newfound ability to expand their own jurisdiction without any legislative approval is to amend the DFA and constrain the FSOC’s designation authority.
A SIFI designation requires the Federal Reserve to exercise its large bank holding company powers over the designated financial institution, even though the institution may have nothing to do with banking. The Federal Reserve, moreover, has determined that the DFA Collins Amendment requires it to impose bank holding company capital rules on all SIFIs. So each designated SIFI will be regulated as if it were a large bank holding company regardless of whether the institution uses insured deposit funding or even makes extensive use of leverage.
Banking regulators, the dominant principals on the FSOC, have made aggressive use of the SIFI designation power. For example, the FSOC designated a large insurance firm over the formal objections of multiple nonbank regulatory members of the FSOC. Bank regulators are the leading advocates for FSOC SIFI designation for large asset management companies. Given the skewed balance of voting power on the FSOC, the DFA gives bank regulators a ready path for extending their jurisdiction over nonbank financial institutions.
While bank regulators are busy making a case for SIFI designations for large insurers and asset-management companies based on dubious financial stability arguments, it is reasonable to ask why these authorities are not pursuing GSE designations. The housing GSEs, despite their size, central importance, and huge need for government assistance, have not been designated as SIFIs. They received more support than any of the designated SIFIs and are the repository of most new mortgage risk since 2008, and yet they are exempt from the heightened prudential capital standards required of designated bank and nonbank SIFIs. Exempting housing GSEs from SIFI designation prolongs the government’s ability to direct lending and subsidize housing finance without focusing on sorely needed reforms.
Systemic-Risk Powers Threaten Competitive Financial Markets
Banking regulators are interpreting DFA systemic-risk powers as a broad grant to identify and prohibit any lending or financial activity they judge to be potentially destabilizing for the financial system. Unfortunately, history shows that regulators do not always fully understand financial system developments.
Regulators have a history of missing building financial imbalances and, left to exercise their own preferences, could easily discourage new financial innovations that promote financial efficiency and economic growth. Undoubtedly, systemic-risk powers will be beneficial when we have benevolent superhero regulators who can see into the future, but until then, the rules create a dangerous new avenue for governments to exercise control over the extension of credit. There are few practical checks or balances on these vague systemic-risk powers.
A particularly troublesome aspect of regulators’ new systemic-risk powers is that systemic risk is never clearly defined in law. Essentially nothing prevents regulators from crying “systemic risk” to prohibit any type of lending in disfavor by the government.
Using a systemic-risk justification, regulators might, for example, stop a bank loan funding a specific merger by claiming systemic risk when the real underlying motivation is the protection of a labor union. Or regulators might use systemic risk to veto a bank loan to fund entrepreneurs in an “out-of-favor” (for example, carbon-based) industry or a loan to a firm competing against firms with politically influential owners.
In the recent case where regulators prohibited leveraged lending, a senior OCC official said the agency would look unfavorably on leveraged loans to private equity firms that are used to pay dividends. At face value, this policy certainly restricts loans that benefit the so-called “1 percent” who work in the private equity industry. As long as regulators can prohibit specific loan transactions by simply arguing that the loans are a source of systemic risk, the scope for the government to use its discretion to withhold bank credit bank is unchecked.
Systemic Risk and the Leveraged Loan “Bubble”
Bank regulators are using their systemic-risk powers to stop banks from originating leverage loans to stem an alleged bubble in mutual funds. But cutting off the supply of new leveraged loans for mutual funds to purchase will only make the credit bubble worse. If there is strong investor demand for leveraged-loan mutual fund shares, limiting new leveraged loan supply will only reduce leverage loan yields, worsening the mispricing of credit risk and the alleged bubble. With more-favorable credit spreads, industry demand for new leveraged borrowing will be further stimulated and bank regulators will be forced to increase their loan rationing. Clearly, it is important to understand why such strong investor demand for leveraged loans exists before intervening to restrict new loan supply in this market.
After bottoming out in 2008, leveraged loan originations recovered as low interest rates allowed firms to refinance their outstanding bank loans. 2013 brought a record $605 billion in originations, besting the prior issuance record of $535 billion in 2007. Takeover activity, often an important source for new leverage loans, has not been particularly strong.
Before 2013, much of the supply of new leveraged loan originations stayed in the banking system. Collateralized loan obligations (CLOs)—special financial entities that purchase and securitize leverage loans—provided a strong source of demand for leveraged loan originations. CLOs purchase a large number of leverage loans and tranche the cash flows from the loan pool into senior-subordinated structures similar to those associated with private-label mortgage-backed securities issued in abundance before the financial crisis. The resulting CLO bond securities (tranches) are rated by National Statistical Rating Organizations. Historically, banks have been important sponsors for CLOs and have often purchased highly rated CLO tranches for bank investments.
In early 2013, bank CLO demand for leveraged loans diminished as changes in the rules for calculating deposit insurance premiums made CLO securities less attractive to large banks. Beginning in April 2013, the FDIC implemented changes in the scorecard it uses to set insurance premiums for banks with more than $10 billion in assets. The changes increased deposit insurance rates for banks holding CLOs and leveraged loans. It effectively became more expensive for banks to hold leveraged loans or CLO tranches and so these exposures migrated out of bank portfolios.
Shortly after deposit insurance rules reduced banks’ demand for CLOs and leveraged loans, mutual fund demand for leveraged loans was stimulated by the Federal Reserve taper scare in May. When former Federal Reserve chairman Ben Bernanke suggested the Fed might begin tapering its QE purchases, investors were surprised and reacted by selling long-term Treasury bonds, causing long-term rates to rise. This rise generated losses for bond fund investors. Yield-hungry investors sold bond funds and invested in high-yield loan funds as an alternative to junk bond investments.
Unlike junk bonds, which typically have fixed coupon rates, leverage loans are floating rate instruments and so are less exposed to the risk of rising Treasury rates. Following the taper scare, high-yield loan funds absorbed a large share of bank-leveraged loan originations. Retail and institutional investors, desperate for yield and fearful of a jump in long rates, moved money into funds filled with leveraged loans and credit risk. Some analysts have compared the risk profiles of high-yield mutual funds to the risks run by high-yield money funds prior to the Lehman bankruptcy and argued that credit losses could trigger a run on these funds and generate wider systemic risk in financial markets.
Bank regulators are now trying to throw sand in the gears of leveraged loan originations in an attempt to stall what they view to be a bubble building in high-yield mutual funds. In evaluating this policy, it is important to understand that the true source encouraging investor demand for high-yield floating rate loans is the Federal Reserve’s zero-interest-rate policy.
Under the prolonged policy of zero interest rates, investors lack short-maturity alternative investments with measurable yields. Indeed, for most retail investors, the rebates on their credit card purchases far outstrip the interest they earn on bank deposits and money funds. Investors also face the prospect of near-certain capital losses on long-term bond investments should they invest for yield using these investments.
In the current environment, it is not surprising that investors have a strong demand for mutual funds that invest in high-yield floating-rate loans. Unless they take equity market risk or choose to earn nearly nothing in short-term deposits and money funds, yield-focused investors have few alternatives but to take on exposure to credit risk through leveraged loan funds. The bank regulatory policy of artificially restricting the supply of leverage loans will only reduce the yield that investors earn on these mutual fund shares, reinforcing the loss in retail saver interest income earned under Federal Reserve QE policies.
The source of the alleged bubble is not demand for excessive bank or corporate leveraging, but rather investor-driven demand for yield and protection against losses from anticipated increases in long-term interest rates. Safety and soundness bank regulations are being used to restrict business credit and limit the yields retail savers earn to allow the Federal Reserve to continue a monetary policy designed to stimulate growth in consumer mortgage credit.
History has shown that when governments try to use financial markets to carry out popular social and political goals, they often end up promoting the extension of nonviable credits. These credits will require a government subsidy somewhere in their life cycle. Often, the subsidy takes the form of a taxpayer bailout of banking losses when the government-directed loans eventually sour. When government policies force banks and other private financial institutions to make unprofitable loans, they impose an invisible tax that discourages the development of the financial system. Eventually resources leave the financial sector, reducing consumer and business access to credit, which limits economic growth.
The financial reforms enacted in the Dodd-Frank Act have given government regulators many new powers, including the ability to use the banking system to implement politically driven lending policies. Against this backdrop, some types of consumer credit are now treated as a virtual entitlement as a backdoor means to redistribute income. Meanwhile, new bank safety and soundness regulations are being used to restrict access to business credit in order to maintain government policies that stimulate housing and consumer mortgage credit. These policies are being implemented without any government-budgeted costs, at least in the short term. But if history is a useful guide, these social policy–driven allocations of bank credit will have a good chance of creating losses for future taxpayers.
1. For example, see Shen Hong, “Perils Mount as Debt Costs Swell in China,” Wall Street Journal, February 10, 2014, http://online.wsj.com/news/articles/SB10001424052702304558804579374721862102300.
2. Charles W. Calomiris and Stephen H. Haber, Fragile by Design: The Political Origins of Banking Crises and Scarce Credit (Princeton, NJ: Princeton University Press, 2014).
3. Lowering mortgage rates can allow existing mortgages to refinance and improve the financial condition of some consumers and stimulate consumption spending. Still, a strategy that stems the economic damage associated with a deflating housing bubble by trying to start a new one is a strategy that closely corresponds to the definition of insanity attributed to Albert Einstein.
4. Peter J. Wallison, “Only a Private Housing Finance Market Can Produce Stability,” AEI Financial Services Outlook (December 2013), www.aei.org/outlook/economics/financial-services/housing-finance/only-a-private-housing-finance-
5. The US Department of Housing and Urban Development issued its final rule on the use of disparate impact analysis as means for legally assessing compliance with the 1964 Fair Housing Act on February 15, 2013. See Rules and Regulations, Federal Register 78, no. 32 (February 15, 2013).
6. Carter Dougherty, “Consumer Bureau Said to Warn Banks of Auto Lending Suits,” February 21, 2013, www.bloomberg.com/news/2013-02-21/consumer-bureau-said-to-warn-banks-of-auto-lending-suits.html.
7. The list of what constitute “protected characteristics” in these cases has been expanding over time.
8. In the case of mortgages, the government can alter the bank’s calculus by using GSE affordable housing goals as a means for transferring the risk of low-quality loans from the originating banks to a government-sponsored agency.
9. See the discussion in Edward J. Pinto, Peter J. Wallison, and Alex J. Pollock, “Comment on Proposed Credit Risk
Retention Rule,” AEI, October 30, 2013, www.aei.org/files/2013/10/31/-comment-on-the-proposed-credit-risk-retention-rule_0725007171.pdf.
10. Gillian Tan, “Banks Sit Out Riskier Deals,” Wall Street Journal, January 21, 2014, http://online.wsj.com/news/articles/
11. By some estimates, leveraged loan originations generated about 25 percent of all investment banking revenue in 2013. See Matt Wirz, “‘Junk’ Loans Pick Up the Slack,” Wall Street Journal, January 9, 2014, http://online.wsj.com/news/articles/SB10001424052702303754404579310643802262108.
12. Mark Gongloff, “Credit Bubble Comeback: Feds Warn of Dangers in Leveraged Loan Market,” Huffington Post, March 2, 2013, www.huffingtonpost.com/2013/03/22/credit-bubble-leveraged-loan_n_2932421.html.
13. Greg Roumeliotis, “Exclusive: U.S. Banking Regulator, Fearing Loan Bubble, Warns Funds,” Reuters, January 29, 2014, www.reuters.com/article/2014/01/29/us-banks-regulators-loans-idUSBREA0S0DG20140129.
14. Office of Financial Research, Asset Management and Financial Stability, September 2013, www.treasury.gov/initiatives/ofr/research/Pages/AssetManagementFinancialStability.aspx.
15. Financial Stability Oversight Council, Proposed Recommendations Regarding Money Market Mutual Fund Reform, November 2012, www.treasury.gov/initiatives/fsoc/Documents/Proposed%20Recommendations%20Regarding%20Money%20Market%20Mutual%20Fund%20Reform%20-%20
16. Designation requires a two-thirds majority, including the vote of the secretary of the Treasury.
17. The criteria are broad and include size, complexity, importance as a source of credit, and interconnectedness.
18. Indeed, as the Office of Financial Research report on the asset management industry suggests, the FSOC is considering designating mutual funds even though they have limited ability to borrow and are funded with nearly 100 percent shareholder equity.
19. For example, see Alex J. Pollock, “How Do You Solve a Problem Like Fannie?” Wall Street Journal, December 23, 2013, http://online.wsj.com/news/articles/SB10001424052702304011304579220154026887972.
20. Tan, “Banks Sit Out Riskier Deals.”
21. Wirz, “‘Junk’ Loans Pick Up the Slack.”
22. The FDIC’s new deposit insurance premium scorecard was finalized in 2011, well before regulators expressed fears of a bubble in leveraged lending. Therefore, the FDIC increase in deposit insurance charges for leveraged loans was completely separate from bank regulators’ systemic-risk campaign against leveraged loan origination.
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