Federal banking regulators are recommending banks bolster underwriting standards for leveraged commercial loans as borrowing of the high-risk debt approaches levels not seen since before the financial crisis, according to nine people with knowledge of the matter.
The Federal Reserve and the Office of the Comptroller of the Currency sent letters to some of the biggest banks asking them to avoid originating loans that can be considered "criticized," or debt classified by regulatory agencies as having some deficiency that may result in a loss, said the people, who asked not to be identified because the letters were private. Forty-two percent of leveraged loans were placed in that category this year.
The market for high-yield, high-risk corporate loans is booming, with borrowings of $839.5 billion this year in the U.S. within 7 percent of the record $899 billion set in 2007 as the Fed's zero interest-rate policy causes investors to seek returns from riskier investments. Lenders contacted by regulators include Citigroup Inc., Deutsche Bank AG, Goldman Sachs Group Inc., Morgan Stanley and UBS AG, said the people.
Representatives for the banks declined to comment on the guidance. Barbara Hagenbaugh, a Fed spokeswoman, and Bryan Hubbard, an OCC spokesman, declined to comment on the letters. Andrew Gray of the FDIC said he couldn't immediately comment.
Leveraged loans and high-yield, high-risk bonds are rated below Baa3 by Moody's Investors Service and lower than BBB- at Standard & Poor's.