Executive Summary
In early December 2025, U.S. regulators including the FDIC and the Office of the Comptroller of the Currency officially rescinded the 2013 leveraged‐lending guidance, which had previously discouraged banks from underwriting loans with debt‐to‐earnings ratios above six times, particularly to private-equity backed or unprofitable tech firms [1][3]. The rollback is expected to shift significant leveraged lending activity back into heavy regulation under banking institutions, reigniting competition with private credit funds—which had expanded to over $700 billion by 2024 partly due to these constraints [1][3]. While regulators see the prior guidance as overly restrictive, critics warn that systemic risk could rise in economic downturns as loan underwriting standards loosen [1][2].
Analysis
The December 2025 withdrawal of leveraged-lending guidance represents a major regulatory pivot—one that alters bank incentives, market shares, and risk profiles. By removing hard thresholds—most notably the 6× debt/EBITDA limit—regulators are giving banks greater judgement over high-risk loans. The immediate winners are likely to be private-equity firms and leveraged buyout sponsors, as banks can now participate more actively in financing deals they previously shunned or underpriced.
The rollback may also help stem the diversion of leveraged lending into the largely unregulated private credit sector, bringing that activity under the oversight of FDIC and OCC-regulated institutions. The anticipated effect is increased competition among private credit funds and banks, potentially narrowing spreads or loosening diligence standards.
However, with looser constraints comes heightened risk. Economic downturns tend to expose vulnerabilities in firms with high leverage and thin or negative earnings. Without rigid guidance, banks might lower underwriting discipline, increasing default rates—particularly among private-equity-backed transactions and speculative tech plays. The decision also sets the stage for a regulatory arms race: if the Federal Reserve follows, consistent rules across the banking sector could be redefined. Additionally, other domains—like capital requirements, stress testing, or commercial real estate exposure—may come under similar pressure for easing.
Strategically, banks may reposition capital toward leveraged lending deals and rediscover profitability in underwriting roles. Private equity will likely negotiate better terms with banks, possibly shifting risk to bank balance sheets. Regulators must consider whether market discipline—and internal risk controls—are sufficient to replace prior formal guidance. The effects will depend heavily on interest rates, inflation, macroeconomic stability, and whether creditors demand stricter covenants outside the regulatory framework.
Supporting Evidence
- Regulators including the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency officially withdrew the 2013 leveraged-lending guidance in early December 2025. [1][3]
- The guidance had discouraged loans where company debt exceeded six times annual earnings (or EBITDA), particularly for private equity deals or unprofitable tech companies. [1][3]
- The guidance had become “overly restrictive,” and regulators said it pushed leveraged lending into the non-bank sector. [3]
- By 2024, private credit funds—largely outside bank regulation—had amassed over US$700 billion in assets under management, buoyed in part by that shift. [1]
- Critics, including former OCC examiner Tim Long, warned that loosening rules could reintroduce systemic risk due to volatility of highly leveraged loans. [1][2]
- The Federal Reserve has not yet officially rescinded its portion of the guidance but is expected to follow after a potential board vote. [1]
- Under the new framework banks will rely on broader credit-risk principles rather than rigid leverage thresholds. [3]
Sources
- [1] www.wsj.com (The Wall Street Journal) — Dec 5, 2025
- [2] www.ft.com (Financial Times) — Dec 5, 2025
- [3] www.reuters.com (Reuters) — Dec 5, 2025