Shared National Credit Review Finds Risk Remains Elevated in Leveraged Loans

For release at 2:00 p.m. ET

WASHINGTON — Federal bank regulatory
agencies find that the share and amount of loan commitments with
the lowest supervisory ratings rose slightly between 2018 and
2019, according to the Shared National Credit (SNC) Program
Review. Total commitments with low ratings remain elevated
compared to lows reached during prior periods of strong economic

The report, which was released today by the Federal Reserve
Board, the Federal Deposit Insurance Corporation (FDIC), and the
Office of the Comptroller of the Currency (OCC), reflects
reviews primarily covering SNC loans originated on or before
June 30, 2019. It finds that credit risk associated with
leveraged lending remains elevated. Lenders have fewer
protections and risks have increased in leveraged loan terms
through the current long period of economic expansion since the
last recession. Most banks have adopted credit risk-management
practices to monitor and control this evolving risk. However,
some of these controls have not been tested in an economic
downturn. The agencies require banks to have risk-management
processes that can identify and adapt to changing market

The 2019 SNC portfolio included 5,474 borrowers, totaling $4.8
trillion, up from $4.4 trillion in 2018. U.S. banks held the
greatest volume of SNC commitments at 44.4 percent of the
portfolio, followed by foreign banking organizations and other
investor entities such as securitization pools, hedge funds,
insurance companies, and pension funds. Total commitments
increased by $396 billion, or 8.9 percent, from third quarter of
2018 to the third quarter of 2019. Growth was concentrated in
investment grade equivalent transactions. The number of
borrowers and facilities increased modestly in 2019 after a
sizeable decline in 2018 associated with an increase in the
minimum commitment threshold to $100 million that was effective
January 1, 2018.

Loan commitments were reviewed and grouped into four categories
by the severity of their risk, from less severe to more severe:
special mention, substandard, doubtful, or loss. The last three
of which are known as “classified.” Overall, the level of loans
rated below “pass” as a percentage of the total SNC portfolio
increased slightly from 6.7 percent to 6.9 percent.
Bank-identified leveraged loan commitments represent 49 percent
of total SNC commitments. Leveraged lending was the primary
contributor to the overall special mention and classified rates.
Investors outside the banking industry held the greatest volume
of special mention and classified commitments, followed by U.S.
banks and foreign banking organizations.

The agencies conduct SNC reviews in the first and third calendar
quarters with some banks receiving two reviews and others
receiving a single review each year. The agencies issue a single
statement annually that includes combined findings from the
previous 12 months. This practice presents a complete view of
the entire SNC portfolio, which can be compared with prior
years’ reports. The next report will be published following the
third quarter 2020 SNC examination.

For additional information, see the attached SNC Program Review


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