WASHINGTON — Bank regulators on Thursday sent banks revised instructions on managing potential risks from leveraged lending.
The updated guidance released jointly by the Federal Reserve Board, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency covers transactions by borrowers whose leverage that exceeds industry norms. It replaces guidelines released in April 2001.
Regulators said the guidance would apply to financial institutions that engage in leveraged lending activities, but only a small number of community banks would be affected.
"While leverage lending declined during the crisis, volumes have since increased and prudent underwriting practices have deteriorated," regulators said in a press release.
For example, certain debt agreements include features that wind up weakening lender protection by excluding meaningful maintenance covenants, or include features that limit a lenders' ability to take action in the event of a weakened borrower performance. Additionally, capital and repayment structures for some transactions have been "aggressive."
"It is important that banks provided leveraged financing to creditworthy borrowers in a safe and sound manner," regulators said.
Revised guidelines focused on several areas, including establishing a sound risk management framework; improving underwriting standards; accurate reporting and analytics; and realistic risk-rating of leverage loans.
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