Warren, Reed Call on Banking Regulators to Take Immediate Action to Address Cracks in Credit Markets

Warren, Reed Call on Banking Regulators to Take Immediate Action to Address Cracks in Credit Markets

"If a fragile banking system cannot withstand a potential economic downturn, American taxpayers, families, and small businesses will once again suffer the consequences."

Text of Letter (PDF)

Washington, D.C. - U.S. Senators Elizabeth Warren (D-Mass.), Ranking Member of the Senate Banking, Housing, and Urban Affairs Committee, and Jack Reed (D-RI) sent a letter to Federal Reserve Vice Chair for Supervision Michelle Bowman, Comptroller of the Currency Jonathan Gould, and Acting Federal Deposit Insurance Corporation (FDIC) Chairman Travis Hill calling for their agencies to take immediate action to ensure the resilience of the banking system as cracks emerge in credit markets, especially private credit markets.

"We are deeply concerned that your agencies are making the banking system more fragile, at the exact moment you should be strengthening it,'" wrote the Senators. "Your agencies are in the process of cutting bank examination staff, limiting examiners' authority, allowing banks to load up on more debt and deplete their financial cushions, and loosening other post-2008 financial crisis safeguards at the worst possible moment."

The Senators continued: "The fact that Tricolor, First Brands, and other corporate credit losses are occurring after years of exuberance and loan growth - and exhibit poor underwriting - suggests there may be structural problems that are only beginning to rear their ugly head."

The lawmakers expressed concerns over how the increasingly interconnected nature of banks and nonbank lenders could exacerbate credit risks: "If a nonbank's underlying loans sour, it may be unable to pay off its own debt. Banks may then be stuck with the weak loans, which served as collateral. It is clear that any stress in the shadow banking sector will ultimately impact the banking sector… Banks have also faced direct competition from these same shadow banks, especially in the private credit market. That dynamic may have fed a race to the bottom in recent years, as they have competed for deals."

The Senators urged the banking agencies to cease deregulatory efforts and staff cuts and instead take the 5 following actions to strengthen the resilience of the banking system:

• Special Supervisory Review: Agencies should review corporate credit risks at all banks with $50 billion or more in assets and deploy supervisory authorities to contain and mitigate these identified risks.

• Activate the Countercyclical Capital Buffer (CCyB): The Fed should activate the CCyB to ensure big banks strengthen their financial cushions as risks build in the financial system.

• Finalize Basel III Endgame: Agencies should finalize a package of capital requirements that would strengthen financial cushions for Wall Street's risky speculative trading activities.

• Finalize Wall Street Executive Compensation Limits: Banking agencies should work with the Securities and Exchange Commission, Federal Housing Finance Agency, and National Credit Union Administration to limit executive bonus packages that incentivize short-term risk taking over long-term safe and sound operations.

• Stress Test Private Credit Market: Agencies should encourage Secretary Bessent to conduct a stress test that evaluates the size, scale, scope, interconnectedness, and mix of activities of the private credit market in the United States to allow policymakers to design safeguards to limit potential damage from the US private credit market.

They concluded by calling for the banking agencies to describe which of the above actions they intend to take to address cracks in credit markets by December 19, 2025.

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