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A Federal Reserve survey found that many of the largest U.S. banks pointed to regulatory restrictions on their balance sheets and reduced risk appetite to explain why they stood on the sidelines during the mid-September spike in overnight funding rates instead of profiting from the excess demand for short-term lending, Bloomberg News reported. Three-fourths of primary dealers responding to the Fed’s December Senior Credit Officer Opinion Survey reported “basically no change” in secured lending from Sept. 16-18, compared with the first week in September, despite a higher lending rate. Fed officials had expected banks with excess liquidity to jump in with extra lending. After the disruption caused the Fed’s benchmark overnight interest rate to stray outside its target range, the central bank intervened by injecting funds into the repo market, eventually returning overnight rates to more normal levels. About three-fifths of those surveyed said they were “at least somewhat certain that the spike in overnight Treasury repo rates was driven by technical factors and thus would only be temporary.”

The boom in the market for leveraged loans, a favorite financing source of private-equity-backed companies, has created vulnerabilities in the global financial system, according to a report from international regulators, the Wall Street Journal reported. A limited number of big banks are most exposed to these markets because they arrange the loans and hold some of them while also offering borrowers revolving credit facilities, according to the Financial Stability Board, a collection of global central-bank officials. The same banks also arrange and underwrite the creation of structured investment funds known as collateralized loan obligations (CLOs). The market for leveraged loans has grown rapidly in recent years, supported by the creation of CLOs, and may range in size from $1.4 trillion to $3.2 trillion globally, depending on the types of lending included. CLOs have boomed again as investors hungry for yield have returned to a kind of investment that was last popular in the run-up to the 2008 credit crisis. Banks globally had almost $1.4 trillion of loans and revolving credit facilities to these riskier borrowers at the end of 2018, much of which hadn’t been drawn down, according to the FSB. On top of that, banks had almost $340 billion of exposure to loans and CLOs at the end of 2018, some of which are meant to be held only temporarily. The FSB identified the holders of 79 percent of leveraged loans and 86 percent of CLOs, but said little was known about the exposure of certain nonbank investors to these markets.

The Securities and Exchange Commission is moving to give ordinary investors far greater access to hedge funds and potentially risky private stock offerings, an action that's drawing fire from consumer advocates, unions and Democrats, Politico reported. The proposal adopted yesterday would make it easier for individuals to tap into funds that are exempt from SEC registration by loosening the definition of what constitutes a sophisticated investor, a category now confined to high net worth people deemed savvy enough to handle more advanced financial products. These individuals, known as "accredited investors," have special access to lucrative — and more uncertain — products such as hedge funds, certain private equity investments and private placements, where stocks or bonds are sold outside a public offering and subject to few SEC regulations. The proposal, which would create a new pool of investors for private offerings, underscores a broader trend across regulatory agencies in the Trump era to modify rules for the benefit of industry. Just last month, the SEC proposed placing proxy advisory firms — which make recommendations to shareholders on such thorny issues as executive pay and climate change — under a tighter grip by regulators, a big win for the industry.

A new Fitch Ratings report said that the rate at which risky corporate loans default is expected to rise next year even without a recession as downgrades outpace upgrades and market access wanes for lower-rated companies, WSJ Pro Bankruptcy reported. The default rate among U.S. institutional leveraged loans will climb to 3 percent in 2020, compared with the 1.8 percent trailing 12-month rate, the ratings agency said in the Friday report. The high-yield bond default rate is expected to reach 3.5 percent in 2020, compared with 2.9 percent on a trailing 12-month basis, according to the report. Michael Paladino, managing director and head of Fitch’s U.S. leveraged finance group, said that the second half of 2019 has been defined by “growing outstanding amounts on our lists of concern, net downgrade pressure and increased investor skepticism toward lower-rated and aggressive sponsor deals.”

Solus Alternative Asset Management, a New York hedge fund best known for its role in the bankruptcy of Toys “R” Us, is under pressure from investors unhappy with its performance, the Wall Street Journal reported. In a sign of discontent, some investors have asked to retrieve their money before the end of their agreed-upon terms as Solus appears on track to deliver its second consecutive year of losses. So far, clients have asked to pull at least $100 million, sources said, a relatively small amount of money for the firm, which manages about $4 billion. However, the clients’ requests add strain to Solus’ assets, which have shrunk by about one-third since last year. Solus was a lender to Toys “R” Us ahead of its bankruptcy filing. Under the company’s complex capital structure, the hedge fund and four other debtholders essentially had the power to stop the clock on its reorganization under chapter 11. Toys “R” Us decided its only option was to liquidate, the Journal reported. Solus has said that it wasn’t responsible for the iconic toy store’s demise. Assets at Solus have dropped steeply, by $1.7 billion, from about $6 billion last year.

One of Wall Street’s biggest bundlers of mortgage bonds has moved into rentals, the Wall Street Journal reported. Redwood Trust Inc., which specializes in packaging jumbo home loans into securities, recently sold a $376 million bond backed by rent payments. The deal was its first since acquiring CoreVest American Finance LLC, a lender to landlords, in October. Redwood’s $490 million purchase of CoreVest—as well as a smaller deal in March for fix-and-flip lender 5 Arches—marks a concession to the rise of renters since last decade’s housing crash and the growing slice of the housing market being bought by landlords and flippers. Purchases by such investors accounted for more than 11 percent of U.S. home sales in 2018, their highest share on record, according to CoreLogic Inc. With its acquisitions, Redwood could originate more than $3 billion of loans to landlords and house flippers in 2020, said Matthew Howlett, an analyst with Nomura Instinet. Doing so wouldn’t only produce fees for bundling the bonds, but also more than $300 million of securities—the lowest-rated 10 percent segment of each deal—that produce high yields.