US Regulators Scrap Leveraged-Loan Rules, Boosting Banks
Move to rescind 2013 guidance gives banks more flexibility to compete with the booming private credit market for lucrative corporate lending.
Federal regulators have formally scrapped a decade-old set of guidelines on leveraged lending, a significant move that eases restrictions on large banks and sets the stage for a renewed competitive battle with the burgeoning private credit market.
In a joint statement, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) announced the rescission of the 2013 Interagency Guidance on Leveraged Lending. The agencies argued the post-crisis measure had become "overly restrictive" and inadvertently pushed lending activity outside the traditional banking system to less-regulated non-bank lenders.
The 2013 guidance was established in the wake of the global financial crisis to discourage federally regulated institutions from underwriting risky, highly indebted corporate loans. While intended to promote financial stability, the rules were criticized by the banking industry for being overly broad and for putting them at a disadvantage against the rapidly expanding world of private credit.
Those private funds, unencumbered by the guidance, capitalized on the opportunity, transforming the corporate financing landscape. The global leveraged loan market has since swelled, with market size estimates reaching over $5.5 trillion in 2024, according to industry data from Mordor Intelligence. The rule change is seen as a direct attempt to allow banks to reclaim market share in this lucrative field.
The decision to withdraw the guidance follows years of industry lobbying and a critical 2017 determination by the U.S. Government Accountability Office (GAO). The GAO concluded that the guidance was effectively a "rule" and should have been submitted for congressional review, a finding that undermined its legal standing. Further, a subsequent GAO report in 2020 questioned whether leveraged lending posed a true systemic risk to the financial system, challenging the core premise of the original guidance.
Banking advocates have long argued that the guidelines were a solution in search of a problem. In a letter to regulators earlier this year, PNC Bank requested a full withdrawal of the guidance, stating it "imposed unwarranted burdens that restricted credit and hindered innovation without materially enhancing safety and soundness," as reported by American Banker.
With the rescission, regulators are shifting from prescriptive rules to a principles-based approach. An OCC bulletin accompanying the decision clarified that banks are still expected to conduct lending in a safe and sound manner, and that examiners will continue to review underwriting standards and risk management practices. The move, however, grants banks significantly more flexibility in how they structure deals and manage their portfolios.
The key question now is how aggressively banks will move to re-enter a market that has become dominated by specialist credit funds. While the rule change removes a major hurdle, private credit firms have established deep relationships and a reputation for speed and flexibility that will remain a competitive challenge for more complex banking organizations. Nonetheless, the policy shift marks a new chapter in the competition for financing corporate America's largest deals.