In December 2025, the Office of the Comptroller of the Currency and the FDIC withdrew the Leveraged Lending Guidance dating back to 2013. This withdrawal is a potentially significant event for banks, borrowers, and the broader credit markets. In this article, Elliot Ganz, LSTA’s chief of advocacy, and Tess Virmani, LSTA’s deputy general counsel and head of policy, discuss the background on the original guidance and the rationale for the withdrawal. They also discuss how the new principles-based supervision may reshape leveraged lending going forward.

Note from Rich Gumbrecht, CEO of SFNet, to SFNet member banks: Our view is that while asset-based loans were largely exempted from the LLG, the rescission provides an opportunity for asset-based lending affiliated lenders to revisit their leveraged lending guidance just as it does for the rest of the bank. Changes will, of course, need to be done in conjunction with the broader changes their institutions choose to make, and always in consideration of the principles laid out in the announcement. Nevertheless, it could lead to an expanded level of leveraged lending activity within the asset-based lending groups at our member banks over time if they believe that is a sound and profitable activity to undertake.

Before we start can you tell us a little bit about the LSTA?

Tess Virmani: LSTA is a not-for-profit trade association that supports the corporate lending markets by developing market standards, best practices, education, and advocacy to promote a fair, efficient, and transparent loan ecosystem.

SFNet: Why was the 2013 Guidance originally issued?

Elliot Ganz: After the Great Financial Crisis there was a perception among the various bank regulators that the leveraged lending market had gotten too aggressive, had too much leverage in the loans, and needed to tamp it down.  It was very clear that they were not only focused on origination of loans by banks, but also on loans that they originated for sale.  So that was an interesting and important part of it.

As part of the Dodd Frank driven regulations, the regulators, including the OCC, FDIC and Federal Reserve, concluded that the banks did not adequately assess and limit risk in the pursuit of business and they effectively substituted their views on credit by imposing limits on what banks could do. Although they knew that this would push loans outside the banking system they willingly made that choice (although perhaps not to the extent of what actually happened). 

Virmani: When the agencies adopted the Leveraged Lending Guidance (“LLG”) it was largely to prevent risks that that never came to pass. LLG had the effect of pushing certain deals outside of the banking system, but it didn’t stop those deals from occurring. Higher leverage deals or loans to borrowers with different business models like recurring revenues-based were still done in private credit. And those loans performed well because of robust credit underwriting practices, which would have been sufficient for banks prior to the LLG. Looking back, I think we see that, ultimately, the LLG was overly restrictive - putting aside its other flaws.

The LLG deviated quite markedly from how banks historically thought about leveraged lending and the risks associated with it.  LLG moved supervision away from a principles-based approach where each institution had discretion to rely on its own expertise and its own underwriting policies to a world where banks were given a one-size-fits all, prescriptive regime for risk management.

SFNet: After the announcement of the LLG there was a series of additional communications referred to as the FAQs.  Can you talk about those?

Ganz: Banks quickly realized examiners would enforce the guidance as if it were a rule, prompting the need for extensive clarification via lengthy FAQs, a consequence of which  was to introduce additional bright-line requirements. The two most important provisions were the six-times leverage restriction and the repayment tests.  The six times restriction became sort of a red line.  If you’re doing a loan more than six times leverage, you really ought to think twice about it.  The repayment test requires companies to have the ability to repay at least 50 percent of the loan within five to seven years. It became very clear from the FAQs that a bank could not originate a loan that did not meet those tests; they were effectively prohibited from that activity. This was a big change from prior practice in which banks had much more latitude to make individual decisions on loans.

Virmani: Certainly, there was a rush to comply, butinconsistencies across agencies and steep learning curves for exam teams created frustration. The OCC-regulated entities were being told certain things which contrasted from the feedback given to Fed-regulated entities.  That was not only frustrating from a commercial perspective because the rules were different for different institutions, but also created compliance challenges. Institutions would go through their risk rating process, looking at their portfolio of what they arranged and which loans they participated in, with a view to meeting examiner expectations. At the end of the Shared National Credit exams, they would be surprised that their ratings diverged from the ratings given by the arranger. 

A lot of time had to be spent with the agencies on education, frankly.  I don’t think that the agencies were all that familiar with the complexity of leveraged lending as it had developed by that point. The ability to incur incremental debt was an area that I recall was an example where at least one or two rounds of SNC reviews were needed before examiners were familiar with incremental debt. The exam teams did gain a better understanding of the leveraged lending business over time.

Ganz: I think it says a lot when you have to have eight pages of FAQs. It goes to the point that you’re not putting out a principles-based construct. You’re making rules, and this is sort of interpreting the rules. The banks were constrained and took it very, very seriously. So, as Tess said, rather than having the discretion to originate loans in accordance with their take on credit and their institutional view, the banks also had to fit it in with the LLG. And, in reality, and in contrast with the previous guidelines, very few exceptions permitted by the regulators.

Virmani: Right. And I would say also, with the FAQs, there was quite a lot of substance there. I mean, quite a few of the most biting pieces of the leveraged lending guidance actually appear in the FAQs, and those were never shared for comment or reviewed by industry. And that was very frustrating because banks were keen to get more guidance, but instead they received less guidance than new bright-line rule.

Why was the Guidance withdrawn?

Virmani: I think there are a couple of reasons. If we look at the view of the banking agencies today, based on the appointees at the helm of these agencies together with this administration’s deregulatory agenda, I think there was a willingness on the part of the agencies to take a hard look at regulation and guidance and ask whether it was really fit for purpose. Were the rules really focused on material risks? Were they really designed to be just what was needed and not anything more?

When President Trump took office in 2025, there were a series of executive orders that were very clear that this is what the agencies were meant to do.

In that way, I think the leveraged lending guidance was a very good candidate for review because LLG really stands out in its prescriptiveness. There had also been a great deal of documented frustration with LLG. BPI had been very vocal about concerns around leveraged lending guidance, including its legal deficiencies. And so I think the opportunity to move in a different direction was offered to the agencies and OCC and FDIC took it. To date, the Fed has not rescinded LLG.

Ganz: Several years ago, the General Accounting Office was asked to opine on whether the guidance was, in fact, a rule—and they concluded that it was. Despite that conclusion, nothing really changed dramatically after that. So, I think this administration said, ‘Why do we have these rules?’ And I think it also goes back to my original point, which is that the agencies wanted to go back to a principles-based approach, which is how it always was prior to the 2013 LLG. Ultimately, that’s what they did.

What changes now for banks?

Virmani: First and foremost, banks now have the opportunity to revisit their own leveraged lending policies.  They are already getting started on this, but it doesn’t immediately lead to a change in policy – banks need to take heed of the principles and incorporate them in their leveraged lending policies if any are not already addressed. The principles are aligned with how our bank members think about leveraged lending.  No one is arguing that leveraged lending doesn’t carry greater risk than investment-grade lending.  That was never the issue.  It's about how do we appropriately and, in a narrowly tailored fashion, oversee this lending; how do we responsibly engage in this activity? And so, I think the principles that OCC and FDIC included in that recession notice are very much true to that principles-based guidance of really focusing on safety and soundness and material risks.

I think one piece that still is yet to be worked out is exactly how much of the rescission will really be reflected in the exam process. Institutions feel prepared because they’ve been both complying with the leveraged lending guidance at the same time as engaging in their own risk-monitoring and risk-management practices that are consistent with the OCC and FDIC’s principles. However, I do think there is a bit of a wait-and-see attitude in terms of what the exam experience will be like.

Ganz: One of the first questions that naturally came to people’s minds is: does this mean there’s going to be a real change in the types of lending activity that banks participate in? My personal view is I don’t think we are going to see big changes in the types of leveraged loan transactions that banks arrange.  And that’s because there are several other considerations around what types of transactions banks wish to originate. There are other regulatory requirements and capital considerations that play into what activity banks wish to participate in.  But I hope it will allow banks to be able to participate a little bit more meaningfully in some of the tech-related and some of the venture-lending type activity that they really have been excluded from because of the leveraged lending guidance. At the margins, we will likely see a change in what loans banks originate, but I really think the most important product of this is going to be the ability to right-size the risk management with respect to leveraged lending and hopefully remove a lot of the undue burden and costs that have been layered on top of this business.

How do you see this impacting the relative value proposition of banks vs. private credit?

Ganz: I think the impact in that context will also be marginal. Banks will be able to do some deals they weren’t able to do before, but there’s so much more that goes into this proposition. To be clear, the leveraged lending guidance did not create the private credit market. The private credit market was already there. There are many factors why it became more popular, and the leveraged lending guidance was by no means the main driver. The withdrawal of the LLG is not going to change that calculation much. There are reasons to do deals in the private credit market, and there are reasons to do deals in the syndicated market—those still exist—and that’s the dynamic we’re dealing with. And again, as I said, at the margin you might see a syndicated deal where you might not have before.

Ganz: There are lots of times when borrowers are looking for the most affordable option. They don’t need the level of bespoke tailoring that is possible in private credit and don’t want to pay for that. So, you’ve seen a lot of fluidity between BSL and private credit, and I think that’s going to continue. The story of the private credit market is a very, very interesting one, but that story is not the leveraged lending guidance.  It’s a different story, of which the leveraged lending guidance is a very small part.

At the end of the day, what sometimes might get a little bit lost in the minds of regulators is the fact that these institutions are looking to engage in their business successfully and if leveraged lending leads to losses for the banks, it is not successful. 

Do you think different types of banks will be impacted differently?

Virmani: I think we may see that. Certainly, the large banks that are very active in the leveraged lending market will be the most clearly impacted. But what we’ve learned from a number of our members—where we wouldn’t necessarily have considered them major players in the leveraged lending space—is that their experience will be impacted differently, but very much improved. For regional banks, some of the benefits they’re going to see have less to do with leveraged lending activity as we typically think of it—the institutional market—and more to do with other lending activity that had, unfortunately, been caught up in this net. Banks should be able to participate more deeply in lending to today’s companies.