Leveraged Loans to Get New Supervision Rules from US Regulators

March 27, 2012 James Heinsman In the News

Three important US banking regulators are asked for public comment on new and tougher guidelines for high-risk, high-yield loans submitted yesterday.

“While there was a pull-back in leveraged lending during the crisis, volumes have since increased, while prudent underwriting practices have deteriorated,” said the three overseers in a joint statement.
The Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency want to upgrade their watchfulness of financial-market and bank-lending trends so that no asset bubbles will emerge, which can often lead to financial crisis.

The guidelines are not legally binding or enforceable, but the rules present acceptable standards and give examiners during routine bank reviews a logical reason for subjecting leveraged loans for more demanding scrutinizing.

The US agencies said that debt agreements “have frequently included features that provide relatively limited lender protection, including the absence of meaningful maintenance covenants.”

The regulators said that the tougher rules they are proposing will have little effect on most community banks, since they do not generally deal with leveraged loans. Any comments the public would like to submit to the regulators should be submitted by June 8th.

FDIC, Federal Reserve, leveraged loans, Office of the Comptroller of the Currency,

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