The banking agencies have finalized a complete rewrite of the rules governing wholesale leverage lending, instituting a series of new standards that significantly constrain a business that has recently grown to pre-crisis levels in ways regulators fear pose both micro- and macro prudential risk. The new standards demand more stringent underwriting procedures that do not vary based on whether the bank intends to hold or distribute a leverage loan or similar financial instrument, a requirement that will not only hike credit quality, but also demand significant changes in related liquidity-risk management at large banks active in this arena. Reflecting growing supervisory focus on the role of senior management and the board, the new guidance also stipulates a far more hands-on role for them related to leverage lending, including with regard to setting explicit “risk tolerances” based on stringent criteria also detailed by the agencies. Coming in concert with proposed capital rules that sharply increase the requirements for holdings in this sector, the new leverage-loan guidance may make it more costly for banks to engage in a fast-growing sector that, while high-risk, is among the few that offers high returns under current low-yield market conditions.
The full report is available to retainer clients. To find out how you can sign up for the service, click here