Agencies Find Weaknesses in Shared National Credits
Credit risk in the Shared National Credit (SNC) portfolio remained at a high level, according to an annual review of large shared credits released November 5 by federal banking agencies. The SNC review has been conducted since 1977 by the Board of Governors of the Federal Reserve System (Federal Reserve), the Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency to assess risk in the largest and most complex credits shared by multiple financial institutions. Leveraged lending, which accounts for approximately one quarter of the SNC portfolio, remained a focus of the agencies. This year’s review found that banks “are making progress in aligning their underwriting practices with the leveraged lending guidance issued by regulators in 2013. However, the review highlighted continuing gaps between industry practices and the expectations for safe and sound banking. Leveraged transactions originated within the past year continued to exhibit structures that were cited as weak by examiners. The persistent structural deficiencies found in loan underwriting by the agencies warrant continued attention. The review also noted an increase in weakness among credits related to oil and gas exploration, production, and energy services following the decline in energy prices since mid-2014. Aggressive acquisition and exploration strategies from 2010 through 2014 led to increases in leverage, making many borrowers more susceptible to a protracted decline in commodity prices.