Six years ago, the United States had a massive financial meltdown that led to $16.394 debt ceiling. The problems can be rooted in the overproduction of the real estate market, unmanaged federal spending and overdeveloped financial sector. Six years later, financial institutions fear that the same problem can happen again if the government will push through high-risk lending.
‘Leveraged loans’ are encouraged by the Trump administration. These are massive loans issue to companies in need of credit to operate and expand rapidly. With newer regulations and policies, banks and other financial institutions are encouraged to issue more than $1 trillion in corporate loans even if in reality, hundreds of companies failed to repay the money.
“The next turndown that we have could be more serious and longer-lasting and more difficult to deal with than it would have been if we had constrained these practices,” said former Federal Reserve chair Janet Yellen.
According to an article published by The Washington Post, the Trump administration tries to ‘juice the economy’ by encouraging more lending. However, bankers in the country have minimal assurance that these loans can be repaid on time.
Although lending show positive effects, if not regulated, the economy can also suffer.
In the report made by White House officials, it states, “Lending has increased, which is a positive development, but care must be taken that excessive leverage and risk do not reprise the mistakes of the 2000s.”
Meanwhile, banks are still careful in issuing high-risk loans like the leverage loans. To prevent taking too much risk from these, some require extra documentation to ensure that companies won’t fall behind repayments that result to an even bigger problem like bankruptcy.
The Office of the Comptroller of the Currency, together with the Federal Reserve and Federal Deposit Insurance Corp. give formal guidance to help banks step out of these risky loans.