Key insight: The Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. rescinded a 2013 interagency leveraged lending guidance, but left the door open to reissuing a revised version in the future.
Supporting data: The agencies said the framework was never formally submitted to Congress despite the Government Accountability Office’s determination that the guidance qualified as a rule under the Administrative Procedure Act.
Forward look: In the absence of the guidance, banks will now follow general risk-management principles concerning leveraged lending.
Key federal bank regulators Friday withdrew from a decade-old interagency guidance document that had governed how banks engage in the leveraged lending market, saying the framework was overly restrictive.
In a joint statement, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. said Friday that they were rescinding the 2013 Interagency Guidance on Leveraged Lending and its 2014 Frequently Asked Questions implementation guidance. Going forward, the agencies said, banks should manage leveraged-loan exposures under the same broad risk-management principles that apply to other commercial lending.
“The 2013 Guidance and 2014 FAQs were overly restrictive and impeded banks’ application to leveraged lending of the risk management principles that guide their other business decisions,” the agencies said. “This resulted in a significant drop in leveraged lending market share by regulated banks and significant growth in leveraged lending market share by nonbanks, pushing this type of lending outside of the regulatory perimeter.”
The agencies’ decision represents a clear break from the old approach and in line with the administration’s deregulatory initiatives in a number of areas. Regulators say the 2013 guidance cast too wide a net — even pulling in some investment-grade companies — and ultimately boxed banks out of deals they felt they could handle.
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The regulators also argue the leveraged lending standards were accomplished without congressional oversight, arguing that the guidance constituted a de facto rulemaking but without the correct procedure under statute. They point to findings from the Government Accountability Office which said that the 2013 guidance technically counted as a rule under the Congressional Review Act, but regulators never sent it to Congress as required.
In place of that framework, the agencies laid out eight general expectations. They want banks to know how much risk they’re willing to take, define what they consider a leveraged loan, stick to uniform underwriting and take a hard look at whether a borrower can pay down debt over time. They also expect banks to track refinancing risk throughout the life of a loan. And if a bank buys into a loan it didn’t originate, it still has to run its own credit checks.
Regulators said they might issue new guidance down the line, but promised that anything future-looking will go through the formal notice-and-comment process.
“Examiners will examine banks’ underwriting, review risk ratings, and monitor the adequacy of loan loss reserves in accordance with general principles of safe and sound lending in a manner tailored to the size, complexity, and risk of leveraged lending activities,” the agencies said in their joint statement. “The agencies will consider issuing additional guidance related to leveraged lending as appropriate.”