Large Loan Quality at U.S. Banks Unchanged in 2013, Fed Says

The quality of large loans that are shared by financial institutions was “relatively unchanged” this year after three years of gains, according to a report by bank regulators including the Federal Reserve.

“The stagnation in credit quality follows three consecutive years of improvements,” the Fed, Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. said in a report on credit risk released today in Washington. The report is an annual review of shared national credits, or loans of $20 million or more held by three or more financial institutions.

The total volume of shared loans increased by $219 billion to $3.01 trillion. About 10 percent were “criticized assets,” or loans having some deficiency or likelihood of resulting in loss, compared with 11 percent last year. The analysis was prepared in the second quarter of 2013 using data as of December 31, 2012, and March 31, 2013.

The report underscores the slow healing of the financial system following the 2008 financial crisis that led to the collapse of some of the largest banking institutions, including Lehman Brothers Holdings Inc. and Bear Stearns Cos. The share of loans with problems remains “approximately twice the percentage of pre-crisis levels,” the report said.

Most of the problem loans were leveraged loans, a type of high-yield, high-risk loans that are used for everything from mergers and acquisitions and buyouts to recapitalizations. Leveraged loans accounted for $227 billion, or 75 percent, of criticized loans.

“After declining during the financial crisis, the volume of leveraged lending has since increased and underwriting standards have deteriorated,” the report said. Banking regulators also issued guidance to financial institutions in March on how to better manage such lending.

To contact the reporter on this story: Joshua Zumbrun in Washington at jzumbrun@bloomberg.net

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

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