A New Bubble Could Be on the Horizon

This past week, a report from Deutsche Bank put the percentage of new "covenant lite" institutional bank loans at almost 50%. That beats the 2006-to-2007 peak of under 40%. These are loans for which there are few if any restrictions on what the borrower can do after taking on the debt. Common covenants include such things as: limits on how much additional debt the borrower can take on, what assets they can pledge to other lenders, restrictions on mergers and acquisitions and so on.

When bank-lending standards become too loose, the thought is that a spike in defaults tends to follow. Also, when banks are willing to lend with few strings attached, it seems to logically suggest that lending standards are indeed loosening. Federal Reserve governor Jeremy Stein mentioned this phenomenon in a recent speech, arguing that it was a potential area of systemic risk that might be stemming from Fed policy....564 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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