Joseph Otting, the head of the Office of the Comptroller of the Currency, said today that it’s up to banks to decide what level of risk they are comfortable with in leveraged lending, and that bankers shouldn’t consider themselves bound by the leveraged lending guidelines issued in the wake of the financial crisis.
In a question and answer session following an on-stage interview at the SFIG Vegas conference, Otting, a former banker who was nominated for the position by President Trump last year and confirmed in November, said the guidelines were not binding and that banks should engage in the lending they want so long as they are acting in a safe and sound manner.
“Institutions should have the right to do the leveraged lending they want, as long as they have the capital and personnel to manage that and it doesn’t impact their safety and soundness,” he said. “Meaning that if they did a ton of that and it was highly concentrated and started to deteriorate, then that is where we would be concerned from a safety and soundness basis.”
Speaking to Debtwire after the session, he said he fully expects leverage levels on deals to increase as a result of regulators’ more hands-off approach to leveraged lending.
“What we are telling banks is you have capital and expected loss models and so if you are reserving sufficient capital against expected losses, then you should be able to make that decision,” he said. “The end result of that is I do think you will see leverage ratios float up over the next 12-18 months.”
Otting’s comments go some way to confirming what many leveraged finance bankers had hoped – that regulators will be more hands-off when it comes to leveraged lending.
The guidelines, introduced in 2013 to curb excessive risk-taking, capped leverage at 6x – subject to certain conditions – and contributed to less aggressive dealmaking among regulated banks, and an uptick in more aggressive deals from non-regulated institutions such as Jefferies and Nomura.
However, in October, the Government Accountability Office designated the guidelines as a formal rule, thus opening them up for congressional review. Since then, regulators have also said they are open to reviewing the guidelines, prompting several bankers to say they have already begun pushing their credit risk officers to allow more aggressive deals.