WASHINGTON—U.S. bank regulators on Friday formally scrapped decade-old leveraged-lending guidance that had constrained banks’ participation in high-risk corporate loans and helped fuel the explosive growth of private credit, in a move expected to reshape competition across the $1.6-trillion leveraged-loan market, Reuters reported.
The Office of the Comptroller of the Currency and the FDI said the 2013 framework had become “overly restrictive” and pushed lending activity into the nonbank sector, weakening regulatory oversight while ceding market share to private lenders. The withdrawal is expected to pull more leveraged lending back inside the traditional banking system and intensify competition between banks and private credit firms, Reuters said.
Leveraged lending—widely used to finance mergers, acquisitions and other corporate transactions—remains a critical funding source for highly indebted borrowers. The Obama-era guidance had broadly drawn a line at six times debt-to-EBITDA, with loans exceeding that threshold facing heightened regulatory scrutiny. Exceptions were allowed only if all secured debt or roughly half of total debt could be repaid within five to seven years, according to Reuters.
Regulators said Friday the rules ultimately interfered with banks’ ability to apply their own risk-management practices. As a result, banks steadily lost ground to nonbank lenders that were not subject to the same constraints, pushing more leveraged lending outside the regulated financial system, Reuters reported.
The rollback marks another regulatory victory for banks under the Trump administration, which has already halted proposed tougher capital requirements and moved broadly to ease post-crisis regulatory constraints, Reuters said. Going forward, banks will instead be expected to manage leveraged-loan activity using broad, principles-based credit-risk standards rather than fixed leverage thresholds.