Fed Says Credit Quality of Large Loans Improves for 2012

The quality of large loans in the portfolios of federally supervised banks improved for the third year in 2012, with problem credits falling 8.1 percent to $295 billion, according to the Federal Reserve.

“Despite this progress, poorly underwritten loans originated in 2006 and 2007 continued to adversely affect” bank portfolios, the Fed, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. said in their annual review of loans of $20 million or more shared by three or more banks known as shared national credits.

The regulators said total shared national credit loans outstanding rose $125 billion to $1.24 trillion, an increase of 11.2 percent. So-called criticized assets -- including weak, doubtful, substandard or uncollectable credits -- made up 10.6 percent of the portfolio, compared with 12.7 percent last year. The regulators analyzed data submitted by financial institutions as of Dec. 31 and March 31.

U.S. regulators failed last decade to avert an asset-price bubble in housing caused partly by lax lending standards. Rising mortgage defaults led to a financial crisis and taxpayer-funded rescues of the nation’s largest banks beginning in 2008. The U.S. economy plunged into the worst recession since the Great Depression from December 2007 to June 2009.

Congress tightened oversight of banks, overall financial stability and consumer protections by passing the Dodd-Frank Act in 2010. The Fed, led by Governor Daniel Tarullo, has raised capital standards for the largest banks, subjected them to annual stress tests and is boosting scrutiny of their lending and trading practices. That’s helped tighten credit conditions for all but the highest-quality borrowers at a time when the economy is posting only moderate growth.

Growth ‘Headwinds’

Fed Chairman Ben S. Bernanke told lawmakers in his semi- annual testimony last month that the recovery “continues to be held back by a number of other headwinds, including still-tight borrowing conditions for some businesses and households.”

While the credit quality of bank assets is improving, the regulators said troubled assets “remain elevated.”

“Reasons for improvement in credit quality included better operating performance among borrowers, debt restructurings, bankruptcy resolutions and ongoing access to bond and equity markets,” the regulators said.

Improving credit quality has helped lift bank stocks. The KBW Bank Index, which tracks the shares of 24 large banks, has risen 20 percent this year compared with a 12.5 percent gain for the Standard and Poor’s 500 Index.

Housing Slump

“If you look at bank loan losses, they have come down for eight or nine consecutive quarters,” said Jason Goldberg, a senior analyst at Barclays Capital Inc. in New York. “Real estate still has a ways to go.”

The regulators said that media and telecommunications companies led other industry groups in the volume of criticized loans with $66 billion. Finance and insurance companies were second with $34 billion.

Nonbank financial companies such as securitization pools, hedge funds, insurance companies and pension funds owned the largest share of substandard credits, the regulators said.

Refinancing risk eased, the agencies said, with 37.1 percent of shared national credits maturing over the next three years, compared with 63.4 percent in the 2011 review.

The 2012 review included an analysis of 110 large leveraged finance borrowers, the report said. Federal regulators criticized leveraged loan standards in March this year and said they were revising supervisory guidance on the products.

“The review again identified an excessive level of risk associated with this subset of the portfolio,” the shared national credit review report said.

The U.S. banking agencies’ sample reviewed $811 billion of the $2.79 trillion credit commitments in the portfolio.

To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net;

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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