Leveraged Lending Guidance Withdrawn by OCC and FDIC
On December 5, 2025, the Office of the Comptroller of the Currency (“OCC”) and Federal Deposit Insurance Corporation (“FDIC”) rescinded guidance on leveraged lending activities by banks. The rescissions should come as a welcome relief to the banking industry, allowing banks to better apply enterprise-wide risk management programs to this type of lending and potentially create additional competition in the private credit loan market.
The recissions by the OCC and FDIC are effective immediately. While Federal Reserve Board has not yet rescinded the versions of the leveraged lending guidance that apply to the banking organizations it regulates, we note there remains an open question of whether that guidance has actual legal effect.1
In this Legal Update, we provide background on the regulation of leveraged lending and discuss the recission of the restrictive guidance by the OCC and FDIC.
Background
Leveraged lending is not a defined term within the banking industry or bank regulation but, for many years, the OCC, FDIC, and Federal Reserve expressed concern with an amorphously defined category of lending where the obligor’s post-financing leverage, as measured by debt-to-asset ratios, debt-to-equity ratios, cash flow-to-total debt ratios or other standards unique to particular industries of borrowers, significantly exceeds industry norms for leverage.2
In 2013, these agencies issued new guidance that required banks to establish a definition of leveraged lending that satisfied certain regulatory criteria and could be applied across all business lines.3 Further, a bank was required to use its definition of leveraged lending to maintain: (i) uniform credit and concentration policies with limits consistent with risks; (ii) well-defined underwriting standards that include a review of the capacity to de-lever; (iii) appropriately sound methodologies for determining “enterprise value;” (iv) sound practices for monitoring of exposures across business lines and pipeline management policies; (v) guidelines for periodic stress testing; (vi) criteria for relying on internal risk-ratings; and (vii) criteria for evaluating financial sponsors (including willingness/ability to repay). That guidance was significantly expanded in 2014 through FAQs that set detailed supervisory expectations for how banks could engage in leveraged lending. As noted in our 2016 article, it was enforced severely by the regulators through supervisory letters and coercive meetings with banking groups.
The 2013 and 2014 leveraged lending guidance was strongly opposed by the banking industry, which noted significant substantive concerns and procedural issues. Further, the impact of the guidance was to drive many lending activities out of the regulated banking system into the arms of less regulated lenders, such as investment banks, private equity funds, and other private credit providers.
Effectiveness and Withdrawal
In 2017, the first cracks began to show with the leveraged lending guidance. In October of that year, the Government Accountability Office (“GAO”) issued a decision concluding that the leveraged lending guidance was a rule under Congressional Review Act (“CRA”). The effect of this decision was that the guidance could not take effect unless and until it was submitted to Congress. Given that the agencies had not submitted the guidance to Congress, there was a strong argument that it had no legal effect.
In 2018, the then-head of the OCC stated publicly that banks did not need to comply with the leveraged lending guidance as long as they had adequate capital.4 Further, between 2018 and 2021, the agencies developed rules that clarified how supervisory guidance, like the leveraged lending guidance, does not have the force and effect of law.5 Bank examiners could not criticize a bank for a “violation” of or “non-compliance” with supervisory guidance, like had been done in 2014 with the leveraged lending guidance.
In November 2025, members of the House Financial Services Committee wrote to the agencies urging that they withdraw the leveraged lending guidance. They stated that the guidance had “made bank credit more difficult to obtain and has been an ineffective means of managing the risks related to truly highly leveraged loans.” Additionally, they noted how the failure of the agencies to submit the guidance to Congress was a violation of the CRA and that bank examiners had continued to enforce the guidance, even after the GAO determination and issuance of rules on the limited role of supervisory guidance.
Therefore, it was not a surprise when the OCC and FDIC announced on December 5 that they were withdrawing the leveraged lending guidance. They found that the guidance was overly restrictive and had impeded the application of enterprise-wide risk management practices to leveraged lending.
They also noted that the issuance and enforcement of the leveraged lending guidance resulted in a significant drop in leveraged lending market share by regulated banks and significant growth in leveraged lending market share by nonbanks, pushing leveraged lending outside of the regulatory perimeter. In addition, they stated that the guidance was overly broad and captured certain types of loans that were not intended to be covered, including loans to investment-grade companies.
New Leveraged Lending Principles
In place of the guidance, the OCC and FDIC announced eight principles that will guide examiners as they examine banks’ underwriting, review risk ratings, and monitor the adequacy of loan loss reserves for leveraged lending activities. These principles are:
- A bank should manage the risks associated with its leveraged lending activities and tailor its risk management practices based on the quantity of the risk inherent in such activities.
- A bank should have a clearly defined risk appetite that is reasonable and reflects the aggregate level and types of risk it is willing and able to assume to achieve its strategic objectives. A bank’s leveraged lending activities should clearly align with this risk appetite.
- A bank should have effective risk management and controls for transactions in its pipeline, including loans to be held and those to be distributed.
- A bank should determine its own definition of a “leveraged loan.”
- A bank’s underwriting criteria should consider a loan’s purpose and sources of repayment and the capacity to de-lever over a reasonable period. Given the risk profiles of leveraged lending transactions, underwriting criteria should be consistently applied to these transactions.
- A bank should conduct an analysis of a leveraged borrower’s past and current performance compared with projections, as well as the assumptions on which the projections are based.
- A bank should monitor a leveraged loan throughout its life cycle to assess the risk that refinancing is unavailable and to appropriately manage changes to the loan’s risk profile.
- A bank that purchases a participation in a leveraged loan should make a thorough independent evaluation of the transaction and risk involved before committing funds. The same credit assessment and underwriting criteria should be applied as if the bank were originating the loan internally.
The recission of the leveraged lending guidance and the implementation of these principles appear to be a big step in permitting banks to implement appropriate underwriting and oversight over this type of portfolio. Such an approach may well allow banks to better compete with non-bank lenders in the leveraged loan market.
1 See BPI, GAO’s Determination that Leveraged Lending Guidance is a “Rule” under the Congressional Review Act (Oct. 20, 2017) (“Because the agencies that promulgated the guidance ... have not provided to Congress or the Comptroller General any of the three required items, the guidance is therefore not effective.”).
2 See 77 Fed. Reg. 19,417, 19,419 n.3 (Mar. 30, 2012).
3 78 Fed. Reg. 17,766 (Mar. 22, 2013).
4 Eleanor Duncan, Banks can “do what they want” in leveraged lending, Reuters (Feb. 27, 2018).
