FR 4203 (Guidance on Leveraged Lending FFR press release)

Printer Version - Board of Governors of the Federal Reserve System

1 of 2

http://www.federalreserve.gov/newsevents/press/bcreg/20130321a.htm

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
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:
Establishing a sound risk-management framework: The agencies expect that management and
the board of directors identify the institution's risk appetite for leveraged finance, establish
appropriate credit limits, and ensure prudent oversight and approval processes.
Underwriting standards: An institution's underwriting standards should clearly define
expectations for cash flow capacity, amortization, covenant protection, collateral controls, and
the underlying business premise for each transaction, and should consider whether the
borrower's capital structure is sustainable, regardless of whether the transaction is
underwritten to hold or to distribute.
Valuation standards: An institution's standards should concentrate on the importance of sound
methods in the determination and periodic revalidation of enterprise value.
Pipeline management: An institution should be able to accurately measure exposure on a
timely basis; establish policies and procedures that address failed transactions and general
market disruptions; and ensure periodic stress tests of exposures to loans not yet distributed to
buyers.

3/21/2013 10:25 AM

Printer Version - Board of Governors of the Federal Reserve System

2 of 2

http://www.federalreserve.gov/newsevents/press/bcreg/20130321a.htm

Reporting and analytics: An institution should ensure that management information systems
accurately capture key obligor characteristics and aggregates them across business lines and
legal entities on a timely basis, with periodic reporting to the institution's board of directors.
Risk rating leveraged loans: An institution's risk rating standards should consider the use of
realistic repayment assumptions to determine a borrower's ability to de-lever to a sustainable
level within a reasonable period of time.
Participants: An institution that participates in leveraged loans should establish underwriting
and monitoring standards similar to loans underwritten internally.
Stress testing: An institution should perform stress testing on leveraged loans held in portfolio
as well as those planned for distribution, in accordance with existing interagency issuances.
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.
Attachment (237 KB PDF)

Media Contacts:
Federal Reserve Board

Eric Kollig

202-452-2955

FDIC

Greg Hernandez

202-898-6984

OCC

Stephanie Collins

202-649-6870

3/21/2013 10:25 AM