Banks’ responsibilities when making venture loans detailed in OCC bulletin

A bulletin released Wednesday by the national bank regulator presents a lengthy run-down of how it views as venture lending, its risks, and the steps it expects banks to undertake to ensure such activity is being managed in a safe, sound manner.

The Office of the Comptroller of the Currency (OCC) said it has observed that some banks have added or are considering adding new commercial lending activities targeting high-risk borrowers in an early-, expansion-, or late-stage of corporate development. This type of lending – which it refers to as “venture lending” (and borrowers as “venture borrowers” or “venture-backed companies”) – is the focus of Bulletin 2023-34.

Noting the heightened uncertainty and higher probability of failure associated with new business ventures, the OCC bulletin underscores the need to manage venture lending in a safe, sound manner, “in compliance with applicable laws and regulations, and with support from sound risk management systems.

“OCC examiners will scrutinize loan commitments that are underwritten without an adequate assessment of the borrower’s capacity to repay and will determine whether such loans should be subject to supervisory criticism,” the agency wrote. “Examiners will ask banks to determine the impact that any weak venture loan underwriting standards may have on the assumptions used in calculating loan loss reserves.”

It said Bulletin 2023-34 presents background information on venture lending; describes venture lending risks; discusses risk management practices for venture lending; and provides guidance for risk-rating venture loans and evaluating repayment capacity.

OCC Bulletin 2023-34