Fed, OCC differ in enforcing leveraged lending guidelines

Fri Apr 25, 2014 1:10am EDT
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By Lauren Tara LaCapra and Greg Roumeliotis

NEW YORK (Reuters) - Some major U.S. banks are privately complaining that they are getting the short end of the regulatory stick when it comes to the profitable business of lending to heavily indebted companies.

Banking and regulatory sources with direct knowledge of the situation said the U.S. Federal Reserve and the Office of the Comptroller of the Currency (OCC) appear to be taking different approaches to implementing a set of guidelines on leveraged loans, even though they issued them jointly in March last year.

The OCC, a division of the U.S. Treasury Department, is zealously implementing them, while the Fed is more relaxed about it, the sources said. While all major Wall Street banks are regulated by the Fed, the OCC oversees only those with national bank charters, which allow a bank to build a nationwide branch network.

The OCC, for example, is more frequently contacting banks about the issue and querying them extensively over their compliance in loans they make to heavily indebted companies. OCC-regulated banks have also received more verbal warnings as well as official letters demanding fixes than banks that are regulated just by the Fed in the United States, the sources said. Such letters and warnings are the first steps before fines and penalties.

The difference in approach, which even some regulatory sources privately admit exists, has meant that banks such as Credit Suisse Group AG and Goldman Sachs Group Inc are able to be more aggressive in making leveraged loans just because they are regulated by the Fed, not the OCC, the sources said.

As a result, these banks could gain ground at the expense of rivals that are regulated by the OCC, including JPMorgan Chase & Co, Bank of America Corp and Wells Fargo & Co, the sources said.

Complicating matters further, the guidelines are not prescriptive enough and leave room for interpretation, the sources said. One senior Wall Street executive said foreign banks are getting a pass from the Fed on deals that OCC-regulated banks can no longer do.

"We would hope going forward that these guidelines not only get applied to U.S. banks but get applied to international banks as well as for those entities that are not part of the banking system," Bank of America Chief Financial Officer Bruce Thompson said, when asked about the issue in a conference call with reporters on April 16.   Continued...

A view shows the Federal Reserve building on the day it is scheduled to release minutes of the Federal Open Market Committee from August 1, 2012, in Washington August 22, 2012. REUTERS/Larry Downing