Three federal regulatory agencies – the Office of the Comptroller of the Currency, the Federal Reserve and the Federal Deposit Insurance Corp. – have jointly issued the attached supervisory guidance on leveraged lending. The new guidance applies to all national banks, federal savings associations, and federal branches and agencies of foreign banks and will replace a similar guidance issued in April 2001.
‘Since the 2001 guidance was issued, the agencies have observed tremendous growth in the volume of leveraged credit, driven in part by demand from non-regulated investors,’ said the agencies in a press statement. ‘The pipeline of aggressively structured commitments grew rapidly, and management information systems (MIS) were at times less than satisfactory. Many banks found themselves holding large pipelines of higher-risk commitments when buyer demand had diminished significantly. In addition, debt agreements frequently included features that provided limited lender protection and contained aggressive capital structures.’
The new guidance will focus on determining a financial institution's risk management framework, underwriting standards, valuation standards, pipeline management, MIS reporting and analytics, risk rating leveraged loans, participation purchasing and stress testing. The agencies say that their respective examiners will be ‘critically evaluating the above factors when assessing a bank's risk management framework, as well as determining credit classifications on leveraged borrowers.’
The guidance becomes effective May 21.