[House Hearing, 116 Congress] [From the U.S. Government Publishing Office] EMERGING THREATS TO STABILITY: CONSIDERING THE SYSTEMIC RISK OF LEVERAGED LENDING ======================================================================= HEARING BEFORE THE SUBCOMMITTEE ON CONSUMER PROTECTION AND FINANCIAL INSTITUTIONS OF THE COMMITTEE ON FINANCIAL SERVICES U.S. HOUSE OF REPRESENTATIVES ONE HUNDRED SIXTEENTH CONGRESS FIRST SESSION __________ JUNE 4, 2019 __________ Printed for the use of the Committee on Financial Services Serial No. 116-29 [GRAPHIC NOT AVAILABLE IN TIFF FORMAT] __________ U.S. GOVERNMENT PUBLISHING OFFICE 39-449 PDF WASHINGTON : 2020 -------------------------------------------------------------------------------------- HOUSE COMMITTEE ON FINANCIAL SERVICES MAXINE WATERS, California, Chairwoman CAROLYN B. MALONEY, New York PATRICK McHENRY, North Carolina, NYDIA M. VELAZQUEZ, New York Ranking Member BRAD SHERMAN, California PETER T. KING, New York GREGORY W. MEEKS, New York FRANK D. LUCAS, Oklahoma WM. LACY CLAY, Missouri BILL POSEY, Florida DAVID SCOTT, Georgia BLAINE LUETKEMEYER, Missouri AL GREEN, Texas BILL HUIZENGA, Michigan EMANUEL CLEAVER, Missouri SEAN P. DUFFY, Wisconsin ED PERLMUTTER, Colorado STEVE STIVERS, Ohio JIM A. HIMES, Connecticut ANN WAGNER, Missouri BILL FOSTER, Illinois ANDY BARR, Kentucky JOYCE BEATTY, Ohio SCOTT TIPTON, Colorado DENNY HECK, Washington ROGER WILLIAMS, Texas JUAN VARGAS, California FRENCH HILL, Arkansas JOSH GOTTHEIMER, New Jersey TOM EMMER, Minnesota VICENTE GONZALEZ, Texas LEE M. ZELDIN, New York AL LAWSON, Florida BARRY LOUDERMILK, Georgia MICHAEL SAN NICOLAS, Guam ALEXANDER X. MOONEY, West Virginia RASHIDA TLAIB, Michigan WARREN DAVIDSON, Ohio KATIE PORTER, California TED BUDD, North Carolina CINDY AXNE, Iowa DAVID KUSTOFF, Tennessee SEAN CASTEN, Illinois TREY HOLLINGSWORTH, Indiana AYANNA PRESSLEY, Massachusetts ANTHONY GONZALEZ, Ohio BEN McADAMS, Utah JOHN ROSE, Tennessee ALEXANDRIA OCASIO-CORTEZ, New York BRYAN STEIL, Wisconsin JENNIFER WEXTON, Virginia LANCE GOODEN, Texas STEPHEN F. LYNCH, Massachusetts DENVER RIGGLEMAN, Virginia TULSI GABBARD, Hawaii ALMA ADAMS, North Carolina MADELEINE DEAN, Pennsylvania JESUS ``CHUY'' GARCIA, Illinois SYLVIA GARCIA, Texas DEAN PHILLIPS, Minnesota Charla Ouertatani, Staff Director Subcommittee on Consumer Protection and Financial Institutions GREGORY W. MEEKS, New York, Chairman DAVID SCOTT, Georgia BLAINE LUETKEMEYER, Missouri, NYDIA M. VELAZQUEZ, New York Ranking Member WM. LACY CLAY, Missouri FRANK D. LUCAS, Oklahoma DENNY HECK, Washington BILL POSEY, Florida BILL FOSTER, Illinois ANDY BARR, Kentucky AL LAWSON, Florida SCOTT TIPTON, Colorado, Vice RASHIDA TLAIB, Michigan Ranking Member KATIE PORTER, California ROGER WILLIAMS, Texas AYANNA PRESSLEY, Massachusetts BARRY LOUDERMILK, Georgia BEN McADAMS, Utah TED BUDD, North Carolina ALEXANDRIA OCASIO-CORTEZ, New York DAVID KUSTOFF, Tennessee JENNIFER WEXTON, Virginia DENVER RIGGLEMAN, Virginia C O N T E N T S ---------- Page Hearing held on: June 4, 2019................................................. 1 Appendix: June 4, 2019................................................. 33 WITNESSES Tuesday, June 4, 2019 Gerding, Erik F., Professor of Law and Wolf-Nichol Fellow, University of Colorado Law SchooL.............................. 5 Ivashina, Victoria, Lovett-Learned Chaired Professor of Finance, Harvard Business School........................................ 8 Nini, Gregory, Assistant Professor of Finance, LeBow College of Business, Drexel University.................................... 10 Vasisht, Gaurav, Senior Vice President and Director of Financial Regulation Initiatives, The Volcker Alliance................... 6 APPENDIX Prepared statements: Gerding, Erik F.,............................................ 34 Ivashina, Victoria........................................... 57 Nini, Gregory................................................ 71 Vasisht, Gaurav.............................................. 81 Additional Material Submitted for the Record Meeks, Hon. Gregory: Written statement of Bartlett Collins Naylor, Financial Policy Advocate, Congress Watch, a division of Public Citizen.................................................... 85 EMERGING THREATS TO STABILITY: CONSIDERING THE SYSTEMIC RISK OF LEVERAGED LENDING ---------- Tuesday, June 4, 2019 U.S. House of Representatives, Subcommittee on Consumer Protection and Financial Institutions, Committee on Financial Services, Washington, D.C. The subcommittee met, pursuant to notice, at 2:48 p.m., in room 2128, Rayburn House Office Building, Hon. Gregory W. Meeks [chairman of the subcommittee] presiding. Members present: Representatives Meeks, Scott, Foster, Lawson, Porter, Ocasio-Cortez; Luetkemeyer, Lucas, Posey, Barr, Tipton, Williams, Loudermilk, Budd, Kustoff, and Riggleman. Also present: Representatives Himes and Garcia of Illinois. Chairman Meeks. The Subcommittee on Consumer Protection and Financial Institutions will come to order. Without objection, the Chair is authorized to declare a recess of the subcommittee at any time. Also, without objection, members of the full Financial Services Committee who are not members of this subcommittee are authorized to participate in today's hearing. Today's hearing is entitled, ``Emerging Threats to Stability: Considering the Systemic Risk of Leveraged Lending.'' I now recognize myself for 4 minutes to give an opening statement. Ranking Member Luetkemeyer and members of the subcommittee, welcome to this hearing on, ``Emerging Threats to Stability: Considering the Systemic Risk of Leveraged Lending.'' This important hearing offers us an opportunity to consider the central role that FSOC and the Office of Financial Research must play to allow us to monitor, quantify, and map emerging systemic risks and designate systemically risky institutions. I have been very concerned about the rapid rise of leveraged loans and covenant-lite loans in recent years. The Fed, the IMF, and many others have referred to these loans as recession amplifiers, and I believe we must consider the possibility that they may prove systemic. When the Federal crisis hit in 2008, one of the central drivers of panic was that the public lost faith in the regulators' ability to anticipate the next financial institution to fail and to contain the spreading crisis. Among the many important reforms enacted into law in the Dodd-Frank Wall Street Reform Act was the establishment of the Financial Stability Oversight Council (FSOC) and the Office of Financial Research (OFR). FSOC got to the root of one of the obvious problems with our pre-crisis regulatory framework--namely, that regulators operating in silos cannot effectively monitor for system-wide risks or easily implement coordinated response strategies to contain the spread of risks. Similarly, the capacity to designate non-bank financial institutions that pose systemic risks to the system and regulate them accordingly is essential. Also central to managing risk was the establishment of the OFR, which is tasked with monitoring risk in the system wherever the risk might originate or lie, quantify the risk, map the interconnectedness of the risk, and inform FSOC in its monitoring of systemic risk. OFR is not bound solely to the banking system and can gather data on financial institutions regardless of their regulator or structure. This is essential as markets evolve. For these reasons, I frankly do not understand the Administration's efforts to dilute the role of FSOC and the OFR and to gut budgets and staff. We should all aspire to a regulatory framework that protects the stability of the system as a whole, that is fully informed on existing and emerging systemic risk, and is ready to contain any new risk so that we protect taxpayers and Main Street. Failing institutions must be allowed to fail without threatening the system as a whole or bringing down Main Street. I look forward to the testimony of our witnesses today and to constructive discussion about emerging systemic risk. It is important that we discuss the risk that leveraged lending poses to the system and whether the regulatory framework we put in place following the last financial crisis is adequate or should be further updated to ensure that we never again live through a crisis that threatens our financial system and capital markets as a whole and inflicts the level of financial hardship that we witnessed in 2008. I will add, in closing, that I am encouraged to see that our work, and this hearing specifically, are already having an impact, as Treasury Secretary Mnuchin called an emergency FSOC meeting over the weekend to discuss leveraged loans and exploding corporate credit. Specifically, according to this article by Bradley--which I will enter into the record--a secret meeting of FSOC was held over the weekend as regulators became increasingly concerned about the threat that overly leveraged companies will pose to the financial system and to the economy in what looks increasingly like an accelerated slowdown of the American economy. I call on FSOC to make public the minutes of the meeting and any presentation by staff, including on the risk they see to the system and their analysis of comments to their proposal to make it harder for FSOC to designate non-bank financial institutions as systemically significant. I now turn to the ranking member of the subcommittee, Mr. Luetkemeyer, for his opening statement. Mr. Luetkemeyer. Thank you, Mr. Chairman. And thank you for holding a hearing on this important topic. Today's hearing is entitled, ``Emerging Threats to Stability: Considering the Systemic Risk of Leveraged Lending.'' The keyword for today's discussion should be ``systemic.'' While it is no secret that leveraged lending contains a certain amount of risk, all lending products do. These hearings should focus on whether leveraged lending risk poses a systemic threat to our financial system. Recently, I have taken note of industry stakeholders and regulators who raise concerns regarding the amount of risk in the leveraged lending sector. Many of my colleagues echoed those concerns at a hearing with prudential regulators last month. As we assess potential concerns about leveraged lending, it is important to take a look at the numbers. The growth rate of leveraged lending in 2018 was 20 percent. On its own, that number may sound high. However, while comparing it to historical growth of leveraged lending since 1997, which is 15 percent, the rise can be an association with a strong economy. As we have heard from Fed Vice Chairman of Supervision Randy Quarles, the recent growth in leveraged lending is largely on par with the economic growth of this country. The total amount of outstanding leveraged loans is estimated between $1 trillion and $1.5 trillion. While this is another large number, the total amount of outstanding business credit is currently $15.2 trillion, making leveraged lending a small portion of risk in business lending. Furthermore, leveraged lending's 4 percent of the total fixed-income markets pales in comparison to mortgage-related loans at 22 percent. Not only does leveraged lending encompass a small portion of overall fixed-income markets, but the systemic significance of leveraged lending is lessened when you consider that banks hold less than 8 percent of outstanding leveraged loans, according to the Federal Financial Stability Report from May of this year. So, in other words, you take $1.1 trillion to $1.5 trillion worth of exposure, 8 percent of which the banks coming up with roughly $100 billion--these are all back-of-the-envelope figures here, but roughly $100 billion worth of exposure. The Fed's Financial Stability Report recently said that a 2-percent loss ratio is an approximate loss ratio in normal economic times as we have now, which is $2 billion. I'm not sure that the expected loss ratio of $2 billion is systemic to our economy. Even at 10 percent, which was what happened in 2008, you are looking at $10 billion. So, again, I am not sure $10 billion is a systemic risk to our economy, but, obviously, we are here today to discuss a lot of that as well. This evidence suggests little systemic risk to our financial markets. However, bank regulators should and are still closely monitoring the marketplace and assessing the risk associated with leveraged lending. The OCC recently stated they remain attentive to heightened risks in the leveraged lending market. And FDIC Chairwoman McWilliams stated in written testimony before this committee that the FDIC is monitoring the market because a significant rise in leveraged loan defaults could have broader economic impacts. I support the regulators' commitment to oversight of the risk associated with leveraged lending. In addition to close attention to all financial markets, regulators should continue their oversight and supervision of banks to ensure proper risk management and capital reserves are in place to appropriately protect against leveraged lending risk as well as all loan risk on their books. I look forward to the discussion on the risk associated with leveraged lending and how it affects our financial system. With that, Mr. Chairman, I yield back the balance of my time. Chairman Meeks. Thank you. I now yield 45 seconds to the gentleman from Georgia, Mr. Scott. Mr. Scott. Thank you very much, Chairman Meeks. This is a very important hearing. I am very concerned about the size of the leveraged loan market and the quality of the loans, particularly with regard to the recent increase in what we refer to as covenant loans. The participation of banks, in contrast to non-bank entities, is very important. And the potential challenge that highly indebted corporations would face in the event of a slowing down of the economy. All of this boils down to a discussion of risk, who holds it, and who can withstand it. Thank you, Mr. Chairman, and I look forward to this hearing. Chairman Meeks. Today, we welcome the testimony, first, of Mr. Gerding, who is a professor of law and Wolf-Nichol fellow at the University of Colorado Law School. Mr. Gerding joined the University of Colorado Law School in 2011. He teaches banking law, contracts, securities regulations, corporations, deals, and corporate finance. His research interests include: securities; banking law; the regulation of financial markets, products, and institutions; payment systems; and corporate governance. He is the author of a book entitled, ``Law Bubbles and Financial Regulation,'' which was published in 2014. His research also focuses on the application of technology to financial regulation, including analyzing the use of technologies such as risk models in governing financial markets. Second, Mr. Vasisht joined The Volcker Alliance in April 2014 and serves as the director of financial regulation initiatives. In this role, he oversees all aspects of the Alliance's work on financial regulatory matters. Prior to joining the Alliance, he served as executive deputy superintendent of the New York State Department of Financial Services, heading the agency's banking division. He has also served as the senior deputy superintendent of insurance, first assistant counsel, and assistant counsel to three Governors of New York, and assistant attorney general in the Investment Protection Bureau of the New York State Attorney General's Office. Third, Ms. Ivashina is the Lovett-Learned Chaired Professor of Finance at Harvard Business School, and she is also the faculty chair of the Global Initiative for the Middle East and North Africa region. She is a research associate at the National Bureau of Economic Research, a research fellow at the Center for Economic Policy Research, and a visiting scholar at the Federal Reserve Bank of Boston and the European Central Bank. Her research spans multiple areas of financial intermediation, including corporate credit markets, leveraged loan markets, global banking operations, asset allocation by pension funds and insurance companies, and value creation by private equity. She is the author of, ``Patient Capital: The Challenges and Promises of Long-Term Investing'', and ``Private Equity: A Casebook.'' And last but not least, we have Mr. Nini. He is the assistant professor of finance at the LeBow College of Business at Drexel University. He teaches classes on financial institutions and markets and conducts research in a variety of areas related to corporate finance and capital markets. His research has been supported by various grants and published in the top finance journals. In addition to his position at Drexel, he is also a fellow at the Wharton Financial Institutions Center, and a visiting scholar at the Federal Reserve Bank of Philadelphia. Before joining Drexel, he was an economist at the Federal Reserve Board in Washington, D.C. Witnesses are reminded that your oral testimony will be limited to 5 minutes. And, without objection, your written statements will be made a part of the record. Mr. Gerding, you are now recognized for 5 minutes to give your oral presentation. STATEMENT OF ERIK F. GERDING, PROFESSOR OF LAW AND WOLF-NICHOL FELLOW, UNIVERSITY OF COLORADO LAW SCHOOL Mr. Gerding. Thank you, Chairman Meeks, Ranking Member Luetkemeyer, and members of the subcommittee, for the opportunity to testify about emerging risks to financial stability from leveraged loans and CLO markets. Financial stability is not merely a technical topic. Promoting financial stability is essential to ending the squeeze on working families and escaping America's cycle of debt. The cycle begins with excessive borrowing. Excessive borrowing, even by corporations as in the leveraged loan market, impacts working families because it is fed into the financial machine. Excessive debt makes our financial system unstable. Financial market disruptions accelerate economic disruptions, from recessions to full-blown financial crises. Economic disruptions have a huge and disparate impact on working families. Further behind in the wake of a crisis, working families must borrow more, and the cycle continues to spin. To end this cycle, promoting financial stability is crucial. A huge portion of leveraged loans are securitized or used to create complex financial products called collateralized loan obligations, or CLOs. CLOs are close cousins of the mortgage- related collateralized debt obligations, CDOs, that were central to the global financial crisis a decade ago. Leveraged loans and CLOs form a pipeline or system. Disruptions at either end of the pipeline can cascade and affect the other market, like a spring or crisis accordion. The pressing question then becomes: How different is the CLO market from the earlier CDO market? There are important differences. Pre-crisis CDOs were backed by residential mortgages, while CLOs are backed by corporate debt. But there are also troubling similarities between the two markets. First, underwriting standards in the leveraged loan market appear to be deteriorating as covenant-lite loans have become prevalent. This mirrors the decline in underwriting standards in residential mortgage markets 14 years ago. Second, many CLO securities created from leveraged loans trade on opaque markets or do not appear to trade at all. In my current research, I am surveying the CLO market, spending hours on intensive interviews with market participants to learn who buys these securities, for what purpose, and whether these investors worry about market disruptions. Several of my preliminary findings ought to trouble you. The most senior investment-grade classes of CLO securities are typically purchased by regulated banks, insurance companies, and pension funds. This creates a transmission line between potential disruptions in the CLO market that could damage the broader economy. Banking and shadow banking markets are not separate but are highly connected. Many senior investment-grade CLO securities appear not to actively trade. Those that do trade typically trade on primitive, opaque markets with little transparent pricing. Why does this matter? Asset-backed securities are supposed to be liquid and tradable. Liquidity would allow regulated institutions to easily exit the market. Theoretical liquidity underpins favorable regulatory treatment of these products, including the ability of banks and other firms to purchase these investments in the first place, as well as favorable capital rules. If liquidity evaporates or was never there in the first place, the assumptions that these products are safe for banks and insurance companies are questionable. A lack of transparent pricing means that investors and regulators cannot rely on market prices to police risk adequately. Regulators must therefore work much harder to police the risk of CLO and leveraged lending markets for threats to financial institutions and financial stability. I am not confident that regulators have or share among themselves the high-quality information that they need, which is why I support the three bills that the subcommittee is considering today. We cannot wait until we need to man the lifeboats to fully fund the iceberg control. We also need to ensure that regulators are sharing data with the OFR and with each other. Thank you very much. [The prepared statement of Mr. Gerding can be found on page 34 of the appendix.] Chairman Meeks. Thank you. Mr. Vasisht? STATEMENT OF GAURAV VASISHT, SENIOR VICE PRESIDENT AND DIRECTOR OF FINANCIAL REGULATION INITIATIVES, THE VOLCKER ALLIANCE Mr. Vasisht. Chairman Meeks, Ranking Member Luetkemeyer, members of the subcommittee, it is an honor and a privilege to testify at this hearing to consider the systemic implications of leveraged lending. Leveraged loans are a key component of business debt. They provide credit to companies with high levels of debt or speculative credit ratings. In recent years, because of their explosive growth and rapidly eroding underwriting standards, leveraged loans have increased vulnerability in the financial system. In an economic downturn, this vulnerability has the potential to disrupt the availability of credit and reduce economic output. To address this weakness, regulators should take the necessary steps to better understand and mitigate the risks of this complex market. Usually arranged by a syndicate or group of banks, leveraged loans are made to private equity firms or corporations mostly to fund a merger or acquisition, pay dividends, or effectuate share buy-backs. Once made, the loans are sold to investors. The largest buyers are collateralized loan obligations, which pool the loans and sell the securities based on their cash flow to investors globally. Although data is limited, CLO investors include foreign and domestic banks as well as non-bank financial institutions such as insurance companies, asset managers, and hedge funds. In recent years, as overall business debt in the United States has skyrocketed, so too has the size of the leveraged lending market. Fueled by a combination of low interest rates, high investor risk tolerance, and low financing costs, leveraged loans have grown to a total of approximately $1.2 trillion, roughly equivalent to the size of the subprime mortgage market at its peak. As the leveraged lending market has swelled in size, its underwriting standards have rapidly deteriorated. So-called covenant-lite loans, which lack basic protections for lenders and investors, now account for nearly 80 percent of new issuances. Moreover, most of the recent growth in lending has been concentrated in the riskiest borrowers. Late in the credit cycle, as investor risk tolerance and asset prices peak, the leveraged lending market could amplify losses. In an inevitable economic downturn, as investors pull back and the price of speculative debt declines, highly leveraged firms will have difficulty obtaining financing and repaying their loans. As default rates spike and prices fall, firms will shrink their economic output and cut jobs. In such a scenario, the stability of the financial system would depend on the ability of banks and investors to absorb losses. Fortunately, large banks have more capital and liquidity than they did before the financial crisis, but deregulatory efforts underway since 2017, including regulators' retreat from the 2013 leveraged lending guidelines, undermine confidence. What's more, significant data gaps on CLO investors and the lack of a comprehensive analysis of CLO funding structures renders a full assessment of potential losses challenging and highly speculative. What is clear, however, is that in the event of a downturn or of sharp asset price declines, the impact on the real economy will be consequential even if it doesn't lead to a collapse of the financial system and a repeat of 2008. For this reason, it is important for policymakers to act now. First, regulators must better understand the leveraged lending market. Put simply, regulators cannot effectively regulate something they do not understand. But given the number of market participants and regulators involved, it is challenging to gather and analyze all the data. I recommend that the Office of Financial Research fill any data gaps and produce a comprehensive analysis on the risks of the leveraged lending market. Second, regulators must safeguard the banking system. Since banks operate at the core of the leveraged lending market, it is important that they remain resilient. I propose that regulators reinstate the substance of the 2013 leveraged lending guidance and require the Nation's systemic banks to build their capital by raising countercyclical capital buffers and strengthening the stress-testing process. Third, regulators should address risks outside the regulatory perimeter. This means that the Financial Stability Oversight Council, which was created by Dodd-Frank, should withdraw its guidance, which would tie it up in knots and will end its ability to designate non-banks. Thank you, and I look forward to answering your questions. [The prepared statement of Mr. Vasisht can be found on page 81 of the appendix.] Chairman Meeks. Thank you. Ms. Ivashina? STATEMENT OF VICTORIA IVASHINA, LOVETT-LEARNED CHAIRED PROFESSOR OF FINANCE, HARVARD BUSINESS SCHOOL Ms. Ivashina. Thank you, Chairman Meeks. To talk about the systemic risk in the leveraged loan market, we need to talk about two things: first, whether there is risk in the first place; and second, will this risk be propagated through the institutions that are holding it. Let me start with whether we have signs of concentration of hidden risk in the system. There is an important parallel to the weakness that characterized the subprime mortgage crisis, and that is lack of visibility into the quality of collateral backing securitized products. The source of opacity today is different than it was in 2008, but it is key to understand that the quality of the loans is dictated not solely by the fundamentals of the company but also by the credit agreement that defines the terms of the loan. These agreements are long and complex, and there are substantial variations in contracting terms that we observe. In a study with my colleague, we see that loans typically are characterized by a wide net of negative covenants that span six different categories. However, we also find that each individual of these negative covenants provisions are commonly eroded by what is known in the industry as baskets and carve- outs. Moreover, we find the prevalence of these baskets and carve-outs is much larger for the highly leveraged loans and those loans that are backing leveraged buyouts. Note that what I am talking about here is very different from the covenant-liteness. This is another element of erosion of credit agreements. With this in mind, the question becomes whether institutional investors and CLO managers, in particular, have the resources and have the right incentives to do proper due diligence on the loans that sit in their portfolios. Tension surrounding some of the recent restructurings--that includes the restructuring of J.Crew in 2017--indicates that at least some of these elements, contractual elements that I mentioned are misunderstood by the creditors. Beyond increasing contractual complexity, we see other elements that would be consistent with an increase in hidden risk. The recent rise in corporate leverage was driven by growth in the first lien senior secure debt. This is what leveraged loans are. In 2007, this layer of debt was capping at 3.7 times EBITDA. Today, that number is 4.5. Evidently, the recovery rate on the 4.5 leverage is much lower than the 3.7. What I am saying is that the use of historical recovery rates for purposes of volume risk today in the segment would be misleading. And, again, the question becomes whether creditors that dominate this market are understanding that risk. The second parallel to the subprime mortgage crisis is the central role of securitization. To be clear, securitization is a useful tool that ultimately helps to bring the borrowing cost down. However, in any securitized structure, creditors holding investment-grade--and for CLOs, that would be close to 90 percent--do not conduct due diligence, and are not expected to conduct due diligence on the underlying portfolio. Instead, these investors rely on accuracy of credit rating, contractual alignment of incentive between junior and senior tranches, and other market mechanisms. Unfortunately, we have seen this mechanism fail before. To have confidence in this market, we need to understand who is holding equity in CLO structures and whether this agent has the right incentives to screen and monitor the underlying risk. Another point that is relevant for systemic risk is, who are the investment-grade investors in CLOs? Do they have stable funding? Are they leveraged? We are not completely in the dark on this question. We know that U.S. banks do not have major direct exposure to CLOs. Other large institutions that typically buy investment-grade fixed-income are foreign banks and pension life insurers. All of these institutions have been known to reach for yield. So an educated guess is that these are the institutions behind the rise in CLOs. We also know that pensions and life insurers are not leveraged, they have stable funding, and are generally able to withstand temporary market fluctuations. And at least pension funds are not financially interconnected institutions. It is these elements that lead market observers and myself to conclude that, currently, leveraged loans do not present elevated risk to the stability of the financial system. That is not to say that the prospect that U.S. pension funds are exposed to hundreds of billions of tranches in CLO structures is not something that should merit a concern on its own, especially since the U.S. State pension fund system has been known to be in a very vulnerable financial position. There is an alternative scenario with several hundreds of billions of dollars of CLO tranches sitting in foreign banks. That, of course, would have consequences of its own that should not be easily dismissed. Finally, what I would like to comment is what is likely to happen if the CLO market would freeze. And, in my view, there are several ingredients that indicate that if the market would go through an adjustment, that market would freeze. The first point is that the corporate sector is likely to face a lot of pressure. And the point that is often misunderstood is that most of the contracts actually have financial covenants. The covenant liteness merely makes the enforcement of the covenants conditional on a set of events, which includes acquisitions and raising new financing. But, in an economic downturn, a company with a covenant-lite loan might avoid the default. Yet, it cannot do much more than that. It will be frozen. Second, if the leveraged loan market shuts down, there is a danger of refinancing. And there has already been an incident of this nature in 2008. However, in 2008, the shutdown of the CLO market was caused by market dislocation-- Chairman Meeks. We are out of time. Ms. Ivashina. --and it is unlikely that it would be this time. Chairman Meeks. Thank you. Ms. Ivashina. Thank you. [The prepared statement of Ms. Ivashina can be found on page 57 of the appendix.] Chairman Meeks. Mr. Nini? STATEMENT OF GREGORY NINI, ASSISTANT PROFESSOR OF FINANCE, LEBOW COLLEGE OF BUSINESS, DREXEL UNIVERSITY Mr. Nini. Chairman Meeks, Ranking Member Luetkemeyer, members of the subcommittee, thanks so much for the invitation to participate in today's hearing. Let me start by saying how heartened I am that the subcommittee is having a hearing on the relatively arcane topic of leveraged loans. Even among business school lunchrooms, leveraged loans have only recently become a topic of discussion. It is my hope today to provide some educational background on the topic and to offer some thoughts on whether I think leveraged loans creates some unique risks to financial stability. Interest in leveraged lending has increased in recent years because the market has grown so rapidly. Having roughly doubled in size over the last decade, the total amount of outstanding leveraged loans is now comparable to the amount of outstanding high-yield bonds, which is a different product that also provides credit to lots of large firms in the United States. I think it is important to consider growth in leveraged lending in the context of growth of overall corporate credit. For example, over the last decade, net new corporate credit has risen by about $4 trillion, but the leveraged loan market has contributed at most one-fifth of that increase. Moreover, some of my research suggests that a lot of the growth in leveraged loans reflects from switching away from one type of credit and into leveraged loans. Of course, it is quite natural that corporate borrowing has been so strong in recent years. A healthy economy creates demand for borrowing, and low interest rates support the supply of credit. Despite this, many measures of corporate credit risk--for example, the ability of firms to repay their outstanding debt--currently appear quite benign. Nevertheless, risk is inherent to all financial markets, and if a slowdown in the economy were to happen, the amount of corporate defaults would increase, these defaults would be concentrated in borrowers with leverage, and investors in leveraged loans would certainly suffer financial losses. Whether leveraged loans create systemic risk is a different question. In the remainder of my time, I wanted to discuss two possible sources of systemic risk that I think are unique to the leveraged loan market. In each case, I find little evidence to be worried. First, there is concern that the terms of leveraged loans seem particularly advantageous for borrowers and that this may reflect aggressive risk-taking by some lenders. One particular concern is the creation and surge of so- called covenant-lite loans. In research I have conducted with two colleagues, we find that nearly every firm that has a covenant-lite loan has another loan that still has traditional financial covenants. Leveraged loans come in two parts: one part is a covenant- lite term loan funded by institutional investors; and one part is a line of credit funded by banks that still has traditional financial covenants. The second part is often overlooked in popular discussions of the leveraged loan market. Other measures of conditions in the leveraged loan market also do not currently suggest excessive risk-taking. During 2018, the average interest rate spread on leveraged loans was only slightly below its historical average. And spreads have risen this year so that the pricing of leveraged loans currently does not suggest that loans are particularly cheap. A second unique feature of the leveraged loan market is the emergence of CLOs as important investors. Economic research has highlighted that the financial structure of lenders is a potential source of systemic risk, and I do believe it is important that we understand how CLOs work. In my opinion, CLOs have none of the hallmarks of financial intermediaries that could create systemic risk. Although CLOs do borrow money to invest in loans, the amount of leverage appears small relative to the underlying risk. Indeed, the most senior investors in CLOs were spared losses even during the height of the financial crisis. Moreover, CLOs borrow using long-term debt, so there is virtually no risk of a bank run on a CLO. In my opinion, it is difficult to envision a scenario in which many CLOs would be forced to liquidate large portions of their portfolios in a short period of time. One realistic concern is that the creation of new CLOs could come to a halt during a period of economic stress. This, in fact, happened during the financial crisis, which meant that many borrowers were unable to issue new leveraged loans. However, since the borrowers in this market tend to be large firms with broad access to capital markets, they largely substituted to alternative sources of credit. I have studied this period and find no evidence that borrowers that had an institutional leveraged loan suffered any additional adverse consequences. To sum up, I think developments in the leveraged loan market should be monitored in the context of overall growth of corporate credit. Although I don't find the level of credit alarming at the moment, I am happy to see regulators and policymakers actively discussing the topic. Second, I view some of the specific changes in the leveraged loan market, particularly growth in covenant-lite loans and CLOs, as primarily reflecting secular changes in the institutional segment of the market rather than a cyclical loosening of credit terms or a significant buildup of systemic risk. Thank you again for the invitation to share my thoughts with you, and thanks for proactively monitoring concerns over financial stability. I am happy to answer any questions you may have. [The prepared statement of Mr. Nini can be found on page 71 of the appendix.] Chairman Meeks. Thank you very much. And I thank all of the panelists for your excellent testimony. I now recognize myself for 5 minutes for questions. And I will start with you, Mr. Gerding. For me, I don't ever want to be put back into a position as I was in 2008 when Secretary Paulson came and talked about systemic risk and the whole world was falling down. And part of what we wanted to do when we did the Dodd-Frank Wall Street Reform Act was to try to put in place with reference to the regulators so that they could look not only at mortgages but also non-financial institutions. My question to you is--what we had in mind with FSOC and OFR is that they would be a regulatory agency to try to get it together. Do you believe that FSOC and OFR have the adequate authority to quantify and map the risk that leveraged loans may pose to the financial system as a whole? Mr. Gerding. I think that they have a number of important tools. I am worried that there are a couple of factors that are undermining their power. One is the subject of one of the bills which your subcommittee is considering, which is giving OFR independent funding, giving the Director of the OFR the power to have independent funding for its agency to set a minimum level. And I understand that the bill would also ensure that the funding of OFR does not go below that particular level. That is critical because OFR is in danger of being hollowed out, either by decisions by the Secretary of the Treasury to reduce its funding or by staffing losses. I think that is important, to ensure that there is a minimum level of funding for the OFR. The OFR, for me, is one of the most underappreciated accomplishments of the Dodd-Frank Act. It essentially created an early-warning system for systemic risk and for financial crises. So I think making sure that that early-warning system functions is crucial. One thing that I think is a huge weakness in our regulatory regime is not necessarily OFR or FSOC but the incentives and the actual data-sharing among Federal financial regulators. I hope that this subcommittee pays close attention to whether other Federal financial regulators are giving OFR and FSOC the critical data that they need to monitor not just banks but non- bank sources of systemic risk. Chairman Meeks. Thank you very much. Ms. Ivashina, could you briefly speak to the importance of quality data to quantify the risk imposed by the system, by leveraged loans, and the limitations in the data currently available? Ms. Ivashina. Absolutely. So, as already mentioned, the window into the leveraged loan market that we have is through banking. However, we know that banking is not holding much of those CLO tranches. And most of the institutions that we can think of that would be holding the CLO tranches actually would focus on what is known as shadow banking. So, first, this data is not collected by regulators. Second is that--this is something I have been trying to pursue for several months with my colleagues. We have been trying to find the private data sets that would address these issues, that would give us insight into what is the role of hedge funds, what is the role of U.S. State pension funds in this segment, and this is something that simply does not exist. Chairman Meeks. Thank you. And, Mr. Vasisht, can we dismiss outright the systemic risks that leveraged loans may pose to the system? Or would you say that we could go from merely a recession amplified to a systemically disruptive system? What are your thoughts? Mr. Vasisht. No, I don't think that we can dismiss that, in large measure because of how opaque leveraged lending is and how opaque CLOs are. We don't fully understand or, actually, fully appreciate the role that banks play in this market. They underwrite the loans. They sell the loans to CLOs. They then invest in the CLOs. And they hedge their risk in terms of holding the loans as well as being investors in those CLOs. One common narrative that I have heard is that banks don't really have much risk and they are not exposed to it. Banks are exposed to it. And the reason I bring it up is because recessions caused by instability in the banking system last longer and are deeper than other recessions. One thing that really does need to be explored is how exposed the banks are. It may be that they are not too exposed and we don't have anything to worry about. But, at this stage, given the opacity of the market, I am not comfortable making that statement. Chairman Meeks. Thank you. I now yield to the distinguished gentleman from Missouri, the ranking member, Mr. Luetkemeyer, for 5 minutes. Mr. Luetkemeyer. Thank you, Mr. Chairman. I don't know really where to start here. Let me talk with Mr. Nini, I think, from the standpoint that I am concerned--we have a situation where we are talking about loans that are being made. And with every loan, there is risk. And that is what banks do. They make loans and assess risk and whether they want to do it or not. That is the nature of their business. That is their business model. And they make their loans and--you made a comment a minute ago that was really intriguing from the standpoint--you said, even if there is a downturn and we no longer are able to do this, to make leveraged loans, that those entities would probably go to another market. They would probably go to the equities market to get the cash they need to be able to continue to--it would be a different source of funding, but these loans probably would not be necessarily as risky because they probably wouldn't go under quite as quickly as, say, a mortgage loan, which people really don't have anyplace else to go. If you have a home mortgage and suddenly you lose a job, you wind up with something upside-down in your loan portfolio. Could you elaborate on that just a little bit? I am trying to get a grasp on how the--and the systemic part of that, then. If there is really not much risk from the standpoint that they really probably don't have as much risk in a leveraged loan because there is ability to continue to shore up the business entity, there is not as much risk there, in my thought process. Am I wrong on that, or is that about right? Mr. Nini. Your sentiment is very much right. The borrowers in the leveraged loan market are some of the largest in the United States. Many are publicly traded firms. Many have access to the corporate bond market. And all will have a line of credit, an existing line of credit, with a bank. In the financial crisis, 2009-2010, there were virtually no new CLOs created. They are the biggest buyers of leveraged loans. And so that put a pretty big damper on at least the institutional part of the leveraged loan market. These firms that had existing leveraged loans had trouble refinancing them or getting a new one. I examine them and compare them to other firms that did not have institutional leveraged loans, and I find no adverse consequences in terms of investment, stock prices, employment. And the reason is because they were able to use these other sources of credit, either borrowing in the corporate bond market, borrowing from a bank. These are big firms, again, and so they are able to substitute across fairly easily. I think it is a risk to consider about, a freeze-up of markets. But this one in particular, because of the nature of the borrowers, at least during the financial crisis, it didn't seem to prove too problematic. Mr. Luetkemeyer. The loss ratios, those seem to bear out a systemic risk. There is obviously a risk there, and our economy would take a hit. But, systemically, to throw it into a downturn or a tailspin even further, it doesn't seem like there is enough there to actually cause that to happen. Mr. Nini. It is important to remember that loans are one of the safest investments that exist in capital markets. They do carry risk, of course, and banks are good at assessing that. But as Professor Ivashina said, they are often the most senior part of a firm's capital structure. Default rates, historically, on leveraged loans have been only about 3 percent. And in the event of a default, the losses happen to be quite small. Mr. Luetkemeyer. Okay. Mr. Vasisht, you have talked a couple of different times and said that the regulators don't understand how to look at leveraged loans and you need OFR to do that. And you were talking about the markets, and you didn't really feel the regulators could do their job. I am kind of concerned about that comment, number one. And, number two, if that is true, that the regulators don't have enough background to understand what they are actually looking at, should we regulate to solve the problem or should we legislate to solve the problem? Ms. Ivashina. So-- Mr. Luetkemeyer. No, I am talking to Mr. Vasisht. Ms. Ivashina. Oh, sorry. Mr. Vasisht. I think-- Mr. Luetkemeyer. Maybe I misunderstood you. Mr. Vasisht. Yes, I think a little bit. What I was saying was, you can't regulate something that you don't fully understand. And that is a comment not on the regulators but more on the lack of data in this market. If you don't fully have a picture of what is going on in the market--so, for instance, we don't know fully who the investors in CLOs are. We know that. There are some things we know, and one of the things that we know is that we don't fully know who the investors are in the CLOs-- Mr. Luetkemeyer. I apologize. My time is about up here, but I want to get to--the heart of the question is, okay, to solve the problem you are talking about here, do we legislate to solve this problem, or do the regulators go in and regulate and propose rules on how they can better analyze and regulate those loans? Mr. Vasisht. In this instance, I think the issue can be resolved with the Office of Financial Research and the powers that it was given under Dodd-Frank. The only issue is, does it have the desire, the incentive, and the funding to actually do that? Mr. Luetkemeyer. Okay. Thank you. Chairman Meeks. The gentleman's time has expired. I now recognize the gentleman from Georgia, Mr. Scott, for 5 minutes. Mr. Scott. Thank you very much, Mr. Chairman. I think we are putting our hands right on the issue here, because I think the most important thing in this hearing is understanding that this is about risk. And, Mr. Vasisht, as you pointed out, it is not just about risk but understanding who is taking this risk and making sure we have the data available to be able to understand it. And with that in mind, Fed Chair Powell, to give us some understanding of this, he said that right now there is $90 million of this CLO business. But he also said that only--$700 billion, I am sorry, in a total market of the CLOs. But only $90 billion of that roughly $700 billion are held by the largest banks. So that comes out to being about 13 percent of all of the CLOs. The question, it seems to me, is, does this mean that our major domestic financial institutions are being protected from the harshest impacts in the event of a financial shutdown? But it also follows that these other non-bank participants in this market, be it mutual funds, pension funds, or insurance companies, may feel the pinch in the downturn. So the question is, to each of you, what do we know about the portion of the CLO market that is taken up by these non- bank entities? What do we know about them? We know that 13 percent are handled by our banks, our largest banks. What about this remaining 87 percent? What do we know about these non-bank entities? Can we start with you on that, Ms. Ivashina? Ms. Ivashina. This is precisely the question. So we have inside of the banks, we take them out, and the bulk of CLO tranches is still left out. I would make that point that you are raising a little bit more complex one, because part of this is investment-grade, which is the bulk, but the layer of the equity, which is definitely not sitting in banks, will be also very important to gain insight. We don't know much. This is why the system is known as--why this is generally described as shadow banking. And, in particular, one question to put out there: How much of that is sitting in U.S. State pension funds? That would be an important question. Mr. Scott. Yes. And my issue is, how can we make sure that these people who rely on their pensions, on their retirement funds, are adequately protected? Not just the banks, but these are people there who are suffering. Let me give you an example. We have many union members right now who are pensioners. Do we know if they are in this position because the money is not there? Particularly, the Teamsters. The Teamsters pension is basically gone. We are having to adjust to that. To what degree were they in this leveraged loan market? How can we make sure that Main Street, the people who are depending upon this, are protected? Mr. Vasisht, you made an interesting point, because I think you are driving home what I am after here. Do you think we have enough information on these participants who are non-banks, who are in real deep in this market? Are they adequate to be able to handle the risk? Mr. Vasisht. Yes, I think that there is not sufficient information at this stage to fully understand the non-banks. I can tell you that the non-banks that invest in CLOs include insurance companies, pension funds, mutual funds, hedge funds, and others. But it would be good to better understand what the exposures are and whether the investors themselves, those investors, have runnable funding structures. So not the-- Mr. Scott. Let me just end-- Chairman Meeks. The gentleman's time has expired. Mr. Scott. Mr. Chairman, is it possible that I could get just one little question? I just wanted to know if the panelists were aware of the information that Fed Chair Powell said, that only 13 percent are covered by the major banks. Chairman Meeks. Just answer yes or no, if you are aware. Mr. Nini. Yes. Ms. Ivashina. Yes. Mr. Vasisht. Yes. Mr. Gerding. I think banks own 45 percent of leveraged loans-- Chairman Meeks. The gentleman's time has expired. Mr. Scott. Thank you very much, Mr. Chairman, for your generosity. Chairman Meeks. I now recognize the gentleman from Kentucky, Mr. Barr, for 5 minutes. Mr. Barr. Thank you, Mr. Chairman. Professor Gerding, in your testimony, you identify CLOs as ``close cousins'' of mortgage-related CDOs that were at the heart of the global financial crisis. From 1993 to 2018, do you know how many principal impairments were recorded for the 9,181 tranches issued by U.S. CLOs over those 26 years? Mr. Gerding. I don't have that data. Mr. Barr. I can tell you what the answer is. It is 53--53 impairments out of 9,181, or .58 percent. And that includes defaults during the period of the worst financial crisis since the Great Depression. Mr. Vasisht, you have attempted to conflate CLOs with other very different asset classes that were actually at the heart of the 2008 financial crisis, namely, subprime residential mortgage-backed securities, credit default swaps, and other squared structures like collateralized debt obligations (CDOs). Do you know how many triple-A- or double-A-rated CLO tranches have defaulted over the last 26 years? Mr. Vasisht. I don't have that data. Mr. Barr. The answer is zero, not a single default, including during the worst financial crisis since the Great Depression. And the reason why CLO debt securities had performed so well--and, by the way, your concern about bank investment in CLOs, they only invest in triple-A and double-A tranches. The reason why CLO debt securities have performed so well historically, even in times of economic distress, is very simple: CLOs bear absolutely no resemblance to the toxic CDOs that preceded the financial crisis. In fact, CLOs performed very well during the crisis. And this is because CLOs are straightforward, long-term- only investment funds, professionally managed by SEC-registered investment advisors that typically hold 90 percent of their assets in senior secured commercial industrial loans. These are not residential mortgage-backed securities, subprime, no-doc loans. These are first-lien, senior secured industrial and commercial loans in well-known American companies with high levels of collateral. Mr. Nini, can you discuss the diversification of CLOs and the alignment of interest between CLO managers and CLO investors that differentiate CLOs from CDOs? Mr. Nini. Sure. The leveraged loan market spans a wide set of firms across many, many different industries and locations. This provides lots of ability for CLOs to invest in a very broadly diversified set of loans. And they all do. They all have rules that require them to do so, and they hold very well- diversified portfolios. The managers of the CLOs, who are charged with selecting those loans, have compensation which looks very much like an equity exposure in the CLO. This puts them on the hook for risk if things go bad; their compensation falls. Mr. Barr. Right. Mr. Nini. The obvious intention of this is to give them incentives to do a good job. Mr. Barr. Right. In fact, CLOs are actively managed, and there is a perfect alignment of interest between the CLO manager and the CLO investors, because the CLO manager is paid only after the note holders are paid. Finally, let me just make this point. And, by the way, there is diversification. Typically, no more than 3 percent of their portfolios in the loans are in any single borrower and no more than 15 percent in any single industry sector. That is fundamentally different than mortgage-backed securities, where there was no visibility, number one, but, number two, they were all concentrated in a single residential real estate market. Finally--this is an important point--because CLOs are long- run, non-mark-to-market investors, they are term structures. And that means they represent locked-up money that can withstand and, in fact, provide liquidity in stressed market environments. So, in a downturn, CLOs actually stabilize the market by acting as a buyer when the rest of the market is looking to sell. It is problematic that nobody understands this, it seems, in this room, except for Mr. Nini. CLOs are long-term capital. They are not subject to short-term redemptions or outflows. And, in this regard, CLOs provide a vital source of liquidity in a downturn. This is exactly the kind of structure that policymakers should want. So, I don't get it. These are high-performing. They are liquidity providers in a downturn. They represent the long- term, non-mark-to-market investors. And why does this matter? Because 72 percent of all American companies are non- investment-grade. Leveraged loans provide $1.7 trillion in financing to American companies, and most of the commercial credit in the market comes from non-banks. Because Dodd-Frank regulation is limiting the amount of leveraged loans a bank can take on, the capacity of non-banks to fill the liquidity gap becomes that much more important. If non-bank lenders become constrained, then guess what? Funding costs will go up. If funding costs go up, bankruptcies happen. If bankruptcies happen, there are less jobs, there are lower wages. That is not good for financial stability. Over- regulation of CLOs would be an impediment to financial stability. And my time has expired. I have more questions, but my time has expired, and I yield back. Chairman Meeks. The gentleman from Illinois, Mr. Foster, is now recognized for 5 minutes. Mr. Foster. Thank you, Mr. Chairman. And thank you to our witnesses. I think you are probably seeing pretty clearly the difference between Members who were actually here in this committee during the financial crisis and those who heard a rather different, after-the-fact rewrite of it. Many previously safe financial products became unsafe during that crisis, and very few people had a clear idea. It remains one of the unsolved problems of the financial crisis. For example, how will we rate these things? How will we avoid the ``issuer pays'' conflict that is intrinsic and is on the relatively short list of problems that we didn't solve? Now, in the last few years, Treasury has downsized the Office of Financial Research, which should remain one of the key ways that we keep our eye on emerging risks. This obviously limits the Office's ability to gather and analyze financial market data, like the leveraged lending market and others. Specifically, President Obama's Fiscal Year 2017 budget provided for an OFR with a staff of 255. President Trump's Fiscal Year 2020 budget estimates 145 employees. This represents a staff budget reduction of more than 43 percent. Professor Vasisht has commented on the fact that we just don't have the data we need in many of the markets, like CLOs and direct leveraged loans. And so my first, I think, simple question is: Do you agree that the Office of Financial Research needs to be well-funded to fulfill its purpose to collect and analyze information about opaque markets such as leveraged lending or CLOs? Mr. Vasisht. It is absolutely critical that that happen. Mr. Foster. And so should Congress consider legislation, such as the discussion draft that I am cosponsoring and intend to introduce, to ensure that the OFR has independent and sufficient funding to gather data on leveraged lending and CLO markets and other emerging threats? Mr. Vasisht. Funding and desire are key components, and I think that legislation would address both. Mr. Foster. Thank you. How about the idea that the OFR or the various Federal financial regulators periodically stress-test certain non-bank markets, such as those for CLOs or complex asset-backed securities? Do you think this would be helpful for policymakers to have a better assessment of potential systemic risks? Mr. Vasisht. Absolutely, it would be very helpful. One of the problems with stress-testing is that second-order effects, indirect effects, are not fully appreciated in stress-testing, so-- Mr. Foster. Correlations between assets. Mr. Vasisht. Yes. Mr. Foster. That was one of the biggest things that almost everyone missed, is the correlation of different tranches. And so, if I could go back a little bit more, who currently gives ratings to the CLOs? And is there any proposed cure for the ``issuer pays'' conflict that bedeviled us during the Dodd-Frank time, trying to find a way around that intrinsic problem? Are any of you familiar with a plausible fix to this? Anyone who wants to-- Mr. Gerding. I think we should be exploring other alternatives to credit-rating agencies. There are a lot of proposals out there. It is a very complicated issue, but one potential way of looking at this is looking at market prices, credit spreads, spreads on credit default swaps. One of the-- Mr. Foster. One of the lessons we learned is, using the spread, the credit spread, as any measure of the real risk, there are times when the market gets things badly wrong. Mr. Gerding. That is absolutely right. Mr. Foster. And not to mention, using LIBOR as a reference, which was--you know, during the crisis, every one of us woke up every day and looked at the LIBOR TED spread and then discovered later that the LIBOR thing was just completely fictitious and literally made up over lunchtime. This is why you need sophisticated entities like the Office of Financial Research, looking in detail at things that, frankly, the average Member of Congress and perhaps even some of the regulators don't have time to look into. Any other comments on the ``issuer pays'' problem with the rating agencies? Do any of you have a favorite solution to that that you could name? Ms. Ivashina. It doesn't have to be one thing. There are several mechanisms. Of course, credit-rating agencies are very important, but so are the market forces, so is visibility into the incentives of the junior tranches we try in charge of collecting the information. Mr. Foster. Okay. Thank you. Mr. Gerding? Mr. Gerding. I don't think we should rely on just one source. I think that is a mistake, to rely just on ``issuer pay'' credit-rating agencies. I would prefer that financial regulators rely on multiple sources. Mr. Foster. Yes. So, if you have time, if you could answer for the record, just point our staff at a few papers that describe what you think are plausible solutions to this. Because I know I have been thinking about it without success for the last decade. Chairman Meeks. The gentleman's time has expired. The gentleman from Colorado, Mr. Tipton, is now recognized for 5 minutes. Mr. Tipton. Thank you, Mr. Chairman. Mr. Nini, in your testimony, you commented that in a downturn, there will be losses. So, to the point of the hearing today, wouldn't an economic downturn pose significant risk to investigators and institutions with leveraged loans on their balance sheets? Mr. Nini. Likely, yes. During economic downturns, corporate defaults do increase. In the last 2 recessions, corporate defaults reached about 8 percent, and investors in those loans suffered losses. And I expect that would happen in the future. Mr. Tipton. And would that pose a significant risk to those investors and institutions? Is it going to be systemic? Mr. Nini. A systemic risk? They would lose money, which they probably wouldn't like. Whether that creates a systemic risk, I believe, is a different question. The CLOs, which hold a fair amount of the risk, I do not believe are a source of systemic risk. Mutual funds hold some of this risk. I don't believe they are a huge source of systemic risk. And then banks and other investigators hold some of the risk, and I think our regulators are monitoring them to see if there is any source of risk there. Mr. Tipton. I appreciate that, because that is actually at the crux of what we are having the hearing on today, on the CLOs, are they going to be actually becoming a systemic risk to the economy. And your answer, effectively, is that you would have losses but it is not going to be systemic? Mr. Nini. That is right. Mr. Tipton. Okay. Is it your understanding that the prudential regulators that we currently have are monitoring the leveraged loan lending market and having the tools necessary to be able to identify and mitigate the risk to the financial markets? Mr. Nini. I believe it--let me stress one thing, is that most leveraged loans are arranged by commercial banks, large Wall Street banks, which are under regulatory surveillance. So this means that it is very unlikely that the origination of leveraged loans would escape oversight from regulators at the origination point. The Shared National Credit Program allows exiting bank regulators a very large amount of oversight at the origination of many leveraged loans. I find it quite telling that the large regulators, including the systemic risk regulators, FSOC and OFR, in their recent reports, all look at leveraged lending and are clearly thinking about the risks that leveraged lending might play in a crisis. Mr. Tipton. Okay. Thank you. And, further, are you concerned that calling leveraged lending ``systemic'' could implicate the countercyclical capital buffer? Mr. Nini. I am not sure just labeling it ``systemic'' might trigger that. I think regulators are thinking carefully about whether leveraged loans might warrant the countercyclical capital buffer independently of exactly how they are labeled. Mr. Tipton. Thanks. And, ultimately--and this is something that always concerns me, coming from a rural area--if we were to label that as ``countercyclical,'' the requirements on the banks to be able to put more capital in, that would ultimately result in higher costs for consumers if there is a downturn, wouldn't it? Mr. Nini. That, for sure, is the concern. In my personal opinion, countercyclical capital requirements are a fairly blunt tool to deal with what is a somewhat modest risk of leveraged lending. Capital requirements would affect all the products the banks offer, including lots unrelated to corporate lending, and the potential for increase in costs would be very widespread. Mr. Tipton. Okay. Thank you. And I yield the balance of my time to Mr. Barr. Mr. Barr. I thank my friend from Colorado. Mr. Nini, let me follow up on the point that I was making towards the end of my questions, and that is the unique characteristic of CLOs in that they are long-term, non-mark-to- market investors. They represent non-mark-to-market investors. Can you comment on how that structure could provide liquidity in a downturn and, in that sense, provide a stabilizing impact on the market? Mr. Nini. Yes. It is very important to note that collateralized loan obligations, they borrow money at maturities longer than the maturities of the loans that they hold. This means they are rarely going to be forced to repay some outstanding debt. During the end of 2018, when there was some volatility in markets, CLOs were buyers of loans at low prices, playing the exact role that you point to. The fact that they can't experience a run does have the potential that they can be a stabilizing force during-- Mr. Barr. And does this explain why CLOs performed so well during the financial crisis? Mr. Nini. I believe it is one of the factors. There were some mark-to-market CLOs that existed pre-crisis. Those have gone away and don't exist anymore-- Mr. Barr. They don't exist anymore. Mr. Nini. --because they don't make sense. Mr. Barr. I yield back. Chairman Meeks. The gentleman's time has expired. The gentleman from Florida, Mr. Lawson, is now recognized for 5 minutes. Mr. Lawson. Okay. Thank you very much. And welcome to the committee. My concern will be for the whole panel. When you go back to 2007, when the financial crisis pretty much hit, what is the difference in subprime lending now compared to back in 2007 that would lead you to, in some of your testimony, say today that we might be headed towards another crisis? Which I really don't understand. And I will start with you, Mr. Gerding, and we will go down the line. If you could explain it to me, so I have a clearer picture? Mr. Gerding. We have discussed quite a bit at this hearing that the leveraged lending market is different than the mortgage lending market. There might be some benefits, some reasons that the leveraged lending market is less systemically important, but just because the financial crisis impacted mortgages and not leveraged loans and CLOs doesn't mean that this time is necessarily different. A shock that affects corporate borrowing rather than real estate mortgages could affect this market in ways that the CLO market and leveraged loan markets were not affected 10 years ago. So it is important to look at similarities and differences and ways in which this market might be less risky but also, in some ways, more risky than the mortgage lending market. One thing that Dodd-Frank did is it regulated the quality of consumer mortgages. Leveraged loans were not similarly regulated or addressed in post-crisis reforms. Mr. Lawson. Okay. Would anyone else like to respond? Mr. Vasisht. I will respond. There are clearly differences. There are similarities, and those similarities are striking, but there are also significant differences. Those differences might make dealing with leveraged loans easier than sub-prime mortgage-backed securities in the pre- crisis era, but you still have to deal with it. Just because there are differences and they might be mitigating factors doesn't mean that you can be complacent about it and ignore it until it balloons into a problem. I think one of the key reasons why it is important to have a hearing like this is to discuss what is missing, what information is missing. How do we get our hands around that information, analyze it, so that we can make statements like CLOs are not runnable, that their investors are not going to pull back and have their own funding problems; how exposed banks actually are to this market, including the lines of credit they provide to non-banks that invest in CLOs? What happens when a non-bank entity that invests in a CLO has stress? What impact would that have on the bank and on the banking sector? These are key questions that still need to be answered. We need information to do that. Mr. Lawson. So, from your standpoint, I can't say it solved it, but Dodd-Frank brought all of this out. And, from the consumer standpoint, the ones that suffer so much from mortgage foreclosures and losing houses and, most of all, the investment, are we on the right track? Ms. Ivashina. I can take this question. From the consumer's standpoint--and this is important to emphasize. The consumer here--again, for me, it comes through the investment into investment-grade alternatives. The point that was raised earlier is that the losses on the investment- grade tranches will not be large. That is true. But if these losses fall into already vulnerable entities--now, we know they are not leveraged entities. They are entities with stable funding. But the U.S. retirement system is vulnerable from a financing standpoint. And so, if these losses fall into entities that are already weak, that could trigger an effect on the broader population and on the consumers. Mr. Lawson. Okay. Did you want to comment, Mr. Nini? Mr. Nini. No. I agree with my colleagues. Mr. Lawson. Okay. Okay. With that, Mr. Chairman, I yield back. Chairman Meeks. The gentleman yields back. The gentleman from Texas, Mr. Williams, is now recognized for 5 minutes. Mr. Williams. Thank you, Mr. Chairman. The economy is booming. Businesses are able to access credit. There are more job openings than workers. And our economy grew at the fastest pace in almost a decade last year. To me, as a small-business owner on Main Street for 50 years, it would seem logical that, as the economy grows, so does the use of leveraged lending. Mr. Nini, how do you think we should be correlating the prevalence of leveraged loans to risks that they pose to the financial system? And are there any specific indicators you think we should be paying attention to? Mr. Nini. I agree with your assessment that the pace of growth of corporate borrowing has largely tracked what is happening with the economy. A strong economy creates demand for borrowing, and the level of borrowing that we see is not dissimilar from what we have seen at other points of economic expansions in the past. In my opinion, we should be and regulators should be monitoring overall growth in corporate credit. There is some academic research suggesting that large increases in credit growth can proceed and exacerbate downturns. Leveraged loans are just one fairly small part of that that should be considered in the broad context of overall credit. Mr. Williams. Thank you. There have been significant changes in financial regulation since the 2008 crisis. Our banks are now better capitalized and more aware of risk than ever before. In the Federal Reserve's ``Financial Stability Report'' that was released in May, it states the following: ``With regard to leveraged lending, banks have improved their management of the associated risks.'' So, Ms. Ivashina, can you explain the difference between corporate loan scrutinization and the securitization of mortgages and how the risk profiles of each are different? Ms. Ivashina. I generally find a comparison between mortgages and corporate loans to be something to be done super- carefully. But there are two elements on each way to compare. And in mortgages, in particular, there was lack of visibility on what lies inside the securitized mortgage obligations. The reason for that was, amongst several other things, corrupt origination practices. What happens in the loan market, of course, is very different. You deal with public companies, our secondary markets. These are sophisticated agents. However, what underpins the risk, not only from the members of a public company but also the credit agreement--and this is where the contractual weakness comes in and the complexity of the contracts goes beyond the covenant-liteness that we have been emphasizing. This was part of my statement. This is one parallel between mortgages and loans, and that is lack of visibility, potential lack of visibility, in what goes into the pool. And the second element here is that, as in any securitized mortgages or in loans, its equity piece, the most junior piece, is that one of the key elements for assuring that the system is functioning. Mr. Williams. Okay. Many of you on this panel have noted the increase in covenant-lite loans in this market. Mr. Nini, in your testimony, you mentioned that the growth in leveraged loans has been a result of investors substituting away from other forms of debt. So what do you see as the main cause of this phenomenon? And do you believe our financial regulators are properly equipped to deal with this trend? Mr. Nini. In my opinion, the emergence of covenant-lite loans reflects a convergence with the high-yield bond market. High-yield bonds, which firms have used forever, would be considered a covenant-lite product. They do not have financial covenants the same way that bank loans do. A similar phenomenon is happening for leveraged term loans, which are being sold to institutional investors--the very same investors that participate in the high-yield bond market who understand these products very well. I recently visited some of our regulators and talked about my research. I think they are very much on top of it. Mr. Williams. Okay. Mr. Chairman, I yield my time to my colleague, Mr. Barr. Mr. Barr. Thank you. I appreciate my friend from Texas yielding. Ms. Ivashina, I wanted to explore this issue, which I think is a very important one, that you raise about lack of visibility. Because, of course, that was a major problem during the financial crisis, the lack of visibility with respect to RMBS and the originate-to-distribute model. That is not what we have here. This is not originate-to- distribute. These are professionally managed, and there is a high level of visibility, unless I am missing something, in terms of these being a senior secured commercial industrial loans into companies that provide financial audited reports to these professional managers. And they are not squared structures. There are no CDOs; there are no credit default swaps on the other end. They are just long-term. Why do you say there is a lack of visibility? Or, relatively speaking, wouldn't you concede there is greater visibility into these products than those subprime RMBS? Ms. Ivashina. On the one hand, the fundamentals are more observable as a company. But, on the other hand, for each loan, we have to understand 200 pages of very complicated legal language. This is not only covenant-liteness, which concerns a very small fraction of the contract, but basket carve-outs and other forms of erosion on each one of the negative covenants that you would need to do for 100 loans that sit in a CLO and for each of the investors and investment-grade to understand that. That is the similarity with the mortgage market. Chairman Meeks. The gentleman's time has expired. I now recognize the gentleman from Georgia, Mr. Loudermilk, for 5 minutes. Mr. Loudermilk. Thank you, Mr. Chairman. And thank you all for being here today. And, yes, this is a topic that I think we need to address, but we need to make sure that our businesses have sufficient access to credit, especially in a time when we are seeing the economy go in the direction it is going. One of the ways that you can bring a halt to a growing economy is to make sure that the small businesses don't have access to the credit they need to continue to grow their businesses. To Mr. Nini, when you compare this to other credit classes like auto loans, student loans, and mortgages, how much outstanding debt is present in leveraged loans as compared to those other types? Mr. Nini. The outstanding amount of leveraged loans, I estimate at about $1.8 trillion, which includes a portion that is funded by banks and a portion that is funded by non-banks. I am not exactly sure about the size of those other consumer credit markets that you reference. I believe they are a bit smaller in their order of magnitude. Mr. Loudermilk. Okay. This is something I would like to investigate to see where that continues. I think that would be worthwhile of us looking into that. Also, while the vast majority of leveraged loans are now made by non-banks, are non-banks still thoroughly regulated by the SEC/FSOC in the States? Yes, Mr. Nini? Mr. Nini. The large non-bank institutions in the leveraged loan market are CLOs that we have talked a bunch about and mutual funds, each of which will have some regulatory coverage by the SEC. Mr. Loudermilk. Okay. Again, Dr. Nini, what is the typical rate of losses on leveraged loans during good economic times? Mr. Nini. During good economic times, it will be less than 2 percent. In recent years, it has been on the order of 1 percent, 1.5 percent. Mr. Loudermilk. What about comparative to a recession? Mr. Nini. In a recession? In the last 2 recessions, the default rate has increased to about 8 percent. Again, in a default, senior loan investors typically don't lose all of their money. They are senior; they have collateral. They typically recover 70, 80 cents on the dollar. So the losses they have are going to be much smaller even than that 8 percent. Mr. Loudermilk. Okay. Thank you. Are leveraged loans made to a wide variety of businesses? Mr. Nini. A very wide variety. They span a lot of industries, a lot of different firm sizes, public and private firms, lots of different geographies, a very wide range. Mr. Loudermilk. Does that help reduce the risk of leveraged loans, when you have a large diversity? Mr. Nini. Yes, of course. It is the first thing we teach students of finance, the benefits of diversification. Mr. Loudermilk. Okay. Approximately what percentage of American businesses are considered to have a credit rating below investment-grade? Mr. Nini. I believe the number of firms that would qualify as leveraged borrowers is in the neighborhood of 70 percent to three-quarters. Most firms do not have a credit rating, so that is what makes it a little difficult to identify what exactly is a leveraged borrower. But I think the number, ballpark, is about 70, 75 percent would be considered a leveraged borrower. Mr. Loudermilk. Okay. I yield back. Chairman Meeks. The gentleman yields back. I now recognize the gentleman from North Carolina, Mr. Budd, for 5 minutes. Mr. Budd. Thank you, Mr. Chairman. And I want to thank our witnesses for joining us this afternoon. I appreciate the intent of the hearing, and I believe my colleagues are actually very sincere in wanting to spot the next potential crisis in our financial markets and that they want to prevent it as much as I do. However, I would urge caution that leveraged lending will be the initiation and the beginning of the next financial crisis. With my colleagues, I also appreciate all the questions that they raised, especially Mr. Tipton's, when it came to the countercyclical capital buffer. I think he actually covered most of my questions, Mr. Tipton from Colorado did. But I would like to yield some additional time to Mr. Barr, my friend and colleague from Kentucky. Mr. Barr. Thank you, Mr. Budd. My friend from Georgia asked, I think, an important question to Mr. Nini about the relative size of the U.S. leveraged loan market compared to the investment-grade bond market, the mortgage debt market, the overall fixed-income market. And the numbers, just to share for the record, according to the securities industry, is that, as you said, $1.7 trillion, $1.8 trillion is the leveraged loans outstanding today. My understanding is that the entire U.S. fixed-income market is around $42 trillion. So, in terms of the relative size compared to the overall fixed-income market, I think that is an important contextual fact that we need to keep in mind. Another point is that, in the last quarter of 2018, the FAANG stocks, five stocks--Facebook, Apple, Amazon, Netflix, and Google--during the volatility of December lost over $630 billion in market cap, which obviously led to short-term losses and significant losses for their investors, but it did not spread across the entire financial system. And I think it is important to note that the losses in these 5 stocks in that one quarter amounts to more than 60 percent of the entire leveraged loan market. So, look, I don't think anybody is going to deny that there is risk in leveraged lending. Of course, there is risk in leveraged lending. That is the whole point. And I don't think many people are going to deny that credit risk is actually increasing either. I think the issue here, for the purposes of this hearing, is whether or not that increased risk presents a systemic issue. And the point is, it is just not that significant of a--it is an important part of the financing of great American job- producing companies. It creates dynamism in our economy. It creates wages and jobs. It forestalls bankruptcies. It helps create efficiencies. But it is a relatively small slice of the entire U.S. economy from a systemic risk standpoint. I think that is the important point. Final point/question to anyone who wants to answer this, I have to note and observe that many of our colleagues who are expressing skepticism of leveraged lending here today are the very same Members of Congress who are calling for a rollback of tax reform, corporate tax reform. They are the same colleagues who are calling for a rollback of the limitations on corporate interest deductibility. They are the same Members of Congress who are calling for an increase in corporate income tax rates, which for leveraged-but-profitable companies doesn't seem to be like a very good idea for financial stability. I do not understand why we would be--if we are concerned about leveraged companies, why we would want to go back to the old Tax Code that incentivized less profit and more leverage. And I would be happy to invite anyone to comment on that. Professor Gerding, I think you want to speak to that? Mr. Gerding. The interest deduction for debt actually incentivizes more leverage by companies, both financial institutions and non-financial institutions. So I don't see that position as inconsistent at all. Mr. Barr. Here is my question. Why would we want to make it harder on leveraged companies by increasing their taxes, to the extent they have taxable liability? And I get it; some highly leveraged companies may not have profits. But most of these companies have taxable profit, corporate profit. They may be leveraged, but they have--why would we want to increase taxes-- if we are concerned about leverage in the system, why would we want to make it harder on leveraged companies? Mr. Gerding. Because, long term, I think we should be reducing our dependence on debt. There are other capital markets, like equity markets, that companies can access to fund themselves. Long-term, excessive reliance on debt, particularly debt like financial institutions, is destabilizing. Mr. Barr. Well, making it harder-- Chairman Meeks. The gentleman's time has expired. Mr. Barr. I yield back. Chairman Meeks. The gentlewoman from New York, Ms. Ocasio- Cortez, is now recognized for 5 minutes. Ms. Ocasio-Cortez. Thank you, Mr. Chairman. In 2005, Bain Capital, Kohlberg Kravis Roberts, and Vornado Realty Trust acquired Toys ``R'' Us in a leveraged buyout and saddled it with billions of dollars in debt before liquidating the chain in June 2018. They liquidated it, owing more than 30,000 workers, many of them my own constituents, a total of $75 million in severance pay while executives walked away with millions of dollars in the business. This was part of a leveraged buyout, or, rather, a leveraged lending scheme. Mr. Gerding, while there is no standard definition of ``leveraged lending,'' would you say that it is thought to be the practice of investors or banks giving loans to companies that have a lot of debt on their books or companies with poor credit ratings? Mr. Gerding. Yes. The borrowers tend to be highly indebted and higher-risk. Ms. Ocasio-Cortez. So it is kind of like subprime lending but for corporations. Mr. Gerding. It is extremely--it is high credit risk. Ms. Ocasio-Cortez. Let's break this down. I am going to bust out my ``bad guy'' example. So let's say I am a bad guy, but this time, instead of trying to hack our political system, I am trying to hack our system of lending and our economic system of debt, you know, give me a monocle and a top hat and a cigar and that whole thing. So I am a bank, I am a bank lender. And Company ``X'' walks through the door. Let's call it ``Schmears.'' And they are asking for a loan. They have very high levels of debt and a poor credit rating, and by every safety and soundness example and measure used to assess creditworthiness, they should not receive this loan. In a leveraged lending situation, do I turn them away? Mr. Gerding. If you are the person that you describe, I think you are probably less interested in social considerations and more interested in just earning a profit. Ms. Ocasio-Cortez. Right, I just want to shoot up profit margin. I don't care how many people I fire. It could be 250,000 people, which is how many were fired in the Sears leveraged lending situation alone. So, considering this Company ``X'', this company's poor creditworthiness, do I do my due diligence as a bank and impose protections for the loan that I give to them? Mr. Gerding. You would do your due diligence, unless you are offloading a lot of that risk to someone else, in which case you don't care as much about the risk that you are taking on. Ms. Ocasio-Cortez. And even if I do try to be a good person and deny them a loan, they can go down the street and get a loan from another bank or non-bank due to their poor credit rating, correct? Mr. Gerding. That is correct in that second part of the explanation for why we see so many covenant-lite loans now. And the chances to remain competitive as a bank, I can look the other way, dismiss their poor credit rating, dismiss all of these things, but I also don't want to take on their risk, right? I am lending to this terrible company that, by all means, could go into the ground, but if they go under, I don't want to be on the hook. Ms. Ocasio-Cortez. I can essentially pool together some loans in the form of collateralized loan obligations, CLOs, and sell it to other banks and non-banks for them to take care of, right? Mr. Gerding. That is correct. And you could even invest in those CLO securities yourself later on. Ms. Ocasio-Cortez. And when people pull those CLOs together, it is possible that a pension fund could buy that package, correct? Mr. Gerding. They actually do. Ms. Ocasio-Cortez. So teachers, police officers, firefighters, nurses, anyone who has a pension fund, they are now exposed to the risk of someone else's fat-cat gambling in the economy, correct? Mr. Gerding. Right. And they can actually purchase riskier--they can and do purchase riskier securities than banks do. So, they may be actually more exposed. Ms. Ocasio-Cortez. Now we are talking about, for example, in the case of Sears, they take on this leveraged lending, a CEO gets put in, runs it into the ground, fires a quarter- million people. They sell the debt to somebody else. A teachers' pension fund is on the hook more than the initial bank that gambled it. Now you have fired a quarter-million people, and now it is teachers and their pension funds that are on the hook for paying for that even though they had nothing to do with it? Mr. Gerding. That is a valid concern. Ms. Ocasio-Cortez. How is this not extremely similar to the 2008 financial crisis and the mortgage crisis? Mr. Gerding. I think there are important similarities. One similarity that hasn't been discussed is that the CLO securities, the pool of securities that you are describing, there is not an active pricing system for those. So if we are talking about having information about how much risk is in the system, market prices are, most economists would say, the best measure of measuring risk. If these giant pools do not trade on deep and liquid markets, we don't have the price to know exactly how much risk is in each of those tranches of CLO securities, including the tranches that you are talking about that are invested in by pension funds. Ms. Ocasio-Cortez. Thank you so much, Mr. Gerding. I yield my time to the Chair. Chairman Meeks. Thank you. The gentlelady's time has expired. And seeing no further witnesses, I now yield 2 minutes to the ranking member for purposes of a closing statement. Mr. Luetkemeyer? Mr. Luetkemeyer. Thank you, Mr. Chairman. I appreciate the opportunity to wrap up here. Just some closing thoughts. Today, we needed to, and we did, I think, find out a lot of information with regards to understanding leveraged loans. It is a tool that is used by corporations to be able to find different ways of accessing funds other than going to the equity markets. But, as we heard today, the equity market is a fallback position in case of a downturn. The ability to refinance is there. I think what we have seen is that there is not a concentration of credit in these, so that we have considerable differences between this and 2008, when we had a huge concentration of credit in the real estate market and the development market, which is considerably larger and much more concentrated. And it was in banks in a way that was way more impactful to their capital than what this would be, from the standpoint of the amount of that. And, to me, that goes back to your regulators. I asked the question a number of times of whether we need to have more regulation or more legislation. I never got an answer to the more legislation. I think, to me, we in Congress need to provide more oversight and not necessarily legislation. I think the regulators need to do a better job. To my mind, they didn't do a very good job in the last crisis. They need to be watching this like a hawk. But I don't know that there is a whole lot of extra risk here compared to what it was in 2008 based on what we have heard today. Interest rates, to me, are always a telltale of what is happening in the market, and, actually, mortgage rates went down last week. So I think we are probably in a better spot that we actually were. Interesting, the last conversation was somebody who actually, instead of worrying about jobs, that she is worried about a leveraged buyout or leveraged loan default, and actually ran off a 25,000-job business from her own district. But I think, to go back to this hearing, it was about leveraged loans. Are they systemic? Can they cause our economy to go over a cliff? And I don't think we have found today that that was the case. I think we have found that, yes, there is risk, but I don't know that there is a risk significant enough--and, as Mr. Vasisht said, there is not enough data to show that it is--that I think we need to be concerned about it from the standpoint of systemic. That being said, the regulators need to be doing their job. And if they do it, I think we will be protected. With that, I yield back. Thank you, Mr. Chairman. Chairman Meeks. Thank you. First, without objection, I would like to submit for the record an article by Mr. Bradley Keoun; a statement from Americans for Financial Reform; and a statement from Public Citizen. I now recognize myself for 2 minutes for purposes of a closing statement. I first would like to thank our witnesses for their contribution to this important conversation. I believe that what we heard today was genuine interest in understanding the nature and drivers of systemic risk and having some level of comfort that the regulators tasked with monitoring risks to the system as a whole are staying ahead of the potential emerging risk in leveraged lending. I, too, was worried when I saw what took place with reference to Toys ``R'' Us and Sears, and it just rang a bell in my ear and a ping in my stomach. Current and past regulators and Treasury Secretaries have been vocal that the integrity of the updated regulatory framework implemented under Dodd-Frank is key to ensuring the stability of our financial system and capital markets. We cannot forget the depth of the 2008 crisis. It is the worst time, or one of the worst times, I have had as a Member of Congress. And we must not be limited to fighting the last battle. Markets change and risk evolves, and regulators must remain vigilant as it is related to systemic risks. The regulators, and the Administration more generally, owe it to the American people and to the taxpayers to ensure that all available tools and resources are used to monitor, quantify, qualify, and map risk to the system. All we want, ultimately, is that when we ask regulators whether leveraged loans or any other risk is a systemic risk that they not answer, ``We don't think so,'' but they say, ``We are certain it is not, because we have all the data that we need to understand the risks, where they lie, how they flow across institutions, and we know how to contain it if a crisis were to emerge in this or another important asset class.'' We look forward to continuing this conversation here in this committee and with the administration and with FSOC. With that, I want to thank Ranking Member Luetkemeyer and the other members of this subcommittee for a constructive discussion today. I also want to thank our witnesses for their testimony today. The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing. Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to these witnesses and to place their responses in the record. Also, without objection, Members will have 5 legislative days to submit extraneous materials to the Chair for inclusion in the record. This hearing is now adjourned. [Whereupon, at 4:28 p.m., the hearing was adjourned.] A P P E N D I X June 4, 2019 [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]