Leveraged Lending

Allowance for Loan and Lease Losses

Banks with held for investment leveraged loans need to ensure that the risks are fully incorporated in the allowance for loan and lease losses and capital adequacy analyses. For allowance purposes, leverage exposures should be taken into account either through analysis of the estimated credit losses from the discrete portfolio or as part of an overall analysis of the portfolio using the institution’s internal risk grades or other factors. At the transaction level, exposures heavily reliant on enterprise value as a secondary source of repayment require special evaluation to determine the need for, and adequacy of, specific allocations as these values can be highly volatile and difficult to fully support.

When banks hold significantly greater exposures than originally intended, bankers and examiners must evaluate their effect on overall portfolio risk levels, and the adequacy of capital and the allowance for loan and lease losses.

Refer to Appendix C, “Accounting for Leveraged Lending, “for additional discussion on the accounting implications.

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