Agencies rescind 12-years-old guidance on leveraged lending; banks told to apply ‘general principles on risk management’

Recission of guidance issued 12 years ago on leveraged lending was announced Friday by two federal banking regulators, who called it “overly restrictive” and impeding banks’ “risk management principles that guide their other business decisions,” the agencies said in joint releases.

Further, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corp. (FDIC) asserted that the guidance constituted a rule subject to the Congressional Review Act – but was never submitted to Congress for review.

The agencies, in their release, said the “Interagency Guidance on Leveraged Lending,” dated March 21, 2013, and the “Frequently Asked Questions for Implementing March 2013 Interagency Guidance on Leveraged Lending,” dated Nov. 7, 2014, “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. In addition, the guidance was overly broad and captured certain types of loans that were not intended to be covered, including loans to investment-grade companies.”

The agencies said, for those reasons, they were rescinding the 2013 Guidance and the 2014 FAQs. No specific effective date was given.

In their place, the agencies said banks should apply the agencies’ general principles for prudent risk management of commercial loans and other types of lending to their leveraged lending activities.

“The agencies expect banks to manage leveraged lending exposures consistent with general principles for safe and sound lending,” they said.

The agencies also noted that examiners will assess 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.”

However, the agencies also said they will consider issuing additional guidance related to leveraged lending as appropriate through the notice and comment process.

Interagency Statement on OCC and FDIC Withdrawal from the Interagency Leveraged Lending Guidance Issuances