Report points to leveraged lending ‘greater risk’ leading to ‘greater scrutiny’ of practice at banks

Leveraged lending at banks is on the rise, presenting greater risk and leading to greater scrutiny of the practice by regulators, the federal insurer of bank deposits said in a Dec. 23 report.

“Leveraged lending presents heightened risk for IDIs if internal risk management programs are not established and effectively managed,” the Federal Deposit Insurance Corp. (FDIC) said in its Fall 2019 Supervisory Insights.

“Examinations have identified instances in which policies and procedures do not have clear portfolio and capital limits on the volume and type of leveraged credits, including limits to any single leveraged borrower,” the agency stated in the report. “Examinations have also identified instances in which policies and procedures are inadequate in terms of monitoring and risk-ranking leveraged credits.”

The report noted that examinations have identified situations where banks and other insured institutions (IDIs) have become overly reliant on the vendor when purchasing leveraged loans. ”IDIs are expected to maintain sound vendor management programs when purchasing leveraged loans from a third party, which includes independent analysis of each credit,” the report states.

In other areas, the asserts that commercial real estate (CRE) risk management can be improved at IDIs. “The FDIC encourages IDIs that engage in significant levels of CRE lending – or any other type of lending – to carefully consider the quality and comprehensiveness of concentration risk management practices and take appropriate action when shortfalls are apparent,” the report states.

As it typically does, the FDIC report also includes a roundup of regulatory and supervisory actions by it and other federal financial institution regulators over the most recent quarter. The roundup lists 63 separate actions taken by the regulators.

FDIC Supervisory Highlights, Fall 2019