Banking

Credit quality remained weak in 2010 but improved from the previous year, according to a recent study by the Federal Reserve and other federal banking agencies. The Shared National Credits (SNCs) Review for 2010 covers large loans and formal loan commitments that are shared by three or more supervised institutions.

According to the review, total loan commitments fell 12.6 percent to $2.5 trillion, and total SNC loans outstanding declined 22.5 percent to $1.2 trillion. Meanwhile, the volume of "criticized" loans decreased more than 30 percent, accounting for 18 percent of all SNCs, said the report. Criticized loans are those rated by banking agencies as having potential weaknesses or inadequate collateral as well as those that are unlikely to be collected in full or are deemed uncollectable.

Debt restructurings, better operating performance drive improvement
The report detailed several factors contributing to the improvements in credit quality, including improved borrower operating performance, debt restructurings, and bankruptcy resolutions. Borrowers also benefited from improved access to bond and equity markets, the study said. The automotive and materials and commodities industries, among others, were named in the report as contributing to the improvement in credit quality.

Refinancing risk, poor underwriting present problems
Despite the improvements, the SNC portfolio still contains significant refinancing risk, with nearly 67 percent of criticized assets maturing between 2012 and 2014, the report said. Additionally, poorly underwritten loans originated in 2006 and 2007 continue to have a negative impact on the overall credit quality of the portfolio. Among the industries with the highest volume of criticized loans, the media and telecommunications industry led with $94 billion, followed by real estate and construction with $60 billion, and finance and insurance with $49 billion.

The federal banking agencies responsible for the review include the Federal Reserve, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision.

October 27, 2010