Fed Report Surprises on Syndicated Loans' Risk

WASHINGTON - Bucking recent credit quality trends, a Federal Reserve Board report released Friday finds syndicated loan portfolios at many large U.S. banks are less risky than their loans to individual borrowers.

The Fed's quarterly poll of senior loan officers asked 56 domestic banks and 22 U.S. branches of foreign banks to describe the extent of their syndicated loan holdings and the quality of their portfolios.

Of the domestic banks in the survey, 86% reported that the default rates for the syndicated loans they hold are the same as or lower than those for loans to individual borrowers.

Bank trade groups said that the results prove recent credit quality fears have been exaggerated.

"Syndicated loans get headlines when they blow up, but there haven't been any more problems there than there have been anywhere else," said Pam Martin, a spokeswoman for the Philadelphia-based lender trade group RMA. "In fact, syndicated loans often receive more scrutiny than loans to individual borrowers."

But David D. Gibbons, deputy comptroller for credit risk at the Office of the Comptroller of the Currency, warned that the data should not blind lenders to an increasing level of risk in the financial system.

"The delinquency rate on commercial and industrial loans, both syndicated and nonsyndicated, has been going up for about 18 months," he noted.

Late next month data from the Shared National Credit Review will be made public, giving lenders and regulators a more detailed look at the state of the syndicated loan market, Mr. Gibbons said. The review is an annual examination by the Fed, the OCC, and the Federal Deposit Insurance Corp. of all commercial loans of $20 million or more in which three or more lenders participate.

According to the Fed survey, U.S. bank participation in the syndicated loan market is more frequent among large institutions, with 58% reporting that syndicated loans make up 20% or more of their commercial credit portfolios. Among smaller banks, by comparison, only 12% reported levels of syndicated loan holdings at 20% or more.

Large banks are also more likely to hold syndicated loans made to below-investment-grade borrowers. Thirty-two percent of large banks said that such higher-risk loans make up one-quarter or more of their entire syndicated commercial loan portfolios. Among small banks, only 13% carried such a concentration of high-risk syndicated loans.

While high-risk loans may make up a small percentage of all syndicated loans, Mr. Gibbons said, they default more frequently than the rest of the syndicated loan pool. In last year's Shared National Credit Review, he said, one-third of the loans that regulators criticized involved highly leveraged borrowers.

The Fed's findings on syndicated loans were only part of a larger survey designed to assess both the demand for credit and banks' credit standards.

Overall, the Fed found a net tightening of credit standards for loans to businesses. No domestic banks reported that they had lowered standards, and 34% reported raising them. The most frequently cited reason for tighter standards was concern about the "economic outlook."

Survey respondents said credit standards for consumer lending and residential mortgages were unchanged from the last survey.

Respondents said demand for all loans - residential mortgages, business, and consumer loans - fell in June, July, and August. Demand for home loans has been declining for more than a year, the Fed said.

While expressing some surprise at the continued decline in mortgage demand, RMA's Ms. Martin said she was pleased by the credit quality statistics.

"These numbers are encouraging. It is what you would expect banks to do in this environment," she said. However, she warned, in a climate of rising interest rates and tightening credit standards, regulators need to be careful not to choke off the credit supply.

"If there is anything to be concerned about, it is for the economy as a whole, considering that the Fed has been raising interest rates and has not ruled out further hikes," she said. "You have to be concerned that credit availability could be unduly restricted."

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