On Sept. 11, 2018, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp., the National Credit Union Administration and the Bureau of Consumer Financial Protection (the Bureau and, collectively, the Agencies) issued a formal statement (the Statement) “clarifying the role of supervisory guidance” such as the 2013 Interagency Guidance on Leveraged Lending (the Leveraged Lending Guidance). The Statement affirms that the Agencies “do not take enforcement actions based on supervisory guidance” and that such guidance “does not have the force and effect of law.” The Statement continues the Agencies’ de-emphasizing of the consequences of noncompliance with the Leveraged Lending Guidance.
The Statement explains that, rather than creating binding rules with the force and effect of law, guidance “outlines supervisory expectations or priorities” and/or provides examples of practices the Agencies consider acceptable under applicable legal standards, such as safety and soundness standards. Further, the Agencies state that guidance is often issued in part as a response to requests from supervised institutions in order to “provide insight to industry” and help “ensure consistency in the supervisory approach.”
The Agencies’ statement further clarifies a number of going-forward policies and practices related to supervisory guidance:
- The Agencies intend to limit the use of numerical thresholds and bright-line (such as the “6x total leverage” benchmark in the Leveraged Lending Guidance and related paydown benchmarks) tests in guidance (although numerical thresholds, such as an institution’s asset size, will continue to be used to tailor the applicability of guidance).
- Examiners will not criticize institutions for a “violation” of guidance, though they may reference guidance to provide examples of safe and sound practices and other actions to appropriately address compliance with laws and regulations.
- Though the Agencies may continue to seek public comment on some guidance documents, seeking comment does not transform guidance into a rule.
- The Agencies will limit the issuance of multiple guidance documents on the same topic.
The Statement is consistent with testimony by Randal K. Quarles, Federal Reserve vice chairman of supervision, before the Senate Committee on Banking, Housing and Urban Affairs in April when he stated:
The guidance was issued to provide clarity regarding safety and soundness issues that may be present in making such loans. The guidance was not issued as a regulation that would be enforceable, and therefore the guidance itself should not be used as the basis for an enforcement or supervisory action. Rather, banking organizations should use it to better understand and manage the risks they are taking, and supervisors should assess a bank's standing under comprehensive principles of safety and soundness rather than pursuant to informal guidance.
Thus, ensuring the guidance is being used in the manner always intended is not telling examiners to “ignore” the guidance nor is it changing the safety and soundness standard that has always governed the evaluation of a bank's loan portfolio. To the contrary, we continue to expect that examiners will evaluate leveraged loans to determine whether they are posing undesirable amounts of risk in a bank's portfolio.
At the time, Mr. Quarles also indicated that the Agencies were discussing whether it would be appropriate to again solicit public comment on the guidance with a view to improving the clarity and reducing any unnecessary burden. No such solicitation has occurred.
The full text of the Statement may be found here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.