WASHINGTON - The volume of large loans criticized by federal bank regulators spiked up again this year, doubling to nearly $200 billion, or roughly 10% of the $2 trillion of credits rated during the Shared National Credit exam, American Banker has learned.
Bank regulators had planned to publicize in September the results of their annual inspection of loans larger than $20 million that are shared by three or more regulated lenders, but the terrorist attacks in New York and Washington pushed back the release.
"The people who need to know, know" the results, one industry source said. "The banking system is fine, but we're just in a very precarious spot right now. I don't think they [regulators] want to release those numbers."
Regulators agree that the industry is still in good shape, with plenty of capital, and that the credit quality problem will drag down earnings - not the banking system.
Still, both bankers and regulators are concerned about the effect the terrorist attacks will have on the economy, particularly on consumers' ability to repay their heavy debt loads. And if consumers stop spending, that will make it tougher for retailers and manufacturers of consumer goods to service their debts.
A new release date for the Shared National Credit exam data has not been set, but the agencies are aiming for mid-October, which was when the aggregate information was issued last year. Banks received individual loan grades in August.
The volume of criticized loans has been on a steady march upward, hitting $45 billion in 1998, $69 billion in 1999, and $100 billion last year. And bankers and regulators alike expect this year's trends of more reserves, writeoffs, and loan sales to continue.
"If there has even been a time to be in the higher end of the range in terms of reserves, today is the day," one regulator said. "I believe they [provisions against bad loans] should be taken this quarter."
Robert W. Nimmo, an executive vice president of Wachovia Corp. in Charlotte, N.C., said he expected high chargeoff rates in the third and fourth quarters. "I think loss rates are going to rise," he said Tuesday in an interview. "This is essentially a recessionary stress-test on our portfolios."
Each spring the Federal Reserve Board, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corp. send hundreds of examiners out to assess roughly 10,000 loans. Each loan either is given a passing grade or is criticized.
Criticized loans can be singled out simply for "special mention" by examiners who see troubling characteristics, or classified into one of three categories: substandard, doubtful, or loss. While last year $100 billion, or 5.1% of the loans examined, were criticized, just 3.3% were classified.
Aggregate data was first publicly released from the 1998 exam.
Banks must take increasingly costly steps as a loan moves through these categories, including eventually writing it off. The grades that the examiners dole out cover both the banks that originated the loan as well as those that bought a piece of it. If repayment is deemed doubtful, then all the banks that own a portion of that credit must bolster their reserves. Examiners paid particular attention this year to how consistently agent and participating banks graded their common credits.
For the first time this year, regulators plan to break out how much of the criticized credits are still held by banks and how much has been sold to other companies, such as firms specializing in distressed debt workout. Because so many banks have sold off their problem credits, that new detail is expected to blunt somewhat the otherwise bad news of a huge jump in criticized credits.
"Banks aren't the only ones holding these credits; it is much more diversified throughout the U.S. capital markets," said Maurice H. Hartigan 2d, the president of RMA, the Philadelphia-based trade association of bank loan and credit officers.
Other bright spots: Unlike last year, when examiners were pushing banks to classify their loans, this year the bankers themselves drove the increase in downgrades. "There were many less examiner-directed downgrades this year," one regulator said.
In fact, very few downgrades, perhaps less than five, were appealed by agent banks. Sources also said that no loans were downgraded more than one notch.
Regulators have publicly stated that the increase in troubled credits this year would at least match last year's 45% rise. That would put the total volume of criticized loans at $145 billion. But according to regulatory sources, the actual figure is closer to $200 billion.
"The level increase is big, but it's not a surprise to bankers or the regulators, given what's been happening in the economy," Mr. Hartigan said. "The system is exceedingly well capitalized."
