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On December 8, the OCC and the FDIC announced that they are rescinding the 2013 Interagency Guidance on Leveraged Lending and the 2014 FAQs. The agencies explained that banks should instead manage leveraged lending activities under generally applicable safe and sound lending principles, including underwriting, credit administration, and risk rating standards used for other commercial loan portfolios.
According to the announcement, the 2013 guidance and 2014 FAQs were overly restrictive, impeded the application of risk management principles used elsewhere in commercial lending, and captured types of loans that were not intended to fall within the leveraged lending framework.
In explaining the rescission, the agencies highlighted several considerations for banks to incorporate into their leveraged lending practices:
- Banks should align leveraged lending activity with safe and sound lending principles. Institutions should assess credit and liquidity risks associated with leveraged borrowers and apply controls appropriate for the size and complexity of exposures.
- Internal definitions of leveraged loans remain important for exposure monitoring.
The agencies noted that institutions should continue maintaining criteria that support consistent identification and aggregation of leveraged exposures across business lines. - Underwriting should emphasize repayment capacity and sustainable capital structures. Analyses should evaluate projected cash flows, reasonable de-levering expectations, and support for the borrower’s long-term repayment ability.
- Ongoing monitoring and lifecycle oversight continue to apply. Banks should monitor borrower performance, assess refinancing capacity, and adjust ratings, accrual status, and reserves consistent with safety and soundness expectations.
- Participation purchasers should conduct independent credit analysis. Banks acquiring participations should apply their own underwriting and diligence standards as if they originated the credit.
Putting It Into Practice: The withdrawal aligns with a broader federal shift this year toward less prescriptive supervisory frameworks and a renewed emphasis on principles-based oversight across the financial sector (previously discussed here and here). Financial institutions should continue monitoring forthcoming OCC and FDIC issuances as agencies recalibrate supervisory approaches and be prepared to update policies and procedures as expectations evolve.
