(Adds comment from the Federal Reserve in 10th paragraph.)
By Lauren Tara LaCapra and Greg Roumeliotis
NEW YORK, April 25 Some major U.S. banks are
privately complaining that they are getting the short end of the
regulatory stick when it comes to the profitable business of
lending to heavily indebted companies.
Banking and regulatory sources with direct knowledge of the
situation said the U.S. Federal Reserve and the Office of the
Comptroller of the Currency (OCC) appear to be taking different
approaches to implementing a set of guidelines on leveraged
loans, even though they issued them jointly in March last year.
The OCC, a division of the U.S. Treasury Department, is
zealously implementing them, while the Fed is more relaxed about
it, the sources said. While all major Wall Street banks are
regulated by the Fed, the OCC oversees only those with national
bank charters, which allow a bank to build a nationwide branch
The OCC, for example, is more frequently contacting banks
about the issue and querying them extensively over their
compliance in loans they make to heavily indebted companies.
OCC-regulated banks have also received more verbal warnings as
well as official letters demanding fixes than banks that are
regulated just by the Fed in the United States, the sources
said. Such letters and warnings are the first steps before fines
The difference in approach, 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
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
, the sources said.
Complicating matters further, the guidelines are not
prescriptive enough and leave room for interpretation, the
sources said. One senior Wall Street executive said foreign
banks are getting a pass from the Fed on deals that
OCC-regulated banks can no longer do.
"We would hope going forward that these guidelines not only
get applied to U.S. banks but get applied to international banks
as well as for those entities that are not part of the banking
system," Bank of America Chief Financial Officer Bruce Thompson
said, when asked about the issue in a conference call with
reporters on April 16.
Bryan Hubbard, a spokesman for the OCC, declined to comment.
The banks declined to comment.
"The Federal Reserve has been closely coordinating with the
OCC on the implementation of the leveraged lending guidance,
including in issuing a joint set of questions-and-answers for
examiners, with the common goal of helping to ensure a safe and
sound banking system," Fed spokeswoman Barbara Hagenbaugh said
in an emailed statement. "A number of the institutions the
Federal Reserve supervises have made progress on this front, but
further work remains, and the Fed will continue to work with the
OCC toward our common goal.''
When the Fed and the OCC, along with the Federal Deposit
Insurance Corp, first issued the guidelines in March last year,
they wanted all banks to be more conservative about making
leveraged loans, a category considered risky because the
borrower takes on a lot of debt.
The guidelines were meant to ensure that banks do not end up
with too much exposure to such companies and avoid a repeat of
the financial crisis when the market for such loans evaporated
and banks were left holding the loans.
Now, if the uneven implementation of the guidelines were to
continue, it could have the effect of concentrating risk on some
banks' balance sheets.
Some sources said that it could create conditions that could
eventually push risky lending entirely out of the regulated
banking sector and into the lightly-regulated realm of shadow
banking, consisting of firms such as private equity and hedge
The details of how these guidelines are being implemented
also provide a window into activity that tends to remain behind
the scenes, and it gives weight to an oft-heard complaint on
Wall Street these days - that various regulators are not
speaking with one voice and that there is often not enough
clarity in what they would like banks to do.
Regulatory sources said that there are different opinions on
leveraged lending among the different agencies.
One regulatory source who spoke on the condition of
anonymity because of rules against discussing internal
negotiations publicly said his agency needs to "enforce more
discipline on our side of the table."
Still, the source added that if OCC-regulated banks do lose
market share in the coming months, "from our perspective, that's
While bankers say that the guidelines are driving more
cautious underwriting decisions, it is not yet showing in market
data, such as the rankings of banks by the amount of loans they
OCC-regulated Bank of America, for example, has held on to
its No. 4 spot in the U.S. leveraged loan league table in the 12
months since the guidance were issued, according to Thomson
Reuters data. The top spots continue to be occupied by the same
Fed-regulated banks - Barclays Plc, Credit Suisse and
Royal Bank of Canada.
Banks won't know how well they have followed the guidelines
until after the regulators conduct an annual review of the
banks' loan books later this year.
Data on the average amount of leverage, which is measured as
a ratio of a company's debt to its cash flow, is also mixed
since the guidelines were issued, with no clear direction on
whether it is causing banks to be more conservative.
Bankers said they are nevertheless having an effect. In an
interview on April 17, for example, Ruth Porat, the chief
financial officer of OCC-regulated Morgan Stanley, said her bank
was "passing on some deals as have a number of our peers."
Morgan Stanley is regulated by the OCC because it has a national
Porat added that the strength in underwriting volumes for
more creditworthy companies has more than offset lost revenue
from those deals.
Still, it could have been a growing business opportunity for
banks at a time when Wall Street's many other businesses are
also under pressure.
Leveraged loan issuance hit 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, up 17 percent from 2012, according to Thomson Reuters and
Freeman Consulting data.
"It tends to be a higher margin business than say just
underwriting a corporate bond," said Jeff Harte, a bank analyst
with Sandler O'Neill.
Harte said that while the boom in high grade corporate debt
issuance may be nearing its end, the growth in leveraged loans
is "still pretty early stage" in this cycle.
(Additional reporting by Peter Rudegeair in New York, editing
by Paritosh Bansal and John Pickering)