Board of Governors of the Federal Reserve System

Credit risk in the Shared National Credit (SNC) portfolio remained elevated, but underwriting and risk management practices improved from prior assessments, according to a review of large shared and complex credits released today by federal banking agencies.

The SNC Program Review has been conducted by the Board of Governors of the Federal Reserve System (Federal Reserve), the Federal Deposit Insurance Corporation (FDIC), and Office of the Comptroller of the Currency (OCC) since 1977. The latest review showed the level of adversely rated assets remained higher than in previous periods of economic expansion, raising the concern that future losses and problem loans could rise considerably in the next credit cycle. The elevated level of risk observed during the recent SNC examination stems from the high inherent risk in the leveraged loan portfolio and growing credit risk in the oil and gas (O&G) portfolio.

Notwithstanding the riskiness of the existing portfolio, the agencies noted improved underwriting and risk management practices related to the most recent leveraged loan originations as underwriters continued to better align practices with regulatory expectations, and as investor risk appetite moderated away from transactions at the lower end of the credit spectrum.

Commitments rated special mention include those that have potential weaknesses that deserve management's close attention and if left uncorrected could reduce the likelihood of repayment or weaken the institution's credit position. Credits considered worse than special mention include commitments rated substandard, doubtful, and loss. Non-pass includes all special mention and classified credits. The agencies' uniform loan classification standards and examination manuals define these risk rating classifications. Loans that are special mention and classified are considered non-pass loans.

The 2016 SNC portfolio included 10,837 credit facilities to 6,676 borrowers, totaling $4.1 trillion, up from $3.91 trillion in 2015. The percentages of non-pass commitments increased to 10.3 percent of the SNC portfolio in dollar terms from 9.5 percent a year ago. Classified commitments increased from 5.8 percent to 6.9 percent. Commitments rated special mention and worse increased from $372.6 billion in 2015 to $421.4 billion in 2016.

Leveraged lending was the primary contributor to the overall special mention and classified rate. Leveraged loans made up 63.3 percent of all SNC special mention and classified commitments. O&G lending was the primary driver for the increase in the overall special mention and classified rate. O&G lending represented 12.3 percent of the SNC portfolio overall and included $77 billion in classified credits compared with $38.2 billion in 2015.

The SNC review found that firms are originating minimal levels of non-pass loans. Examiners noted continued progress toward full compliance with the underwriting and risk management expectations for leveraged loans, which were published by the agencies in December 2013.

U.S. banks held the greatest volume of SNC commitments at 44.9 percent of the portfolio, followed by foreign banking organizations and then non-bank entities. The share of credits rated special mention and worse that were held by non-bank entities fell from 68 percent in 2015 to 60.8 percent this year.

To more efficiently deploy supervisory resources, the agencies initiated a semi-annual SNC examination schedule in 2016. SNC reviews are now planned for the first and third calendar quarters with some banks receiving two examinations and others continuing to participate in a single review each year. Results from the semi-annual examinations will be combined in order to present a complete review of the entire SNC portfolio that is comparable to prior years. The next report will be published following the first quarter 2017 SNC examination.

For additional information, including definitions, see the attached SNC review.