Regulators Release Shared National Credits Review and Express Concern over Leveraged Lending | Practical Law

Regulators Release Shared National Credits Review and Express Concern over Leveraged Lending | Practical Law

On November 7, 2014, the Federal Reserve Board, Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency released findings of an annual Shared National Credits review and expressed concerns over leveraged lending.

Regulators Release Shared National Credits Review and Express Concern over Leveraged Lending

by Practical Law Finance
Published on 12 Nov 2014 • USA (National/Federal)
On November 7, 2014, the Federal Reserve Board, Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency released findings of an annual Shared National Credits review and expressed concerns over leveraged lending.
On November 7, 2014, the Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency released a joint press release which highlighted findings of the annual Shared National Credit (SNC) review. The SNC program was established in 1977 with the goal of providing an efficient and consistent review and analysis of SNCs. SNCs include any loan or formal loan commitment, and 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 $20 million or more.
  • Is shared by three or more unaffiliated supervised institutions.
This review included a supplement relating exclusively to leveraged loans which exposed concerns regarding leveraged lending practices including:
  • The high percentage of leveraged loans that are criticized SNC assets (leveraged loans make up almost 75% of criticized SNC assets, despite representing less than 25% of the 2014 SNC portfolio).
  • Material weaknesses in the underwriting standards and risk management of leveraged loans.
  • 33% of leveraged loans are criticized by the agencies.
  • Several areas in which institutions need to strengthen compliance leverage lending guidance including provisions addressing:
    • borrower repayment capacity;
    • leverage;
    • underwriting; and
    • enterprise valuation.
  • Risk management weaknesses at several institutions engaged in leveraged lending including:
    • lack of adequate support for enterprise valuations;
    • reliance on dated valuations;
    • weaknesses in credit analysis; and
    • overreliance on sponsor's projections.
In researching the leveraged loan supplement, the agencies reviewed $623 billion of commitments, which represent 81% of all leveraged loans by dollar commitments).
As a result, regulators plan to increase the frequency of leveraged lending reviews in order to maintain an adequate level or risk.
The agencies also released answers to FAQs on the Interagency Guidance on Leveraged Lending which was released in March 2013 (see Legal Update, US Bank Regulators Release Supervisory Guidance on Leveraged Lending). The guidance seeks to help institutions strengthen their risk management framework so that leveraged lending activities do not originate and distribute poorly underwritten and low-quality notes which then raise risk in the banking and broader financial systems.