Yesterday, the four federal banking agencies released the 2009 interagency annual Shared National Credit Review (SNC). The review concludes that the level of losses from syndicated loans issued by banks and other financial institutions totaled $53 billion in 2009, which exceeds “the combined loss of the previous eight SNC reviews and nearly tripled the previous high in 2002.” The report attributes the losses largely to poor underwriting standards and continuing weakness in economic conditions.

The 2009 review states generally that the credit quality of all entities has deteriorated dramatically. In preparing the review the agencies “reviewed $1.2 trillion of the $2.9 trillion credit commitments in the SNC portfolio, or 41 percent of the credits by dollar volume,” based on analyses of credit-related data provided by federally supervised institutions as of December 31, 2008, and March 31, 2009. According to the review, “nonbanks held 47 percent of classified assets in the SNC portfolio, despite making up only 21.2 percent of the SNC portfolio [and] U.S. bank organizations held 30.2 percent of the classified assets and made up 40.8 percent of the SNC portfolio." Hedge funds, pension funds, insurance companies and other entities held about 21% of the SNC portfolio.

Some of the key conclusions from the review include the following:

  • Criticized assets increased 72%, from $373 billion (13.4% of the SNC portfolio) in 2008 to $642 billion (22.3% of the SNC portfolio) in 2009.
  • Classified assets rose even more, increasing 174%, from $163 billion (5.8% of the SNC portfolio) in 2008 to $447 billion (15.5% of the SNC portfolio) in 2009.
  • The review notes that “[t]he severity of criticism increased with the volume of SNCs classified as doubtful and loss rising to $110 billion, up from $8 billion in 2008,” while “[l]oans in nonaccrual status also increased nearly eight times to $172 billion from $22 billion.” Loans classified as nonaccrual “included $32 billion in credits classified as loss and $56 billion classified doubtful.”
  • The review identifies “significant deterioration in credit quality of leveraged finance credits, with these loans representing more than 40 percent of the dollar volume of total criticized assets.” Approximately “72 percent of the dollar volume of the 50 largest leveraged finance SNCs were criticized, which represents one-third of all criticized assets.”

The review states that, although underwriting standards in 2008 have improved as compared to 2007 and 2006, the SNC portfolio still “contained loans with structurally weak underwriting characteristics that were committed before mid-2007 that contributed significantly to the increase in criticized assets.” According to published reports some banks have already warned that the SNC review will further depress third-quarter results that will be released in mid- to late-October.

The SNC program was created in 1977 to provide a comprehensive and consistent review and classification of shared national credit “which is a loan and/or formal loan commitment, and any asset such as real estate, stocks, notes, bonds, and debentures taken as debts previously contracted, and extended to borrowers by a federally supervised institution, its subsidiaries, and affiliates” in the amount of $20 million or more and that is shared by three or more unaffiliated supervised institutions. In addition, many of the loan commitments reviewed are shared with foreign banking organizations and nonbanking institutions, including securitization vehicles, hedge funds, insurance companies and pension funds.