• Regulators rescind 2013 leveraged lending guidance seen as overly restrictive

• Banks regain authority to define leveraged loans and apply their own risk frameworks

 • Withdrawal expected to accelerate commercial and industrial loan growth

 • Move shifts competition back toward banks and away from private credit firms

 • Regulators stress need for strong underwriting, risk appetite discipline and lifecycle monitoring

 • Analysts warn looser rules may increase future credit losses

US banking regulators have scrapped decade-old leveraged lending guidance, opening the door for banks to expand into higher-risk corporate lending that had largely shifted to private credit firms. 

The Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation said Friday the 2013 framework had become “overly restrictive” and pushed significant lending activity outside the regulated banking system.

The agencies argued that the original guidance, as well as implementation advice issued in 2014, inadvertently prevented banks from applying their own established risk management principles. 

They said the result was a sharp decline in banks’ market share of leveraged loans and a corresponding rise in lending by nonbank firms. 

Under the new approach, banks will once again be responsible for defining what constitutes a leveraged loan and determining how such exposures fit within their risk appetites.

The change marks a substantial policy reversal and is expected to fuel stronger commercial and industrial loan growth. 

In a note to clients, a JPMorgan Securities analyst said activity could increase “potentially sharply at some banks,” particularly those that had stepped back from the market due to regulatory pressure. 

Regulators acknowledged the previous guidance had swept in loan types that were never intended to be restricted, including financing for investment-grade companies.

The rescission gives banks greater discretion in structuring loans tied to acquisitions, buyouts and borrowers with elevated debt levels. 

Regulators said that going forward, banks must manage leveraged lending exposures consistent with longstanding principles of safe and sound lending. 

They stressed the importance of aligning activities with risk appetite statements and ensuring robust credit and liquidity risk controls.

Supervisors encouraged banks to maintain disciplined underwriting practices, evaluate repayment capacity, monitor exposures across the loan life cycle and apply consistent credit assessments to both originated loans and participations. 

Examiners will continue reviewing underwriting quality, risk ratings and loan loss reserves, tailoring oversight to each institution’s scale and complexity.

The shift comes amid renewed scrutiny of the trillion-dollar private credit market, which has grown rapidly as banks retreated from high-risk transactions. 

Treasury Secretary Scott Bessent has argued that banks have been excessively constrained, allowing nonbank lenders to dominate a sector in which they face far lighter regulation. 

Some regulators, including former FDIC Chair Martin Gruenberg, have warned that private credit firms often operate with high leverage and deep interconnectedness with the banking system.

The Federal Reserve, which co-authored the original guidance, declined to comment. Analysts expect the central bank to eventually weigh in, given the significant implications for financial stability and competitive dynamics.

Industry advisers say the new framework will prompt banks to rethink lending strategies and update risk policies. 

A financial markets expert at PwC said the added flexibility could materially affect financing for non-sponsored borrowers, encouraging institutions to reassess how they price and structure deals.

However, the loosening of constraints is not without risk. An analyst at RBC Capital Markets warned that while deregulation may fuel loan growth in the short term, it could also lead to higher credit losses when the next downturn hits. 

The challenge for banks will be navigating newly expanded opportunities without repeating past mistakes in a market where risk and reward remain tightly intertwined.