Overview
In March 2013, U.S. bank regulators issued joint supervisory guidance on leveraged lending to prevent a return of pre-2008-style underwriting excesses, with examiners informally anchoring scrutiny around a roughly six-times-EBITDA leverage benchmark. Over the next decade, banks’ pullback helped shift riskier deal finance toward private-credit funds, CLOs, and other nonbanks—expanding an opaque “shadow banking” ecosystem even as regulators maintained the guidance was supervisory, not a binding rule.
Since the OCC–FDIC rescission on December 5, 2025, officials have reinforced that the rollback is part of a broader push toward principles-based supervision: Acting FDIC Chair Travis Hill highlighted the withdrawal in a December 11 FSOC statement alongside other supervisory-reform initiatives. Meanwhile, Treasury Secretary Scott Bessent—FSOC’s chair—has urged a reevaluation of FSOC’s post-crisis approach in the name of reducing regulatory burdens, drawing criticism from Sen. Elizabeth Warren as lawmakers press for stress testing and tighter monitoring of bank–private-credit linkages. The Federal Reserve still has not publicly joined the OCC–FDIC rescission, keeping attention on whether the Fed aligns its supervisory posture and how regulators respond to Warren and Reed’s requested December 19 deadline.
Key Indicators
People Involved
Organizations Involved
A bureau of the U.S. Treasury that charters, regulates, and supervises national banks and federal savings associations.
An independent U.S. agency that insures bank deposits and supervises state-chartered banks that are not members of the Federal Reserve System.
The U.S. central bank, which also serves as the primary prudential regulator for bank holding companies and many large banks.
An independent, nonpartisan agency that works for Congress, often called the congressional watchdog.
The Senate committee with jurisdiction over banking, insurance, and securities regulation, including oversight of OCC, FDIC, and the Federal Reserve.
A broad set of nonbank lenders—including direct-lending funds, business development companies, and credit strategies within private-equity firms—that extend loans outside the traditional banking system.
A post-crisis council created by Dodd-Frank to identify and respond to systemic financial risks across regulators and markets.
Cabinet department responsible for U.S. economic and fiscal policy; oversees the OCC and chairs FSOC via the Treasury Secretary.
Timeline
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Treasury Secretary Bessent calls for reevaluating FSOC’s post-crisis approach
Political ResponseTreasury Secretary Scott Bessent, chair of FSOC, issued a public letter urging a rethink of FSOC’s role and the broader post-crisis regulatory framework, arguing rules have become excessive or duplicative—prompting pushback from Sen. Elizabeth Warren.
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Hill spotlights leveraged-lending rollback in FSOC update on supervisory reforms
Political/Regulatory SignalIn a statement at an FSOC meeting, Acting FDIC Chair Travis Hill cited the OCC–FDIC withdrawal from the 2013 leveraged-lending guidance as one of several recent steps to reform supervision and boost bank lending under principles-based standards.
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Senators warn on private-credit and bank–nonbank risks
Political ResponseOn the same day as the OCC–FDIC rollback, Senators Elizabeth Warren and Jack Reed send a letter to the Fed, FDIC, and OCC calling for a private-credit stress test and a supervisory review of banks’ exposures to nonbank lenders. Citing recent losses and about $1.2 trillion in loans to nonbank financial institutions, they urge stronger safeguards, including consideration of a countercyclical capital buffer.
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OCC and FDIC rescind 2013 leveraged-lending guidance
Regulatory ActionThe OCC and FDIC jointly announce that they are rescinding the 2013 Interagency Guidance on Leveraged Lending and the 2014 FAQs, as well as prior communications transmitting those documents. They argue the guidance was overly restrictive, captured some investment-grade borrowers, and shifted leveraged-lending market share from regulated banks to nonbanks, and note GAO’s finding that the guidance was a CRA ‘rule’ never submitted to Congress. Banks are told to rely on eight general principles for safe and sound leveraged lending tied to existing credit-risk standards.
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Agencies ease leverage capital standards for big banks
Regulatory ActionThe Fed, FDIC, and OCC finalize a rule modifying the enhanced supplementary leverage ratio for the largest banks to function more as a backstop to risk-based capital requirements and to reduce disincentives for low-risk activities such as Treasury market intermediation, part of a broader deregulatory tilt.
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Leveraged-loan market rebounds to record size
Market DevelopmentS&P Dow Jones Indices reports that the U.S. leveraged-loan market has reached about $1.5 trillion in market value, rivaling the U.S. high-yield bond market, with record quarterly trading volumes. The resurgence underscores the continued centrality of leveraged lending to corporate finance even before formal rule changes.
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Private credit matches leveraged loans and high-yield bonds in scale
Market DevelopmentGlobal private-credit assets under management climb to around $2.1 trillion by 2023, roughly matching the size of the U.S. leveraged-loan and high-yield bond markets. Analysts and central banks note that post-crisis bank regulation and supervisory guidance, including on leveraged lending, helped drive more risky corporate credit into nonbank channels.
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Role-of-guidance rule codified
Regulatory PolicyFinancial regulators finalize a rule codifying that supervisory guidance does not create binding legal obligations, replacing the 2018 statement. Industry groups had petitioned for this change after cases like the leveraged-lending guidance, where they argued supervisors treated guidance as enforceable rules.
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Agencies reaffirm supervisory guidance is not binding law
Regulatory PolicyFive federal agencies, including the Fed, FDIC, and OCC, issue an Interagency Statement on the Role of Supervisory Guidance, making clear that guidance does not have the force and effect of law and that enforcement actions will not be based on noncompliance with guidance. This is partly a response to concerns over leveraged-lending and other supervisory practices.
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GAO deems leveraged-lending guidance a ‘rule’ under Congressional Review Act
Legal/ProceduralIn response to a request from Senator Pat Toomey, the Government Accountability Office rules that the 2013 Interagency Guidance on Leveraged Lending is a ‘rule’ under the Congressional Review Act and therefore should have been submitted to Congress and GAO before taking effect. The guidance was never submitted, undermining its formal legal footing.
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Banks pull back as private credit surges
Market ReactionFollowing the guidance, large banks increasingly avoid underwriting the riskiest leveraged loans or those that would attract examiner criticism, especially above six times EBITDA. Private-credit funds, CLO managers, and other nonbank lenders step in, gaining market share in financing leveraged buyouts and dividend recapitalizations.
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FAQs clarify supervisors’ expectations
Regulatory ActionThe agencies release Frequently Asked Questions on the 2013 leveraged-lending guidance, elaborating how banks should define leveraged loans, structure underwriting standards, and manage pipeline risk. Market participants interpret the combination of guidance and FAQs as de facto rules, particularly around the six-times-EBITDA benchmark.
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Post-crisis Interagency Guidance on Leveraged Lending
Regulatory ActionOCC, the Federal Reserve, and FDIC publish the Interagency Guidance on Leveraged Lending, replacing the 2001 guidance. The document tightens expectations for underwriting, repayment capacity, and risk management of highly leveraged corporate loans, with examiners informally focusing on deals with leverage above roughly six times EBITDA.
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First modern interagency leveraged-finance guidance
Regulatory ActionOCC, Federal Reserve, and FDIC issue guidance on leveraged financing, seeking to improve risk management as leveraged loans and LBO activity grow. This 2001 framework later becomes the foundation for stricter post-crisis rules.
Scenarios
Banks re-enter leveraged lending aggressively but manage risk within capital and supervisory limits
Discussed by: Bank trade groups, some regulators, and industry analysts quoted by Reuters, ABA Banking Journal, and OCC/FDIC statements
In this scenario, large banks use the rollback to underwrite more highly leveraged deals and reclaim market share from private-credit funds, but do so within existing capital and risk-management frameworks. Internal models, stress tests, and market discipline constrain the most extreme structures even without a hard six-times-EBITDA benchmark. Regulators focus on the new eight-point principles—risk appetite, underwriting quality, pipeline management, and lifecycle monitoring—rather than leverage ratios alone. Over time, a larger share of leveraged loans migrates back into the regulated banking perimeter, while private credit remains prominent but less dominant. This outcome depends on benign macro conditions, continued investor scrutiny of weak credits, and supervisors vigorously enforcing qualitative safety-and-soundness standards.
Regulatory rollback fuels a new leveraged-credit cycle and amplifies losses in the next downturn
Discussed by: Skeptical former regulators, academics, and commentators cited by the Financial Times and Wall Street Journal
Here, the removal of specific supervisory guardrails leads banks to compete more directly with private-credit funds on leverage and terms, especially as dealmakers push for larger, more aggressive LBOs and dividend recapitalizations. Amid easing capital rules for large banks and sustained investor demand for floating-rate paper, underwriting standards erode and covenant-lite structures proliferate. When a macro shock hits or rates move unfavorably, default rates spike on junk-rated borrowers and heavily indebted companies; banks, CLOs, and private-credit funds all take losses. Post-crisis, policymakers respond with a tougher, formal rulemaking—possibly including numerical leverage limits and higher countercyclical capital buffers—reversing much of the current deregulatory trend.
Congress and the Fed force a compromise: a narrower, formal leveraged-lending rule replaces broad guidance
Discussed by: Legal analysts and policy-watchers following GAO’s 2017 opinion and recent Senate oversight letters
Building on GAO’s determination that the 2013 guidance was a ‘rule’ under the Congressional Review Act and on continued political scrutiny from senators like Warren and Reed, Congress pushes regulators toward a more formal, narrowly tailored leveraged-lending regulation. The Fed, wary of diverging from the OCC and FDIC but cautious about systemic risk, joins a new notice-and-comment rulemaking focused on specific problem areas such as debt-funded dividends, weak covenants, and concentrated exposures to cyclical sectors. The result is a hybrid regime: the broad 2013 guidance and its six-times-EBITDA bright line remain rescinded, but a more targeted rule imposes clear, enforceable constraints on the riskiest practices while leaving room for case-by-case supervisory judgment.
Private credit remains dominant while banks’ comeback is limited and risk stays in the shadows
Discussed by: Market research from Preqin, IMF-cited studies, and S&P Global reporting on private-credit growth
Despite the rollback, private-credit funds continue to expand faster than banks can or will. Many sponsors and borrowers prefer nonbank lenders for speed, flexibility, and fewer syndication risks, and private-credit AUM is projected to roughly double by 2030. Banks selectively step back into some larger, higher-quality leveraged deals but remain constrained by capital rules, internal risk culture, and reputational concerns. Systemic risk stays concentrated in opaque private vehicles funded partly by institutional investors and bank credit lines. Regulatory focus over time shifts from leveraged-lending guidance toward broader data collection and macroprudential tools for monitoring and backstopping nonbank credit markets, including liquidity facilities or new disclosure regimes.
Macro or political shock triggers a clampdown on both banks and private credit
Discussed by: Scenario analyses by central banks and international bodies worried about shadow banking
A severe recession, a wave of leveraged-loan and private-credit defaults, or a political backlash against perceived Wall Street excess produces a sharp turn in policy. Congress or a future administration mandates stronger, statutory limits on highly leveraged corporate borrowing, expands the regulatory perimeter to cover large private-credit managers more like banks, and potentially introduces new resolution and capital frameworks for nonbanks. Leveraged lending becomes more expensive and scarcer, reducing LBO activity and deal-driven growth but lowering systemic risk. This scenario would likely emerge only after visible distress, such as widespread losses in pension funds or a rescue of a large nonbank lender, focuses public anger.
Historical Context
Pre-2008 Leveraged Finance and the Global Financial Crisis
2003–2009What Happened
In the years before 2008, banks aggressively expanded leveraged lending, high-yield bond issuance, and securitization, including covenant-lite loans and complex structured products. Lax underwriting and light-touch regulation contributed to a broad credit bubble, particularly in subprime mortgages and leveraged structured products. When housing prices fell and defaults rose, losses spread through the banking system and shadow banking, leading to the collapse or rescue of major institutions and prompting post-crisis reforms such as Dodd-Frank and tougher supervisory expectations on leveraged lending.
Outcome
Short term: The crisis caused severe market dislocation, the failure or bailout of major financial institutions, and deep recessions worldwide, forcing extraordinary central-bank interventions and government rescue programs.
Long term: Regulators tightened capital and liquidity standards, enhanced stress testing, and introduced new tools like the Volcker Rule. Supervisors also issued targeted guidance, including the 2013 leveraged-lending guidance, to prevent a repeat of pre-crisis excesses, though these measures later faced pushback for driving risk into nonbanks.
Why It's Relevant
The 2013 leveraged-lending guidance was a direct post-crisis response to perceived excesses in pre-2008 leveraged finance. Rolling back that guidance raises questions about whether market discipline and general safety-and-soundness standards alone can prevent a similar buildup of risky corporate leverage.
The U.S. Savings and Loan Crisis and Deregulation of the 1980s
Late 1970s–1990sWhat Happened
Savings and loan associations, traditionally conservative mortgage lenders, were hit by interest-rate shocks and then deregulated through laws such as the Depository Institutions Deregulation and Monetary Control Act of 1980 and the Garn–St. Germain Depository Institutions Act of 1982. These reforms expanded S&Ls’ powers to make commercial and real-estate loans without commensurate supervisory capacity. Many thrifts took on high-risk assets in a bid to ‘gamble for resurrection.’ When those bets failed, roughly a third of S&Ls collapsed, costing taxpayers on the order of $120–160 billion and leading to a sweeping regulatory overhaul under FIRREA.
Outcome
Short term: Hundreds of S&Ls failed, the FSLIC insurance fund became insolvent, and the Resolution Trust Corporation was created to resolve failed institutions and dispose of their assets.
Long term: The crisis prompted tighter supervision, higher capital standards, and consolidation in the thrift industry, as well as debate over how deregulation without strong oversight can fuel moral hazard and systemic losses.
Why It's Relevant
The S&L episode illustrates how loosening constraints on leveraged, specialized lenders without robust, enforceable risk controls can generate a rapid buildup of bad assets and large public costs. It offers a cautionary parallel as regulators loosen informal constraints on leveraged corporate lending while relying on principles-based supervision.
Commodity Futures Modernization Act and OTC Derivatives Deregulation
2000–2008What Happened
The Commodity Futures Modernization Act of 2000 effectively exempted most over-the-counter derivatives, including credit default swaps, from comprehensive regulation. Large banks and nonbanks expanded derivatives dealing and risk-transfer activities in lightly supervised markets. These instruments amplified leverage and interconnectedness in the financial system and played a central role in the unraveling of structured-credit products during the 2008 crisis.
Outcome
Short term: OTC derivatives markets grew rapidly with little transparency, contributing to the sudden collapse of institutions like AIG and amplifying systemic panic when counterparties lost confidence.
Long term: Post-crisis reforms brought derivatives onto central clearinghouses, imposed margin requirements, and increased transparency, but debates continue about whether the earlier deregulatory choices enabled excessive complexity and hidden leverage.
Why It's Relevant
The CFMA’s experience shows how pushing risk into lightly regulated markets can obscure vulnerabilities until a crisis hits. The migration of leveraged lending from banks to private-credit funds and CLOs after 2013 is a similar case of regulatory arbitrage; today’s rollback raises the question of whether risk is better managed inside tightly supervised banks or dispersed in shadow banking.