Trump Administration Rollback Lets Banks Take On Riskier Debt
US regulators have cancelled a key safeguard created after the 2008 financial crisis, clearing the way for banks to take on riskier lending to the buyout industry. The Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation said they were withdrawing the 2013 leveraged lending guidance because it was too restrictive and had pushed a large share of such lending to unregulated non-bank lenders.
The original guidelines advised that loans where company debt rose above six times earnings should “generally” be considered risky. Although not legally binding, banks treated them like firm rules. Leveraged loans, usually used to support private equity takeovers, are junk-rated and often sold by banks to other investors. While profitable in normal markets, these loans have caused heavy losses during downturns when banks struggled to sell them without deep discounts.
The rules were introduced after the financial crisis, when banks were left holding risky loans they could not offload. Regulators worried such lending could again overload companies with unsustainable debt and spark fresh financial instability. The rollback now comes at a time when some investors are already warning of early stress among weaker US borrowers. Recent failures at car parts supplier First Brands and subprime lender Tricolor, along with a rise in defaults in the junk loan and bond market to a four-year high of 5.3 per cent, have added to concerns.
Analysts say the decision will encourage banks to return aggressively to leveraged lending, increasing competition with private credit giants such as Apollo, Blackstone and Ares. These firms have been offering loans far beyond the six-times earnings threshold and with more flexible terms, including allowing interest to be paid with additional debt. While the change may boost loan growth, experts warn it could also lead to higher losses in the next economic downturn. Regulators said banks must now apply the same prudent risk-management principles to leveraged loans as they do to all corporate lending.
