BOARD OF GOVERNORS

OF THE

FEDERAL RESERVE SYSTEM

WASHINGTON, D.C. 20551

DIVISION OF BANKING

SUPERVISION AND REGULATION

SR 13-3

March 21, 2013

Revised November 13, 2014

On November 7, 2014, the Federal Reserve and the other federal banking agencies issued a 

press release with a Frequently Asked Questions (FAQs) document to clarify the 2013

Interagency Guidance on Leveraged Lending. The FAQs are available at the Board’s press 

release on the 2014 Shared National Credits Review and Leveraged Lending: 

http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20141107a3.pdf.

TO THE OFFICER IN CHARGE OF SUPERVISION AT 

EACH FEDERAL RESERVE BANK AND TO FINANCIAL INSTITUTIONS 

SUPERVISED BY THE FEDERAL RESERVE

SUBJECT: Interagency Guidance on Leveraged Lending

Applicability to Community Banking Organizations: This guidance applies to all institutions 

that originate or participate in leveraged lending activities, including community banking 

organizations supervised by the Federal Reserve with total consolidated assets of $10 billion or 

less.

1

The Board of Governors of the Federal Reserve System, together with the Federal

Deposit Insurance Corporation and the Office of the Comptroller of the Currency, has issued the 

attached Interagency Guidance on Leveraged Lending (2013 leveraged lending guidance). This

guidance outlines high-level principles related to safe–and–sound leveraged lending activities.

This guidance applies to all financial institutions supervised by the Federal Reserve that engage 

in leveraged lending activities.2

1 The number of community banks with substantial involvement in leveraged lending is small; therefore, the Federal 

Reserve generally expects community banking organizations to be largely unaffected by this guidance. 

2 This includes bank holding companies, savings and loan holding companies, state member banks, and statechartered branches and agencies of foreign banks.

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Overview of Guidance

The 2013 leveraged lending guidance updates and replaces the 2001 Interagency 

Guidance on Leveraged Financing (2001 guidance).3 Further, the 2013 leveraged lending

guidance is intended to be consistent with sound industry practices and to expand on recent 

interagency guidance on stress-testing.

4

In summary, the 2013 leveraged lending guidance addresses:

• Definition of leveraged lending. The guidance encourages companies to develop and 

maintain a definition of leveraged lending that can be applied across all business lines. The 

guidance also includes examples of loan terms common in leveraged lending definitions. 

• Participations Purchased. The guidance notes that institutions of all sizes can have 

exposure to leveraged loans by acting as participants. In particular, an institution that 

acquires a loan participation should apply the same standards of prudence, credit assessment 

techniques, and in-house limits that would apply if the institution originated the loan. In 

addition, the guidance provides that loan participants should obtain copies of all loan 

documents and any other documents relevant to the credit. 

• Methods for determining enterprise value. The guidance notes that lenders often rely upon 

enterprise value when (1) evaluating the feasibility of a loan request, (2) determining the debt 

reduction potential of planned asset sales, (3) assessing a borrower’s ability to access the 

capital markets, and (4) estimating the strength of a secondary source of repayment. The 

guidance describes three common approaches (that is, asset, income, and market) for valuing 

closely-held businesses under conventional business appraisal theory and discusses the 

circumstances in which each approach is most appropriate. 

• Pipeline management. Market disruptions can substantially impede the ability of a loan 

underwriter to consummate syndications or otherwise sell down exposures, which may result 

in material losses to the underwriter. Accordingly, the guidance indicates that institutions 

should (1) have strong risk management and controls over transactions in the distribution 

pipeline, including amounts to be held and those to be distributed, and (2) be able to 

differentiate transactions according to their tenor and investor class. 

• Underwriting. An institution’s underwriting standards should be clear, written, and 

measurable, reflecting the institution’s risk appetite. Accordingly, the guidance contains 

underwriting and risk management standards for leveraged loans and encourages originating 

institutions to be mindful of the reputational risk associated with poorly underwritten 

leveraged transactions.

3 With the issuance of the 2013 leveraged lending guidance, SR letter 01-9, “Interagency Guidance on Leveraged 

Financing,” is superseded.

4 Refer to SR letter 12-7, “Supervisory Guidance on Stress Testing for Banking Organizations with More Than $10 

Billion in Total Consolidated Assets.”

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• Stress Testing. Institutions should conduct periodic loan- and portfolio-level stress tests on

leveraged loan portfolios, including loans planned for distribution, and incorporate the results 

into enterprise-wide stress testing activities. 

• Risk management and reporting. Institutions should diligently monitor higher-risk credits, 

including leveraged loans. Accordingly, the guidance indicates that management should 

receive comprehensive reports about the characteristics and trends of the institution’s

leveraged lending portfolio at least quarterly and that the institution’s board of directors 

should receive a summary of this information. Internal policies should identify the data

fields to be captured by an institution’s management information systems, which should yield 

accurate and timely reporting to management and the board of directors. 

Reserve Banks are asked to distribute this letter to financial institutions supervised by the

Federal Reserve in their districts, as well as to their own supervisory and examination staff. 

Questions regarding the attached guidance should be addressed to Carmen Holly, Supervisory 

Financial Analyst, at (202) 973-6122; or Robert Cote, Senior Supervisory Financial Analyst, at 

(202) 452-3354. In addition, questions may be sent via the Board’s public website.

5

Michael S. Gibson

Director

Attachments: 

• Interagency Guidance on Leveraged Lending

• Frequently Asked Questions (FAQ) for Implementing March 2013 Interagency Guidance 

on Leveraged Lending (November 7, 2014)

Cross-reference to: 

• SR letter 12-7, “Supervisory Guidance on Stress Testing for Banking Organizations with 

More Than $10 Billion in Total Consolidated Assets”

• SR Letter 98-25 “Sound Credit Risk Management and the Use of Internal Credit Risk 

Ratings at Large Banking Organizations

Supersedes:

• SR letter 01-9, “Interagency Guidance on Leveraged Financing”

5 See http://www.federalreserve.gov/apps/contactus/feedback.aspx.

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