OCC BULLETIN 2014-55
Subject: Leveraged Lending
Date: November 7, 2014
To: Chief Executive Officers of All National Banks, Federal Savings Associations, and Federal Branches and Agencies of Foreign Banks; Department and Division Heads; All Examining Personnel; and Other Interested Parties
Description: Frequently Asked Questions for Implementing March 2013 Interagency Guidance on Leveraged Lending
On March 22, 2013, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation (collectively, the agencies) jointly issued supervisory guidance on leveraged lending. The 2013 guidance, published in the Federal Register on that same day, applies to all national banks, federal savings associations, and federal branches and agencies of foreign banks (collectively, banks). Since the 2013 guidance was issued, the agencies have addressed numerous questions regarding the applicability and implementation of the guidance. The attached frequently asked questions (FAQ) document is designed to foster industry and examiner understanding of the 2013 guidance and to promote consistent application of the guidance in policy formulation, implementation, and regulatory supervisory assessments.
Note for Community Banks
The number of community banks with substantial involvement in leveraged lending is small; therefore, the agencies generally expect community banks to be largely unaffected by this bulletin. Nonetheless, community banks should be aware of the content of this guidance and incorporate consideration of the risks and expectations contained in the guidance in their due diligence efforts for purchasing loan participations. For community banks that engage more fully in leveraged lending activities, the risk management and other expectations of the guidance should be followed.
The attached FAQs focus on the following:
- Although the guidance provides flexibility when defining leveraged loans, the agencies expect definitions to include common characteristics for borrowers that are recognized as leveraged in the debt markets and have addressed these expectations in questions 1 through 4.
- Questions 5 through 13 discuss supervisory expectations regarding banks’ origination of non-pass leveraged loans. It is inconsistent with supervisory expectations to originate non-pass leveraged loans, or to refinance, modify, or renew a non-pass leveraged loan unless actions have been taken by the bank(s) to correct or mitigate the structural or credit-related concerns that resulted in the special mention rating.
- Question 14 discusses the evaluation of classified loans and encourages banks to work with problem borrowers in workout situations.
- Questions 15 and 16 outline trading assets and how they should be included within the scope of the guidance.
- The guidance established benchmarks about leverage levels and de-levering capacity. Questions 17 through 19 clarify the application of benchmarks and definitions outlined in the guidance.
- Questions 20 to 24 describe supervisory expectations about applying the guidance to certain banks and loan transactions.
- Question 25 explains that a bank’s implementation of the guidance is assessed and monitored by examiner considerations of leveraged lending risk management processes, as well as through transaction testing of leveraged loans.
- Question 26 clarifies the distinction between the guidance and the Federal Deposit Insurance Corporation’s deposit insurance assessment rule.
Banks that engage in leveraged lending transactions should consider and implement all applicable aspects and sections of the 2013 guidance. Examiners evaluate banks’ implementation of the guidance and the supporting FAQs when assessing risk management frameworks, determining risk ratings on leveraged borrowers, and evaluating overall compliance with the guidance.
Direct questions or comments to Lou Ann Francis, National Bank Examiner and Commercial Credit Technical Expert, Credit Risk Policy Division, at (202) 649-6670.
Deputy Comptroller for Credit and Market Risk