Fed Says Banks Failing To Observe Buyout Leverage Limits

May 14 2014 | 10:11am ET

The Federal Reserve has issued a stark warning to banks: Observe the buyout leverage limits it introduced with the Office of the Comptroller of the Currency last year, or face further action.

“Judging from aggregate market data, it appears that many banks have not fully implemented standards set forth,” Todd Vermilyea of the Fed’s Division of Banking Supervision and Regulation said. “A lot of work has been done to date by agencies to assess compliance with the guidance, but clearly much more work remains to be done and stronger supervisory action may be needed.”

While the OCC has publicly warned banks on the rules, which advise banks not to issue senior debt for buyouts worth more than six times a company’s cash flow, the Fed has until now taken a quieter approach, sending private letters to banks.

Still, the Fed has indicated it will go easier on the banks it regulates—Goldman Sachs, Morgan Stanley and foreign firms—than will the OCC, which has proclaimed a “no exceptions” policy. By contrast, the central bank said it would allow the banks under its purview to participate in a small number of such deals, totaling no more than 2% of their leveraged-loan book.

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