Agencies Find Increased Credit Risk in SNC Program

The federal banking agencies found increased credit risk in the Shared National Credit portfolio—a bundle of large, syndicated bank loans that includes 5,652 borrowers and totals $5.1 trillion—according to the SNC Review released today.

The increased risk was primarily attributed to the effects of COVID-19, but banks are better equipped to mitigate loan risks because of strengthened risk management practices implemented since the 2008 downturn, the agencies noted. The report also found that banks have substantially increased their loan-loss reserves, and that “aggregate capital in the system has risen by nearly a percentage point since March of 2020.”

The share of low-rated commitments in the SNC portfolio rose significantly to 12.4% in 2020 from 6.9% in 2019. Total SNC commitments were up 5% year-on-year, while the total number of credit facilities increased modestly. Outstanding SNCs increased 11.1% to $2.62 trillion.

U.S. banks held the greatest volume of SNC commitments at nearly 44.5% of the portfolio, followed by foreign banking organizations and nonbanks. Leveraged loans accounted for 66% of all special mention commitments (which are non-classified commitments that examiners flag for concern).

The report noted that COVID-19-related stresses had “a significant impact on obligors within the SNC population,” particularly those in sectors that were particularly affected by the pandemic. “[T]he level of risk was magnified in leveraged lending transactions when the obligor was operating in a COVID-19 impacted industry,” the agencies observed. “The special mention and classified rate in this segment rose from 13.5% to 29.2% between third quarter 2019 and third quarter 2020.”