WASHINGTON (MNI) – The Federal Reserve, the Federal Deposit
Insurance Corp. and the Office of the Comptroller of the Currency issued
the following statement Monday:

Credit Risk in the Shared National Credit Portfolio Declines, but
Remains High

The credit quality of large loan commitments owned by U.S. banking
organizations, foreign banking organizations (FBOs), and nonbanks
improved in 2012 for the third consecutive year, according to the Shared
National Credits (SNC) Review for 2012. A loan commitment is the
obligation of a lender to make loans or issue letters of credit pursuant
to a formal loan agreement.

The volume of criticized loans remained high at $295 billion
compared with levels before the financial crisis, but declined 8.1
percent from 2011. A criticized loan is rated special mention,
substandard, doubtful, or loss.

Reasons for improvement in credit quality included better operating
performance among borrowers, debt restructurings, bankruptcy
resolutions, and ongoing access to bond and equity markets.

Despite this progress, poorly underwritten loans originated in 2006
and 2007 continued to adversely affect the SNC portfolio. While the
overall quality of underwriting of SNCs that were originated in 2011 was
significantly better than in 2007, some easing of standards was noted,
specifically in leveraged finance credits, especially compared with the
relatively tighter standards present in 2009 and the latter half of
2008. Refinancing risk eased during the past year as 37.1 percent of
SNCs will mature over the next three years compared with 63.4 percent
for the same time frame in the 2011 SNC Review.

The federal banking agencies expect banks and thrifts to originate
syndicated loans using prudential underwriting standards, regardless of
their intent to hold or sell them. SNCs that are poorly underwritten
will be subject to regulatory criticism or classification during annual
SNC reviews. The federal banking agencies expect to finalize revised
guidance on leveraged lending to form the basis of the agencies
supervisory focus and review of supervised financial institutions
involved in leveraged lending.

Although nonbank entities, such as securitization pools, hedge
funds, insurance companies, and pension funds, owned the smallest share
of loan commitments, they owned the largest share (62.4 percent) of
classified credits (rated substandard, doubtful, or loss).

In other highlights of the review:

–Total SNC commitments increased 10.6 percent from the 2011 review
to $2.79 trillion. Total SNC loans outstanding increased $125 billion to
$1.24 trillion, an increase of 11.2 percent.

–Criticized assets represented 10.6 percent of the SNC portfolio,
compared with 12.7 percent in 2011.

–Classified assets declined 8.8 percent to $196 billion in 2012
and represented 7 percent of the portfolio, compared with 8.5 percent in

–Credits rated special mention, which exhibited potential weakness
and could result in further deterioration if uncorrected, was largely
unchanged at $99 billion in 2012, representing 3.6 percent of the

–Adjusted for losses, nonaccrual loans declined to $81 billion
from $91 billion, an 11.1 percent reduction.

–The distribution of credits across entitiesU.S. banking
organizations, FBOs, and nonbanksremained relatively unchanged. U.S.
banking organizations owned 43.2 percent of total SNC loan commitments,
FBOs owned 36.9 percent, and nonbanks owned 19.8 percent. The share
owned by nonbanks declined for the second consecutive year. Nonbanks
continued to own a larger share of classified (62.4 percent) and
nonaccrual (66.4 percent) assets compared with their total share of the
SNC portfolio. Institutions insured by the Federal Deposit Insurance
Corporation owned 13.4 percent of classified assets and 9.5 percent of
nonaccrual loans.

–The media and telecommunications industry group led other
industry groups in criticized volume with $66 billion. Finance and
insurance followed with $34 billion, then utilities with $30 billion.
Although these groups had the largest dollar volume of criticized loans,
the three groups with the highest percentage of criticized loans were
entertainment and recreation (28.3 percent), media and
telecommunications (24.6 percent), and transportation services (22.7
percent). Each of these industry groups saw declines in the share of
criticized loans from a year ago.

The SNC program was established in 1977 to provide an efficient and
consistent review and analysis of SNCs. A SNC is any loan or formal loan
commitment, and any asset such as real estate, stocks, notes, bonds, and
debentures taken as debts previously contracted, extended to borrowers
by a federally supervised institution, its subsidiaries, and affiliates
that aggregates to $20 million or more and is shared by three or more
unaffiliated supervised institutions. Many of these loan commitments are
also shared with FBOs and nonbanks, including securitization pools,
hedge funds, insurance companies, and pension funds.

In conducting the 2012 SNC Review, agencies reviewed $811 billion
of the $2.79 trillion credit commitments in the portfolio. The sample
was weighted toward noninvestment grade and criticized credits. The
results of the review are based on analyses prepared in the second
quarter of 2012 using credit-related data provided by federally
supervised institutions as of December 31, 2011, and March 31, 2012.

** MNI Washington Bureau: 202-371-2121 **

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