The banking agencies have proposed a complete rewrite of the rules governing wholesale leverage finance, instituting a series of new standards that could significantly constrain a business that has recently grown to pre-crisis levels in ways regulators fear poses both micro- and macroprudential risk. The new standards would 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 would also stipulate a far more hands-on role for them related to leverage finance, including with regard to setting explicit “risk tolerances” based on stringent criteria also detailed by the agencies.
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