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    US Agencies Review Credit Risk at National Level

    February 14, 2022

    The Board of Governors of the Federal Reserve System (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) jointly published the 2021 Shared National Credit (SNC) Review Report. The SNC Program assesses risk in the largest and most complex credits in the country. The 2021 report reflects reviews conducted in the first and third quarters of 2021 and primarily covers loan commitments originated on or before June 30, 2021.

    The 2021 SNC portfolio included 5,764 borrowers, totaling $5.2 trillion in commitments, an increase of 2.1% from a year ago. The 2021 SNC Review focused on borrowers in five industries that were affected significantly by the pandemic: entertainment and recreation, oil and gas, commercial real estate, retail, and transportation services. The results show that SNC credit risk for large syndicated loans improved modestly in 2021 but remains high largely due to the impact of COVID-19. SNC commitments with the lowest supervisory ratings (special mention and classified) have decreased from 12.4% in 2020 to 10.6% in 2021. Nearly half of total SNC commitments are leveraged loans and commitments to borrowers in COVID-19 affected industries represent about one-fifth of total SNC commitments. The report notes that credit risk associated with leveraged lending is high and leveraged loans comprise half of total SNC commitments but represent a disproportionately high level of the total special mention and classified exposures. The review cautions that portfolio management and stress testing processes should consider that loss and recovery rates may differ from historical levels and risks identified in stress tests should be measured against their potential impact on capital and earnings. Moreover, the review results highlight that direction of risk in 2022 will be impacted due to management of COVID-19 pandemic and other concerns such as inflation, supply chain imbalance, labor challenges, and high debt levels while vulnerability to rising rates could negatively impact the financial performance and repayment capacity of borrowers in a wide variety of industries.

     

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    Keywords: Americas, US, Banking, Covid-19, Credit Risk, SNC Loans, US Agencies, Lending, Portfolio Management, Stress Testing, Leveraged Lending

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