U.S. banking regulator’s review find some upturn in credit quality, risk still elevated for leveraged loans

by Wesley Brown ([email protected]) 393 views 

Federal banking regulators found in a recent yearly review of U.S. banks that risk associated with the loan portfolios for large syndicated financial institutions had declined due to improving economic conditions in most sectors.

Despite the improved review, the dollar volume of loans rated below “pass,” as a percentage of total loans remains elevated compared with levels experienced in prior economic cycles, according to the Shared National Credit (SNC) Program Review. Furthermore, the evaluation also found increased risks associated with leveraged lending.

The SNC report — released on (Friday, Jan. 25) by the Federal Reserve Board, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) — reflects the results of reviews in 2018 covering SNC loans originated by or before March 31, 2018. The agencies prompt banks to update credit risk management practices as the risk profile of borrowers and the industry changes.

The 2018 SNC portfolio included 8,571 credit facilities to 5,314 borrowers, totaling $4.4 trillion, up from $4.3 trillion in 2017. U.S. banks held the greatest volume of SNC commitments at 44.3% of the portfolio, followed by foreign banking organizations and other investor entities such as securitization pools, hedge funds, insurance companies, and pension funds.

At the beginning of 2018, federal banking regulators increased the minimum aggregate loan commitment threshold to be included in the review from $20 million to $100 million. Under the revised definition, loan commitments increased modestly compared with levels reported in 2017. The number of borrowers and credit facilities, however, has declined.

A syndicated loan is extended by a group of financial institutions to a single borrower. Syndicates often include both banks and non-bank financial institutions, such as collateralized loan obligation structures, insurers, pension and mutual funds.

Reviewed loan commitments were stratified by the severity of their risk–special mention, substandard, doubtful, or loss, the last three of which are known as “classified.” Overall, the level of loans rated below “pass,” as a percentage of the total SNC portfolio, decreased year-over-year from 9.7% to 6.7%. Leveraged lending was the primary contributor to the overall “special mention” and “classified” rates, comprising 73% of “special mention” and 86% of “classified” commitments. Investors outside the banking industry held the greatest volume of “special mention” and “classified” commitments, followed by U.S. banks and foreign banking organizations.

The agencies conduct SNC reviews in the first and third calendar quarters with some banks receiving two reviews and others receiving a single review each year. The agencies issue a single statement annually that includes combined findings from the previous 12 months. The next report will be published following the third quarter 2019 SNC examination. To see the SNC Program Review Report, click here.