May 13 A senior Federal Reserve official warned
banks on Tuesday the central bank may have to take further
action to ensure compliance with U.S. guidance on leveraged
lending, in the clearest sign yet it is seeking to dispel a
perception that it is lenient.
Banking and regulatory sources told Reuters last month that
the Office of the Comptroller of the Currency (OCC) is zealously
pursuing the implementation of leveraged loan guidelines it and
the Fed issued jointly last year. By contrast, the Fed is more
relaxed, these sources said.
On Tuesday, however, the Fed made some of its most hawkish
comments on the matter. In prepared remarks to the 2014 Credit
Markets Symposium in Charlotte, North Carolina, Todd Vermilyea,
senior associate director for banking supervision and regulation
at the Fed, warned of potentially more scrutiny following
regulatory letters sent to banks last year titled "Matter
"Recent industry level data suggest that despite the
issuance of the leveraged lending guidance and the MRAs, terms
and structures of new deals have continued to deteriorate in
2014," Vermilyea said in his opening statement, a copy of which
was provided by a Fed spokeswoman.
"A lot of work has been done to date by the agencies to
assess compliance with the guidance, but clearly much more work
remains to be done and stronger supervisory action may be
needed," he added.
The issuance of leveraged loans, often referred to as "junk
rated," rose to a record $1.14 trillion in the United States
last year, up 72 percent from the year before, according to
Thomson Reuters Loan Pricing Corp.
Banks received $1.47 billion in fees in 2013 for U.S.
leveraged loans, a 17 percent increase from 2012, according to
Thomson Reuters and Freeman Consulting data.
A difference in approach between the Fed and the OCC, which
even some regulatory sources privately admit exists, has meant
that banks such as Credit Suisse Group AG and Goldman
Sachs Group Inc are able to be more aggressive in making
leveraged loans just because they are regulated by the Fed, not
the OCC, the sources have told Reuters.
As a result, these banks could gain ground at the expense of
rivals that are regulated by the OCC, including JPMorgan Chase &
Co, Bank of America Corp and Wells Fargo & Co
, these sources have said.
Vermilyea said the Fed, OCC and Federal Deposit Insurance
Corp intend to use the upcoming regulatory examinations later
this year, referred to as the Shared National Credit (SNC)
review, to assess banks' conduct and adherence to "safe and
sound lending standards".
Last year's SNC review revealed large gaps between industry
practices and guidelines, Vermilyea said. The review showed
weaker underwriting and large volumes of loans that did not have
the capacity to amortize in reasonable periods, he added.
Complicating matters, the guidelines are not prescriptive
enough and leave room for interpretation, bankers have
(Reporting by Greg Roumeliotis in New York; Editing by Steve