On July 29, 2016, the US Federal Reserve Board, the FDIC and the OCC released the results of the Shared National Credit (SNC) review. The review showed that the level of adversely rated assets remained higher than in previous periods of economic expansion, raising the concern that future losses and problem loans could rise considerably in the next credit cycle. The elevated level of risk observed during the recent SNC examination stems from the high inherent risk in the leveraged loan portfolio and growing credit risk in the oil and gas portfolio.
Notwithstanding the finding that credit risk in the SNC portfolio remains elevated, the agencies noted improved underwriting and risk management practices related to the most recent leveraged loan originations, as underwriters continue to better align practices with regulatory expectations and as investor risk appetite moderates away from transactions at the lower end of the credit spectrum.
The SNC review found that US banks held the greatest volume of SNC commitments at 44.9 percent of the portfolio, followed by foreign banking organizations at 33.6 percent and then non-bank entities. The share of credits rated “special mention” and worse that were held by non-bank entities fell from 68 percent in 2015 to 60.8 percent this year, though overall such commitments increased from $372.6 billion in 2015 to $421.4 billion in 2016. The agencies’ uniform loan classification standards and examination manuals define these risk-rating classifications.
According to the SNC review, leveraged lending was the primary contributor to the overall “special mention” and “classified” rating, with leveraged loans making up 63.3 percent of all SNC “special mention” and “classified” commitments. Oil and gas lending was the primary driver for the increase in the overall “special mention” and “classified” rating, representing 12.3 percent of the SNC portfolio overall and including $77 billion in “classified” credits compared with $38.2 billion in 2015. The SNC review found that firms are originating minimal levels of “non-pass” loans and examiners noted continued progress toward full compliance with the underwriting and risk management expectations for leveraged loans, which were published by the agencies in December 2013.
The SNC review is available at: https://www.federalreserve.gov/newsevents/press/bcreg/bcreg20160729a1.pdf.