Banks Wary of Syndicated Loan Performance, Fed Says

WASHINGTON — Lenders are concerned about the performance of syndicated leveraged commercial and industrial loans in 2015, a Fed survey said Monday, underlining regulators' worries that such loans may be a source of systemic risk.

In its regular survey of senior bank loan officers, the Fed said 22% of bank respondents and 27% of officers representing large banks said they expect the quality of existing syndicated leveraged C&I loans to deteriorate somewhat over the course of the year.

Far more respondents — 72% of all banks and 73% of large banks — indicated that they expect those loans' performance to be unchanged. But the proportion of respondents who saw trouble for syndicated leveraged C&I loans was substantially higher than most other loan categories. By contrast, most banks surveyed took a neutral view of the performance of nonleveraged syndicated C&I loans and as many institutions said their performance would improve as those who said they would decline.

The only category included in the survey that reported lower performance expectations by lenders were subprime auto loans, which nearly 30% of respondents said would deteriorate this year.

"Banks stated that they generally anticipated improvements in the performance of most loan types this year," the report said. "However, [some] banks indicated that they expected the credit performance of syndicated leveraged loans to deteriorate this year, and about one-third of the banks that originate subprime auto loans expected delinquency and charge-off rates to increase in 2015."

Syndicated loans are large loans that involve multiple lenders pooling capital and thus distributing the risk of default.

The Office of the Comptroller of the Currency last year began pointing to both syndicated and auto loans as a potential source of systemic risk, saying that the low interest rate environment has caused lenders to go to greater lengths to find high-yield investment opportunities. Fed Chair Janet Yellen, however, sounded a more measured tone in a speech last May, saying that "some reach-for-yield behavior may be evident" in the syndicated loan market, but that "these increases appear modest to date."

For the first time, the survey also included more comprehensive questions about residential real estate loans to reflect the Consumer Financial Protection Bureau's recent changes to its Qualified Mortgage rules. The results showed that some banks have eased their lending standards for government-sponsored enterprise-eligible loans, but banks report demand for most home loans is weaker than expected. Consumer credit card loans and auto loans are stronger by comparison, the survey found.

Banks also reported that they had tightened the terms of certain C&I loans for various but discrete reasons. The declining price of oil and gas has tightened lending policies, banks reported, as has "increased concerns about the effects of legislative changes, supervisory actions or changes in accounting standards."