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Credit Risk in the Shared National Credit Portfolio Declines, but Remains High

 

Aug 30 - The credit quality of large loan commitments owned by U.S. banking organizations, foreign banking organizations, and nonbanks improved in 2012 for the third consecutive year, according to the Shared National Credits Review for 2012. A loan commitment is the obligation of a lender to make loans or issue letters of credit pursuant to a formal loan agreement.

The volume of criticized loans remained high at $295 billion compared with levels before the financial crisis, but declined 8.1 percent from 2011. A criticized loan is rated special mention, substandard, doubtful or loss.

Reasons for improvement in credit quality included better operating performance among borrowers, debt restructurings, bankruptcy resolutions, and ongoing access to bond and equity markets.

Despite this progress, poorly underwritten loans originated in 2006 and 2007 continued to adversely affect the SNC portfolio. While the overall quality of underwriting of SNCs that were originated in 2011 was significantly better than in 2007, some easing of standards was noted, specifically in leveraged finance credits, especially compared with the relatively tighter standards present in 2009 and the latter half of 2008. Refinancing risk eased during the past year as 37.1 percent of SNCs will mature over the next three years compared with 63.4 percent for the same time frame in the 2011 SNC Review.

The federal banking agencies expect banks and thrifts to originate syndicated loans using prudential underwriting standards, regardless of their intent to hold or sell them. SNCs that are poorly underwritten will be subject to regulatory criticism or classification during annual SNC reviews. The federal banking agencies expect to finalize revised guidance on leveraged lending to form the basis of the agencies’ supervisory focus and review of supervised financial institutions involved in leveraged lending.

Although nonbank entities, such as securitization pools, hedge funds, insurance companies and pension funds, owned the smallest share of loan commitments, they owned the largest share (62.4 percent) of classified credits (rated substandard, doubtful or loss).

In other highlights of the review:

The SNC program was established in 1977 to provide an efficient and consistent review and analysis of SNCs. A SNC is any loan or formal loan commitment, and any asset such as real estate, stocks, notes, bonds, and debentures taken as debts previously contracted, extended to borrowers by a federally supervised institution, its subsidiaries, and affiliates that aggregates to $20 million or more and is shared by three or more unaffiliated supervised institutions. Many of these loan commitments are also shared with FBOs and nonbanks, including securitization pools, hedge funds, insurance companies and pension funds.

In conducting the 2012 SNC Review, agencies reviewed $811 billion of the $2.79 trillion credit commitments in the portfolio. The sample was weighted toward noninvestment grade and criticized credits. The results of the review are based on analyses prepared in the second quarter of 2012 using credit-related data provided by federally supervised institutions as of Dec. 31, 2011, and March 31, 2012.

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