WASHINGTON — Overall risk in syndicated loans has declined in the last year due to better performance, but the dollar-value of loans identified as underperforming remains elevated compared to historical trends, regulators said Friday.
Overall credit quality of loans examined in the Shared National Credit Review has benefited from the economic climate, according to the three regulators that release the semiannual report. However, the agencies noted that fewer loans are now examined as part of the SNC program due to a higher reporting threshold.
“The level of loans in the SNC portfolio with the lowest supervisory ratings declined, largely because of improving economic conditions in the oil and gas sectors,” the Federal Reserve Board, Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. said in the report.
The interagency examination of syndicated loans at large banks and is used as an opportunity for regulators to evaluate the credit quality of loans across the industry that do not fall under the jurisdiction of any single banking regulator. The report — which includes large credits shared by three or more institutions — identifies loans as either “pass,” “special mention,” “substandard,” “doubtful,” or “loss.” The last three categories are known as “classified” categories.
Despite the improving overall credit quality in the $4.4 trillion shared-credit portfolio, the report warned that the number of loans identified as “classified” or “special mention” remains higher than the historical average. Leveraged loans made up a significant portion of that increase, the report said.
Loans flagged for concerns "remain elevated compared to prior economic cycles,” the report said. “A significant portion of the special mention and classified commitments are concentrated in transactions that agent banks identified as leveraged loans.”
Yet the picture appears brighter once the reporting change is factored into the results. With the the threshold for loans to be examined as part of the review now raised from $20 million to $100 million, the proportion of syndicated loans identified as classified or special mention was 6.7%. That is down from nearly 10% in 2017. The report said much of that decline is attributable to the reporting change.
Leveraged loans make up the vast majority of classified or special mention loans. The report said that 72.8% of special mention loans are leveraged loans, as well as 87% of substandard loans, 44.8% of doubtful commitments and 76.3 of losses. Nonetheless, leveraged lending had increased to over $2 trillion in 2018, up from $1.7 trillion in 2017.
U.S. banks held the majority of the total shared credit portfolio in 2018 — totaling some $1.9 trillion — but foreign banks are close behind at $1.4 trillion and other nonbank investors making up some $894 billion. But the nonbank investors hold 62.1% of classified and special mention loans, followed by U.S. banks with 20.3% and foreign banks with 17.6%.
Leveraged loans have been a source of concern for regulators for years, with bank regulators issuing a guidance in 2013 discouraging certain kinds of leveraged loans. That guidance was
Congressional Democrats have remained
