Federal banking regulators have eased stringent post-crisis limits on leveraged lending, allowing banks to increase exposure to high-risk corporate debt. The move, effective January 2026, marks a significant shift in capital requirements for major financial institutions.
- Leveraged loan exposure cap increasing from 15% to 20% of Tier 1 capital by 2027
- Applies to banks with over $250 billion in assets, including JPMorgan Chase and Bank of America
- Average leveraged loan default rate at 2.1% in 2024, down from 4.7% in 2023
- New stress tests require analysis of 4.5% unemployment and 12% bond price drop scenarios
- Mandatory capital surcharges of 1.5 percentage points for banks exceeding thresholds
- ICE BofA High Yield Index rose 2.3% on the announcement
Major US banking regulators have announced a phased relaxation of capital rules governing leveraged loan portfolios, signaling a broader reassessment of post-2008 financial safeguards. The Federal Reserve, FDIC, and Office of the Comptroller of the Currency jointly approved changes that will allow large banks to raise their leveraged loan exposure from a current cap of 15% of Tier 1 capital to 20% by 2027. This adjustment applies to institutions with over $250 billion in assets, including JPMorgan Chase, Bank of America, and Citigroup. The decision follows a comprehensive review of credit risk metrics and market conditions since the 2023 banking turmoil. Regulators noted an improved stability in the commercial credit markets, with default rates on leveraged loans averaging 2.1% in 2024—down from a peak of 4.7% in 2023. Additionally, the average loan-to-value ratio on new leveraged loans has declined to 68%, from 73% in 2022, indicating stronger collateral coverage. The revised framework includes enhanced risk-based capital buffers and stress-testing mandates. Banks must now conduct annual scenario analyses under adverse macroeconomic conditions, including a 4.5% unemployment rate and a 12% drop in corporate bond prices. Firms that exceed new thresholds will be subject to mandatory capital surcharges of 1.5 percentage points above the baseline. Market participants reacted positively, with the ICE BofA High Yield Index rising 2.3% in early trading. Investment banks that underwrite leveraged loans, such as Goldman Sachs and Morgan Stanley, are expected to see higher deal volumes. However, consumer advocates and some regulators have expressed caution, warning that easing oversight could increase systemic risk if credit standards erode.