Donald Trump and his administration could pull back on leveraged lending guidelines in the U.S., paving the way for banks to lend more to highly indebted companies and encourage more buyout deals.
According to a report by Reuters, which cited bankers, investors and lawyers, Trump could tell regulators to be more lenient with the enforcing of the rules, which were put in place in 2013 by the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency. The report noted, due to Trump’s appointments and nominations to his team, enthusiasm that the rules will be lessened is growing. After all, a lot of the appointments have business and investment banking backgrounds and are well-versed with high-risk transactions.
“I’m not saying the actual policy is going to change, but the implementation of it, the take-no-prisoner stance of the Fed, I think that could change essentially overnight,” a senior leveraged loan banker told Reuters. Reuters pointed to the appointments of former Goldman Sachs Partner Steve Mnuchin as Treasury Secretary and Wilbur Ross as Commerce Secretary as examples of pro-business appointments. Ross, for example, is an old hand at the leveraged loan market, while Mnuchin is cofounder of OneWest, a regional bank. Both are vocal critics of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Reuters noted that relaxing the limits would enable commercial banks to offer loans that are highly leveraged, which could drive a new wave of merger and acquisition activity. Trump, noted the report, is going after higher growth by letting companies repatriate overseas cash and by pledging to cut taxes. “We are certainly not expecting any rapid change in the regulatory environment. I think, generally, across sectors, the view is that the way deregulation happens from practical perspective is not by changing regulation but by reducing enforcement. So, the rules are still on the book, but there is less enforcement,” a second banker told Reuters.