Federal Regulatory Agencies Raise Concerns Over Declining Credit Quality in 2023 Shared National Credit Program Report

Washington D.C., February 15, 2024

In the jointly issued 2023 Shared National Credit (SNC) report, key federal banking regulatory agencies, including the Federal Reserve Board, Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC), highlight that credit quality associated with large, syndicated bank loans remains at a moderate level. However, the report underscores growing concerns about declining credit quality trends, attributed to higher interest rates affecting leveraged borrowers and compressed operating margins in select industry sectors.

Risks Across Industries

While the overall assessment indicates moderate credit quality, risks in leveraged loans are noted to be persistently high. Specific industries, including technology, telecom, and media; health care and pharmaceuticals; and transportation services, are flagged for elevated risks. The real estate and construction sector presents a segmented risk landscape, with deteriorating trends in certain sub-sectors offset by stability or improvement in others. Industries impacted by the pandemic, such as transportation services and entertainment/recreation, show notable signs of improvement.

Portfolio Overview

The 2023 SNC portfolio comprises 6,589 borrowers, representing a total commitment of $6.4 trillion, reflecting an 8.7 percent increase from the previous year. Notably, the percentage of loans requiring close attention ("non-pass" loans, including SNC commitments rated "special mention" and "classified") rose from 7.0 percent to 8.9 percent year over year. Although U.S. banks hold 46 percent of all SNC commitments, their share of non-pass loans is comparatively lower at 20 percent. Leveraged loans constitute nearly half of total SNC commitments, making up 86 percent of non-pass loans.

The report's findings underscore the need for vigilant monitoring of credit quality trends amid economic shifts, with a focus on managing risks associated with leveraged loans and specific industry sectors showing heightened vulnerability.