FINANCIAL SERVICES

Fed says credit quality of large loans improves for third year

BLOOMBERG FILE PHOTO/BRENDAN SMIALOWSKI
THE U.S. FEDERAL Reserve building stands in Washington, D.C., U.S.
Posted 8/27/12

WASHINGTON - The quality of large loans in the U.S. banking system improved for the third year in 2012, with problem credits falling 8.1 percent to $295 billion, according to the Federal Reserve.

“Despite this progress, poorly underwritten loans originated in 2006 and 2007 continued to adversely affect” bank portfolios, the Fed, Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. said in their annual review of loans of $20 million or more shared by three or more banks known as shared national credits.

The regulators said total shared national credit loans outstanding increased $125 billion to $1.24 trillion, an increase of 11.2 percent. So-called criticized assets, or problem loans, represented 10.6 percent of the portfolio compared with 12.7 percent in 2011. The regulators analyzed data submitted by financial institutions as of Dec. 31 and March 31.

The Fed, led by Governor Daniel Tarullo, has raised capital standards for the largest banks, subjected them to annual stress tests and is boosting scrutiny of their lending and trading practices. That’s helped tighten credit conditions for all but the highest quality borrowers.

“Reasons for improvement in credit quality included better operating performance among borrowers, debt restructurings, bankruptcy resolutions and ongoing access to bond and equity markets,” the regulators said.

The regulators said that media and telecommunications companies led other industry groups in the volume of criticized loans with $66 billion. Finance and insurance companies were second with $34 billion.

Nonbank financial companies such as securitization pools, hedge funds, insurance companies and pension funds owned the largest share of substandard credits, the regulators said.

Refinancing risk eased, the agencies said, with 37.1 percent of shared national credits maturing over the next three years compared with 63.4 percent in the 2011 review.

The U.S. banking agencies’ sample reviewed $811 billion of the $2.79 trillion credit commitments in the portfolio.

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