It Seems the FSB Has Been Fighting the Last War

By Kavaljit Singh | Letter (FT) | March 12, 2019

At last, the Financial Stability Board has woken up to assess the potential financial stability risks emanating from leveraged loans that currently stand at more than $1.3tn (“Watchdog turns up heat on leveraged loan industry as high risk debt soars”, March 8).  Since 2010, leveraged lending issuance has witnessed a rapid growth as yield-hungry investors rushed to grab the specialist loan vehicles — collateralised loan obligations.

What is worrisome is not merely the magnitude of outstanding debt, but the deteriorating underwriting standards for leveraged loans. Close to 80 per cent of outstanding US leveraged loans are covenant-lite, placing fewer restrictions on the borrowers and lesser protection for the lenders. In the event of an economic downturn, covenant-lite loans are at a higher risk of default, thereby posing a threat to the soundness of institutional investors (from pension funds to insurance companies) that hold more than 90 per cent of leveraged loans.

One wonders why it took so long for the FSB to examine such potential threats, even though its mandate is to identify and address new and emerging risks to financial stability. Many market participants, national regulators and the International Monetary Fund have been raising red flags on this issue for some time. It seems that the FSB has been fighting “the last war”.

The FSB also needs to address new risks posed by the shadow banking sector and fintech innovations.

Finally, it needs to be more transparent in its functioning, seeking regular engagements with academia, non-governmental organisations and consumer groups, rather than restricting itself to the financial services industry.

Is Randal Quarles, FSB chairman, listening?

Kavaljit Singh

Director, Madhyam

New Delhi, India


This letter appeared in Financial Times, March 12, 2019 (available at