WASHINGTON—The credit quality of large loan commitments owned by U.S. banking organizations, foreign banking organizations, and nonbanks is generally unchanged in 2014 from the prior year, according to a report just released by several banking agencies.
In fact, the agencies said in a joint statement, there continue to be “serious deficiencies in underwriting standards and risk management of leveraged loans.”
The annual Shared National Credits (SNC) review found that the volume of criticized assets remained elevated at $340.8 billion, or 10.1% of total commitments, which approximately is double pre-crisis levels. The stagnation in credit quality follows three consecutive years of improvements. A criticized asset is rated special mention, substandard, doubtful, or loss as defined by the agencies' uniform loan classification standards. The SNC review was completed by the Federal Reserve Board, Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency.
Leveraged loans as reported by agent banks totaled $767 billion, or 22.6% of the 2014 SNC portfolio and accounted for $254.7 billion, or 74.7%, of criticized SNC assets. Material weaknesses in the underwriting and risk management of leveraged loans were observed, and 33.2% of leveraged loans were criticized by the agencies.
The leveraged loan supplement also identifies several areas where institutions need to strengthen compliance with the March 2013 guidance, including provisions addressing borrower repayment capacity, leverage, underwriting, and enterprise valuation. In addition, examiners noted risk-management weaknesses at several institutions engaged in leveraged lending including lack of adequate support for enterprise valuations and reliance on dated valuations, weaknesses in credit analysis, and overreliance on sponsor's projections.
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