US Bank Regulators Ease Post-Crisis Curbs on Leveraged Loans

(Bloomberg) — US banking agencies are easing Obama-era rules that spurred complaints from bankers they were being sidelined by too much regulation amid rapid growth in the private credit industry.

The 2013 guidance was “overly restrictive” and “overly broad,” the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. said in a statement on Friday. The old guidance resulted in a significant drop in market share for regulated banks in leveraged lending and pushed much of that business to nonbanks, the regulators said.

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“The agencies expect banks to manage leveraged lending exposures consistent with general principles for safe and sound lending,” the OCC and FDIC said.

The Trump administration has vowed to loosen or strip away banking rules put in place in the years following the 2008 banking crisis. So far, the effort has included easing some capital requirements, giving banks more say in the Federal Reserve’s annual stress tests and telling examiners to focus on empirical matters instead of less tangible threats such as reputational risks.

The OCC, FDIC and Federal Reserve issued the original guidance to combat weakening standards as issuance of private debt grew. Banking heavyweights such as JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon have groused for years about how regulated the banking industry has become compared with peers in the private markets. It’s a view shared by other bankers and lawyers in the industry.

Credit Needs

“There will be some ability of banks to engage in riskier behavior and activity because of this,” said Kimberly Prior, a financial services regulatory lawyer at King & Spalding. “But maybe that’s not the worst thing in the world. There are people that need credit and we do need to give businesses the chance to thrive and grow.”

Bankers will still be subject to restrictions, just not as stringently, Prior said. “They know its not the Wild West; they can’t just do what they want,” she said.

The tight curbs on banks encouraged “regulatory arbitrage” in which home lending and corporate loans migrated to lightly regulated private lenders and thus outside the purview of federal overseers, according to Citizens Financial Group Inc. CEO Bruce Van Saun.

“Does that create a better, safe-and-sound overall financial system?” Van Saun said in an interview earlier this week before the announcement. “We may have a super-safe banking system, but if a lot of that exposure now is outside the banking system, are we creating new systemic risks?”

Soured Loans

Jeffrey Gundlach, DoubleLine Capital’s chief executive, blasted private credit last month for allowing for “garbage lending” that could precipitate a financial crisis.

The impact of pushing the riskiest debt deals beyond regulated markets is starting to show. In recent weeks, Blue Owl Capital Inc. called off a merger of two of its private-credit funds and BlackRock Inc. marked to zero the value of private debt it had extended to a home improvement company.

There are also concerns about stretched valuations, spread compression and aggressive competition from peers in leveraged finance as well as other private credit lenders.

The reality is that the OCC hasn’t been enforcing compliance for years, and Friday’s official rollback should give banks more confidence to underwrite riskier deals, said Joe Slotnick, a banking and finance lawyer at Cahill Gordon & Reindel.

One of the likely goals of the new guidance is to push more financial activity back into traditional banking, Slotnick said. “Each of these banks has a really comprehensive risk apparatus that is not going be disassembled just because the already-disclaimed leveraged lending guidelines have been rescinded,” he said.

The Fed wasn’t included in Friday’s statement, and a representative for the central bank declined to comment.

–With assistance from Katanga Johnson.

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