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Caroline Crenshaw, SEC Commissioner

Life Health > Annuities

SEC Commissioner Concerned About Insurers' Broadly Syndicated Loans

By Allison Bell

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What You Need to Know

  • Insurers hold about $117 billion in bank loans.
  • About half are leveraged bank loans, and many of the leveraged loans are BSLs.
  • Crenshaw wonders how much due diligence the holders of BSLs can really do.
  • She also worries about the possibility that insurers or other investors could pile up hidden BSL risk.

Caroline Crenshaw is using broadly syndicated loans to illustrate what she believes to be the harm done by limiting the reach of the U.S. Securities and Exchange Commission.

Crenshaw, a Democrat nominated to serve on the SEC in 2020 by former President Donald Trump, talked about broadly syndicated loans last week in Washington, during an appearance at an event organized by the Center for American Progress.

“Much of this market is not subject to meaningful regulation, and investors are being put at risk,” Crenshaw said, according to a transcript of her speech posted on the SEC website. “In addition, I am concerned that systemic financial issues are lurking in the market, and that if these instruments are not monitored more closely, the risk to the financial system itself will continue to grow.”

What it means: Crenshaw’s remarks could cause some investors to take another look at their BSL holdings.

They could also show what kinds of arguments the SEC could use if tough times cause problems for assets now beyond the SEC’s regulatory reach.

Broadly syndicated loans: A BSL is a large loan made to a big company and syndicated by a bank to investors.

Analysts at the National Association of Insurance Commissioners’ Capital Markets Bureau track them together with other leveraged bank loans, or loans made to borrowers with relatively low credit ratings, but in deals structured in such a way that the lenders are supposed to get paid back before most other creditors.

The NAIC analysts reported that banks had issued a total of $1.4 trillion in leveraged loans in 2017, and that about 87% of the loans were BSLs.

In 2022 about 55% of U.S. insurers’ $117 billion in bank loan holdings consisted of leveraged bank loans. BSLs and other bank loans accounted for about 2% of U.S. insurers’ assets.

Crenshaw’s views: Crenshaw gave BSLs as an example of an asset that has been defined not to be an SEC-regulated security.

Crenshaw noted that she sees the BSL issue as just part of the problem of world financial system dependence on instruments that are not regulated as ordinary bank loans or as securities.

Insurance companies power those instruments together with investment funds, pension plans and managers of collateralized loan obligations, she said.

Like private offerings, BSLs are presented to sophisticated individual investors and institutional investors with “big-boy” documents, with the expectation that the investors will do their own due diligence, she said.

“Frequently, investors have neither the means nor the time to conduct meaningful diligence,” Crenshaw said.

Moreover, she said, because investors trade BSLs privately, they could build up too much BSL exposure outside of the view of the SEC and other regulators.

She warned that the lack of visibility could lead to rapid changes in market conditions for BSLs and other assets that the SEC can’t regulate in a crisis.

“Greater disclosure and the greater integrity of disclosure that comes with antifraud rules, protections against insider trading, and gatekeepers would guard against the BSL market becoming a proverbial ‘market for lemons,’” she argued.

“I am aware that some may argue that BSLs have only exhibited isolated problems,” Crenshaw said. “But, as in the years leading up to 2008, a metamorphosis in the system may be occurring before our eyes. I worry that this market is becoming riskier in ways that regulators have not yet fully considered.”

SEC Commissioner Caroline Crenshaw. Credit: SEC 

Allison Bell

Think_Allison

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