Bloomberg: Regulators stand by while U.S. bank lenders get footloose

It was only last week that I was chiding a couple of the venture debt players for completely dropping their covenants to win the odd deal here and there (see prior post ““No MAC, No Cov” eventually means No Return” May 6-14). According to Bloomberg News, the U.S. Federal Reserve has discovered that loose underwriting standards are actually a bigger problem in the U.S. commercial bank market. Here are some of their findings, as outlined in a speech yesterday in Charlotte by a senior Fed supervisor:

– “Terms and structures of new deals have continued to deteriorate in 2014”

– The “amount of borrowings made that lack typical lender protections also rose to at least a five-year high of $313 billion last year”

– “The exclusion of ‘meaningful maintenance covenants’ is a sign that ‘prudent underwriting practices have deteriorated'”

– “Debt levels of more than six times earnings before interest, taxes, depreciation and amortization, or EBITDA, ‘raises concerns.'”

You have to wonder how long it’ll be before U.S.-based borrowers start to see their banks clamping down. Surely the Fed’s inspectors will bring the hammer down, not to mention the FDIC, for fear of not staving off a new crisis. Having publicly highlighted the lax lending standards problem for the second consecutive year, the Boards of the FDIC and Federal Reserve can’t afford to be charitable any longer. Particularly since the FDIC has issued just a single new bank charter following the financial crisis, on the basis that the industry hadn’t yet fully recovered from Wall Street’s near death experience in 2008/09.

MRM