GAO opens door for Congress to review leveraged lending

By Davide Scigliuzzo

NEW YORK (IFR) – The investigative arm of Congress has decided that US bank guidelines on leveraged lending are subject to Congressional review, clearing the way for them to possibly be overturned.

After months of consideration, the US Government Accountability Office said the guidelines amount to a formal rule that Congress can review.

In the wake of the last financial crisis, banking regulators recommended against banks making loans to companies with a debt-to-earnings ratio greater than six times or that are unable to pay down debt quickly.

Critics charge those guidelines have hindered bank loans to business, and that they usurp the powers of the legislature to make law.

In March, US Senator Pat Toomey asked the GAO to decide if they were actual rules, which unlike guidelines can be potentially voted down under the 1996 Congressional Review Act.

“It is a rule subject to the requirements of the CRA,” the GAO said in a letter to Toomey on Thursday.

The Federal Reserve, Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency – the main US bank regulators – announced the guidelines in 2013.

In a speech earlier this year, Toomey was critical of the “huge increase in the regulatory powers and authorities [granted] to various agencies,” including their use of guidance to help shape policy.

“These kind of actions have the power of a rule-making … just to say they really have the power of law, but they exist outside the traditional rule-making.”

Participants in the finance industry say any lending that flouts the guidelines risks inviting the scrutiny – or worse – of the authorities.

Yet many argue the guidelines are too opaque and too broad, while some business sectors are better able than others to cope with higher leverage multiples.

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