It Ain’t All Bad News in the Nation’s Loan Book
Just how poorly are commercial loans in the United States performing?
Bankers in recent days have been pointing fingers at regulators, saying that they are increasingly tarring credits that are otherwise A-OK. And because of that, bankers say, in general, they are restricting their loan-making. Reading between the lines, bankers are blaming regulators for insipid lending volume nationwide.
So I wondered if this was true? Are regulators really to blame, because if regulators were indeed tightening the safety-and-soundness noose around bankers, it would be understandable if banks correspondingly pinched their underwriting.
You can ask the Federal Reserve, OCC, or FDIC for numbers on how many loans in this nation are classified as “troubled,” and you’ll get stonewalled. Anecdotally, the evidence seems to imply that more loans are getting whitewashed by regulators. From The Wall Street Journal on Dec 2:
For the first time in his 35-year career, Steve Wilson, the newly elected chairman of the American Bankers Association and the chairman and chief executive of the 25-branch LCNB National Bank in Lebanon, Ohio, said that he experienced an examiner classifying a performing [commercial] loan—one that was continuing to make payments—as troubled.
But buried deep in a report the FDIC clued me into is at least some of the answer. The report is called the “Shared Credits National Review of 2010,” and it was published by the FDIC, Fed, Office of the Comptroller of the Currency and the Office of Thrift Supervision last September, and I can’t find an article about it anywhere. Just by way of background, the Shared National Credit Program was established in 1977 by the Fed, FDIC, and OCC “to provide an efficient and consistent review and classification of any large syndicated loan,” according to the Fed. “Today, the program covers any loan or loan commitment of at least $20 million that is shared by three or more supervised institutions.”
So what does the review of $1 trillion (that’s “trillion” with a T) loans say? Well, regulators are certainly not quarantining more loans.
The severity of classifications improved, with the volume of credits classified as doubtful and loss decreasing to $48 billion [in mid 2010] from $110 billion, a 56.4 percent reduction [from the year previous]. Nonaccrual loans declined to $151 billion from $172 billion. Adjusted for losses, nonaccrual loans declined from $140 billion to $136 billion.
Not just has the severity of classifications improved, but just the sheer volume of “criticized” credits has declined.
Criticized assets, which include assets rated special mention, substandard, doubtful, and loss, declined to $448 billion [in 2010] from $642 billion [in 2009] and represented 17.8 percent of the SNC portfolio, compared with 22.3 percent in 2009.
The SNC portfolio — for those of you keeping score at home — includes $2.5 trillion of commercial loans.
Source: Shared Credits National Review of 2010
This is not to say problems do not remain in the nation’s credit portfolio. If only all was jolly.
Although the volume of criticized assets declined by more than 30 percent from 2009’s record level and the severity of classifications lessened with $15 billion of loss compared with $53 billion in 2009, the volume and percentage of criticized and classified assets remained at historically high levels. Performance of the SNC portfolio remained heavily influenced by its significant exposure to 2006- and 2007-vintage credits with weak underwriting standards. Refinancing risk within the portfolio is also significant, with nearly 67 percent of criticized commitments maturing between 2012 and 2014.
Taking that into account, however, there is still the fact that regulators have upgraded nearly $200 billion of commercial credits from their woe-is-me list. I am not implying that regulators haven’t toughened up. Of course they have. But there needs to be a sense of reality in this lenders-aren’t-lending debate. Blame can be assigned to either party, to be sure — although such a game is far from productive. Lend with integrity; regulate with integrity. Someone famous once wrote, “To thine own self be true.” Yes, Shakespeare applies to banking, too.
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