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Bank Loan Advisory Shows Increased Credit Risk at Highest Levels
The Federal Reserve Bank of New York released it's overall credit rating for bank-debt warning of a continuing decrease in the quality of debt. A major sign of overall economic decline.
Source: TheTip, 2002-10-08
Candidate: The FED
Board of Governors of the Federal Reserve System
Joint Release Federal Deposit Insurance Corporation
Office of the Comptroller of the Currency
For Immediate Release October 8, 2002
Bank Regulatory Agencies Find Adversely Rated Syndicated Loans
Continue to Increase in 2002, but at Slower Rate than Previous Year
WASHINGTON -- The quality of large syndicated bank loans continued to deteriorate this
year, but at a slower rate than was evident in 2001, according to the 2002 Shared National
Credit (SNC)1 review, which federal bank regulators released today. The deterioration was
consistent with general economic, sectoral, and credit market trends.
The results -- reported by the Board of Governors of the Federal Reserve System, the Office of
the Comptroller of the Currency and the Federal Deposit Insurance Corporation -- are based on
analyses that were prepared during the second quarter and reflect business and economic
conditions that prevailed at that time.
For the 2002 review, total loan commitments classified as either substandard, doubtful or loss
rose by $39.4 billion or 34 percent over the previous year, compared to a net increase of $54.3
billion or 86 percent the year before. At the same time, commitments rated special mention
rose $3.6 billion or 5 percent compared to $39.1 billion or 108 percent the year before.
Adversely rated credits are the total of loans classified substandard, doubtful, and loss and loans
rated special mention. Under the agencies’ Uniform Loan Classification Standards, classified
loans have well defined weaknesses, including default in some cases, while special mention
loans exhibit potential weaknesses, which may result in further deterioration if left uncorrected.
Deterioration since the middle of last year was largely driven by the pronounced problems in
the telecommunication sector, alleged corporate fraud, weakness from the recent recession, and
the after-effects of September 11th. Similar to last year, deterioration has been particularly
evident for credits to leveraged and speculative-grade borrowers that are facing difficulty
generating sufficient cash flow to service their debts because of over capacity, weaker pricing or
slower than anticipated growth. At the same time, certain market segments have shown
moderate improvement, with the professional, scientific, financial, insurance and other service
sectors showing lower classification levels relative to 2001.
In 2002, the SNC Program covered 9,328 credits totaling $1.9 trillion in loan commitments to
5,542 borrowers. Of the total commitments, $692 billion was advanced and outstanding.
Classified credits totaled $157.1 billion, or 8.4 percent of total commitments, up from $117.6
billion or 5.7 percent in 2001. At the same time, loans listed for special mention rose to 4.2
percent of total commitments, from 3.7 percent in 2001. On a combined basis, special
mention and classified loans represent 12.6 percent of total commitments, up from 9.4 percent
a year ago but still below the peak of 16 percent in 1991 (see Chart 1 and Appendix A). None
of these figures include the effects of hedging or other techniques that individual
organizations might have employed to mitigate risk.
2
Of particular note for 2002 was a record $19.6 billion in commitments characterized as loss, up
$11.6 billion from the year before. Of that total, $7.6 billion or 39 percent was attributable to
the telecommunication and cable industries.
Of the $1.9 trillion in total SNC commitments, U.S. banking organizations2 and foreign
banking organizations (FBO) each held 45 percent of the exposures, and nonbank firms held
the remaining 10 percent (see top panel of Table 1). Since 2000, the share of commitments
held by U.S. banks has fallen somewhat, while the nonbank share has grown. For 2002, the
rate of deterioration for credits held by these groups has differed markedly, with U.S. banking
organizations experiencing an 11 percent increase in classifieds, compared to 39 percent for
FBOs and 68 percent for nonbanks...The whold document can be found here:
FED Press Release
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