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Board of Governors of the Federal Reserve System
Federal Deposit Insurance Corporation
Office of the Comptroller of the Currency
FOR IMMEDIATE RELEASE
March 21, 2013
Agencies Issue Updated Leveraged Lending Guidance
WASHINGTON — Federal bank regulatory agencies today released updated supervisory guidance on leveraged lending, which has been increasing since 2009 after declining during the financial crisis.
The guidance from the Federal Reserve Board, the Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency (the agencies) covers transactions characterized by a borrower with a degree of financial leverage that significantly exceeds industry norms. The guidance replaces guidance issued in April 2001.
Before the financial crisis, the volume of leveraged credit transactions grew tremendously and participation by non-regulated investors willing to accept looser terms increased. While leveraged lending declined during the crisis, volumes have since increased and prudent underwriting practices have deteriorated. For example, some debt agreements have included features that weaken lender protection by excluding meaningful maintenance covenants and including other features that can limit lenders' recourse in the event of weakened borrower performance. In addition, capital and repayment structures for some transactions, whether originated to hold or to distribute, have been aggressive. Management information systems at some institutions have proven less than satisfactory in accurately aggregating exposures on a timely basis.
It is important that banks provide leveraged financing to creditworthy borrowers in a safe and sound manner.
The guidance issued today focuses attention on the following key areas:
This guidance applies to financial institutions supervised by the agencies that engage in leveraged lending activities. The number of community banks with substantial involvement in leveraged lending is small and they should be largely unaffected by this guidance.
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