Read the Shared National Credit Program Report Here

  • Source: federalreserve.gov

Treliant Takeaway:

Treliant knows credit risk. If your institution needs assistance with credit risks, we can help.

Report Highlights:

The Board of Governors of the Federal Reserve System (FRB), the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC) have issued a report summarizing the findings of the 2020 Shared National Credit (SNC) reviews. A SNC is a large, complex credit shared by multiple regulated financial institutions.[1] SNCs are reviewed twice annually, in the 1st and  3rd calendar quarters of each year. The most recent SNC report primarily focuses on loan commitments originated on or before June 30, 2020. Despite the economic downturn, the 2020 SNC population grew by 5.0 percent from 2019, with total commitments of $5.1 trillion.

The 2020 SNC reviews found that credit risk in SNCs was high and increasing relative to the 2019 reviews. Reviewers noted that economic disruption related to COVID-19 created “significant operating challenges and uncertainty for many borrowers, with a substantial increase in defaults and downgrades.” Classified and special mention SNC commitments exceeded 12 percent in 2020, up from less than 7 percent in 2019. The increase was largely due to sectors the greatest COVID-19 impacts, such as real estate, entertainment and recreation, oil and gas,  retail, and transportation services.[2] These sectors experienced substantial increase in classified and special mention risk ratings, as detailed in the table below.

Sector Special Mention + Classified %
2019 2020
Oil and Gas 10.7 23.3
Real Estate 2.6 7.2
Retail 10.0 12.7
Entertainment and Recreation 5.9 24.3
Transportation 15.1 56.1

The 2020 SNC reviews also revealed high and increasing credit risk associated with leveraged lending. Although these leveraged loan commitments represented less than ½ of all SNC loan commitments, they accounted for 2/3 of special mentions and more than ¾ of classified loan commitments. Many leveraged loans had weak structures and layered risks, including high leverage, weak covenants, permissive borrowing terms, draws on incremental facilities, and/or aggressive repayment assumptions.  The prudential banking regulators noted that banks originating or participating in leveraged lending transactions should ensure adherence to safe and sound banking practices, including realistic assessments of economic recovery and repayment capacity; consideration of any new debt assumed by borrowers during the COVID-19 pandemic; and the possibility that loss and recovery rates will differ from historical patterns.

[1] The complete definition of a SNC is a loan or formal 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 $100 million or more and is shared by three or more unaffiliated federally supervised institutions, or a portion of which is sold to two or more such institutions.

[2] For additional information on the 2021 outlook for key credit sectors, see Tom Freeman and Lynn Woosley, 2021 U. S. Credit Outlook: More Turbulence Ahead.

Author

Lynn Woosley

Lynn Woosley is a Senior Director with Treliant.  She is a seasoned executive with extensive risk management experience in regulatory compliance, consumer and commercial credit risk, credit and compliance risk modeling, model governance, regulatory change management, acquisition due diligence, and operational risk in both financial services and regulatory environments.