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Federal Reserve Board Gov. Elizabeth Duke sharply criticized key aspects of a pending accounting proposal that would expose a bank's assets and liabilities — including loans held to maturity and deposits — to fair-value treatment.
September 14
WASHINGTON — Regulators are poised to release data this week pointing to a record number of syndicated loans experiencing a decline in credit quality.
The proportion of classified loans — those that regulators deem substandard, doubtful or a loss — nearly tripled over the past year to 15.5% of the industry's total syndicated loan portfolio, according to Kathy Murphy, the chief accountant at the Office of the Comptroller of the Currency.
Add in a fourth category of shaky loans and 22.3% of the industry's syndicated business worth roughly $600 billion is termed criticized, up from 13.4% a year earlier.
During the height of the savings and loan crisis in 1991, the proportion of criticized loans topped out at 16%. "Unfortunately I don't have the best information to relay," Murphy said in a presentation Tuesday to the American Institute of Certified Public Accountants. "The results were that the criticized and classified loans are at a record level. This is partly driven by the economy and is partly driven by the underwriting that occurred prior to 2008."
That picture is not expected to brighten soon, Murphy said, because banks are still working through a number of loans that were originated before the financial crisis.
"There are still some problems to work through," she said. "There are still some credits prior to 2008 or mid-2007 that will still need to be worked through, so we do see more problems to come."
Along with the OCC, the Federal Reserve Board and the Federal Deposit Insurance Corp. have conducted a study of shared national credits since 1977. The Office of Thrift Supervision joined the process in 2001.
Under the program, examiners review loans and commitments of $20 million or more that are held by three or more financial institutions. The full report is expected to be released by regulators Friday and will give a better sense of how big loans to manufacturers, financial firms, real estate and service companies fared during the downturn. But given the higher levels of troubled loans, some observers said regulators will use the opportunity to push for more consistency in the syndicated market.
"It will reinvigorate the regulatory effort to improve coordination and governance of the syndicated loan market," said Karen Shaw Petrou, the managing director of Federal Financial Analytics Inc. "The regulators tried a significant initiative years back to ensure consistent policy among the agencies and they got beaten back. But I think you'll see that become another piece of rewriting the credit risk rules that's going to come back onto the agenda."
There was one bright spot in the information that was released Tuesday: 19% of reviewed loans were judged "weak" by the regulators, down from 34% a year earlier.
Meanwhile, a Fed official followed up on remarks made Monday by Fed Gov. Elizabeth Duke, who criticized a proposal being considered by the Financial Accounting Standards Board that would subject all of a bank's assets and liabilities — including deposits and assets held to maturity — to fair-value accounting.
"We actually support the independent standards-setting processes of the FASB," Arthur Lindo, the Fed's chief accountant said at the same conference. "There are times when we have differences of opinion. One of them is the speed with which they make changes."
Under pressure from the International Accounting Standards Board, the FASB could make its proposal by yearend, a time line that frightens some bank regulators. But FASB Chairman Robert Herz said last month that any proposal would not be implemented before 2011.