Fed Paints Stark Picture Of Credit Quality

FederalReserveCommercialPaper

Credit quality sucks, says The Fed

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Credit quality declined sharply for loan commitments of $20 million or more held by multiple federally supervised institutions, according to the 32nd annual review of Shared National Credits (SNC).

The credit risk of these large loan commitments was shared among U.S. bank organisations, foreign bank organisations (FBO), and nonbanks such as securitization pools, hedge funds, insurance companies, and pension funds. Credit quality deteriorated across all entities, but nonbanks held 47 per cent of classified assets in the SNC portfolio, despite making up only 21.2 per cent of the SNC portfolio. U.S. bank organisations held 30.2 per cent of the classified assets and made up 40.8 per cent of the SNC portfolio.

The 2009 review covered 8,955 credits totaling $2.9 trillion extended to approximately 5,900 borrowers. Loans were reviewed and categorized by the severity of their risk–special mention, substandard, doubtful, or loss–in order of increasing severity. The lowest risk loans, special mention, had potential weaknesses that deserve management attention to prevent further deterioration at the time of review. The most severe category of loans, loss, includes loans that were considered uncollectible.

Key findings were:

  • criticised assets, which included SNCs classified as special mention, substandard, doubtful, or loss, reached $642 billion, up from $373 billion last year, and represented 22.3 per cent of the SNC portfolio compared with 13.4 per cent in 2008.
  • SNC commitment volume increased $92 billion, or 3.3 per cent, while the number of credits remained virtually unchanged.
  • Classified assets, which included SNCs classified as substandard, doubtful, or loss, rose to $447 billion from $163 billion and represented 15.5 per cent of the SNC portfolio, compared with 5.8 per cent in 2008. Classified dollar volume increased 174 per cent from a year ago.
  • Special mention assets, which exhibited potential weakness and could result in further deterioration if uncorrected, declined to $195 billion from $210 billion and represented 6.8 per cent of the SNC portfolio, compared with 7.5 per cent in 2008.
  • The severity of criticism increased with the volume of SNCs classified as doubtful and loss rising to $110 billion, up from $8 billion in 2008. Loans in nonaccrual status also increased nearly eight times to $172 billion from $22 billion. Nonaccrual loans included $32 billion in credits classified as loss and $56 billion classified doubtful.

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