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Joint Press Release

For Immediate Release

Board of Governors of the Federal Reserve System
Federal Deposit Insurance Corporation
Office of the Comptroller of the Currency
Office of Thrift Supervision

September 25, 2006

Shared National Credit Data Reflect Good Credit Quality Performance,
Large Increase in Credit1 Commitment Volume, and
Small Rise in Riskier Deals
The volume of syndicated credits rose rapidly, in part reflecting a rise in merger and
acquisition activity over the past year, according to the Shared National Credit (SNC)2 review
released today by federal bank and thrift regulators. The review noted a small increase in
problem credits as a share of commitments in 2006. The bulk of this increase was associated
with credits held by nonbank3 entities while problem loans at regulated institutions,
particularly those with insured deposits, grew slightly. Deterioration in exposures to the
manufacturing sector, primarily the automotive industry, accounted for most of the softening
in asset quality. The review affirmed that most other industries exhibit improved credit
quality from peak problem levels experienced only a few years ago. Examiners also found,
however, a continued easing of underwriting standards in the syndicated lending market in
general, particularly in non-investment grade or leveraged credit facilities.
The results--reported by the Board of Governors of the Federal Reserve System, the Office of
the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the Office
of Thrift Supervision--are based on analyses prepared in the second quarter of 2006 and
reflect business and economic conditions at that time.
Total adversely rated credits4 rose slightly to 5.1 percent of total commitments from 4.8
percent a year ago (see Chart 1). Similarly, the ratio of classified commitments to total
commitments rose slightly to 3.3 percent from 3.2 percent last year. Total classified
commitments rose by $9.4 billion, or 18 percent, since 2005, compared with a net decrease of
$21.5 billion, or 29 percent, the previous year. Commitments rated special mention increased
by $7.5 billion, or 29 percent, in contrast to 2005 when they fell by $7.0 billion, or 21
percent.
Classified commitments held by United States (US) domiciled banking organizations
increased to $13.1 billion from $11.9 billion in 2005, but the classified ratio remained at only
1.6 percent due to growth in these companies’ syndicated credit portfolios.
These discussions of adversely rated credits and their ratios do not include the effects of
hedging or other techniques that organizations often employ to mitigate risk.

Overview
In aggregate, the 2006 SNC Program covered 7,009 credits totaling $1.9 trillion in credit
commitments to 4,833 borrowers. Total SNC commitments increased by nearly $250 billion,
a 15.2 percent increase from 2005, the largest annual expansion in nearly eight years. The
current level of commitments is slightly below the 2001 peak of $2.0 trillion, while adversely
rated commitments are only 40 percent of their peak level in 2002. The increase in 2006 total
commitments reflects, in part, substantial merger and acquisition financing provided over the
past year. Total outstandings, or drawn amounts, of $626 billion were up 20 percent from the
prior year.
For the 2006 review, total commitments classified as substandard rose $14.0 billion, or 32
percent from the prior year, while doubtful credits decreased $3.1 billion, or 55 percent (see
Table 1). Commitments classified as loss fell $1.5 billion, down 56 percent from the prior
year. Outstanding nonaccrual5 classified credits fell 8 percent to $17.7 billion.

Table 1: SNC Adversely Rated Commitments ($ billions)

Substandard
Doubtful
Loss
Total Classified

Total Commitments
% Change
2005
- 2006
2001 2002 2003 2004 2005 2006
87.0 112.0 112.1 55.1 44.2 58.1
32%
22.5 26.1
29.3 12.5 5.6
2.5
-55%
8.0
19.1
10.7
6.4
2.7
1.2
-56%
117.5 157.1 152.2 74.0 52.5 61.8
18%

   Percent of Commitments
Memo: Nonaccrual classified

5.7%
N/A

8.4%
51.0

9.3%
51.0

4.8% 3.2% 3.3%
30.1 19.3 17.7

-8%

Special Mention

75.4

79.0

55.2

32.8

29%

25.9

33.4

Total Criticized
   Percent of Commitments
Total SNC Commitments

192.8 236.1 207.4 106.8 78.3 95.2
9.4% 12.6% 12.6% 6.9% 4.8% 5.1%
2,049 1,871 1,644 1,545 1,627 1,874

22%
15.2%

Note: Figures may not add to totals due to rounding.
Industry Trends
The volume of classified SNCs improved slightly in most industries (see Appendix B)6 , with
the notable exception of the Manufacturing sector. While commitments to this sector
increased 8.4 percent, weakness in the automotive industry during the year led to a $15.6
billion, or 147 percent, increase in classified credits. This softness in the manufacturing sector
overshadowed notable improvements in loan classifications in the Oil, Gas, Pipelines &
Utilities sector, Lodging & Transportation sector, the Construction & Real Estate sector, and
the Professional, Scientific & Other Services sector, each with classified volumes falling by
approximately one-third. Classified commitments also declined for the Telecommunication
and Cable industry (by $2.4 billion or 14 percent), but remain elevated at 10 percent of total
commitments.
The volume of special mention SNC credits increased 29 percent or $7.5 billion, with
increases observed in most industries except Manufacturing and Professional Services.
Trends by Entity Type
During 2006, the portion of SNC commitments held by U.S. domiciled banking organizations
edged down 0.5 percentage points to 44 percent, a level mostly unchanged in the past five
years. Compared to last year, the portion held by foreign banking organizations (FBOs) also
slipped 0.5 percentage points to 41 percent in 2006 (see Table 2).
Over the past ten years, lenders not affiliated with banks, such as brokerage firms, mutual
funds, insurance companies, and hedge funds, have taken on larger positions in the syndicated
market. These nonbank entities have increased their share to 14 percent of total commitments
compared to 8 percent five years ago and 2 percent in 1996.
The quality of holdings also varied among entity types with classified commitments
amounting to 1.6 percent of total commitments at U.S. banks compared with 2.2 percent at
FBOs and 11.8 percent at nonbanks. Nonbank holdings of classified commitments increased
even more dramatically over the past five years than their overall syndicated credit holdings,
increasing from 21 percent of all classified credit commitments in 2001 to 51 percent in 2006.
U.S. banks only held 21 percent of classified commitments in 2006. Total nonaccrual loans
improved for U.S. banks and FBOs, but worsened for nonbanks. Nonbank entities held 58
percent of nonaccrual loans in 2006 with U.S. banks only holding 16 percent.

Table 2: Exposures by Entity Type
Share of Total Commitments (%)

US Banking Institutions
   Insured

2001
46.2
43.8

2002
45.3
42.8

2003
45.4
42.5

2004
46.5
43.4

2005
44.8
41.5

2006
44.3
40.8

   Uninsured(*)
FBOs
   Insured
   Uninsured(*)
Nonbanks

2.3
45.4
5.0
40.4
8.4

2.5
44.8
5.1
39.7
9.9

2.9
43.8
5.4
38.4
10.8

3.1
41.6
5.5
36.1
12.0

3.3
42.1
6.0
36.1
13.1

3.5
41.5
6.2
35.3
14.3

2004
18.8
16.0
2.8
31.3
2.8
28.5
24.0
74.2

2005
11.9
8.6
3.2
15.5
1.5
14.0
25.0
52.5

2006
13.1
9.0
4.1
17.3
1.6
15.7
31.5
61.8

2004
2.6
2.2
0.4
4.9
0.4
4.4
13.0
4.8

2005
1.6
1.2
0.4
2.3
0.2
2.0
11.7
3.2

2006
1.6
1.1
0.5
2.2
0.2
2.0
11.8
3.3

2004
7.7
0.1
7.6
17.6
17.6
12.3
37.6

2005
3.9
3.1
0.8
9.0
0.4
8.6
11.9
24.8

2006
2.8
1.8
1.0
4.7
0.4
4.3
10.2
17.7

Total Classifications ($ billion)

US Banking Institutions
   Insured
   Uninsured(*)
FBOs
   Insured
   Uninsured(*)
Nonbanks
Totals

2001
48.5
43.9
4.6
44.0
7.3
36.7
25.0
117.5

2002
53.7
47.6
6.0
60.0
8.4
51.6
42.1
155.8

2003
43.6
37.8
5.8
65.0
6.8
58.3
43.6
152.2

Classifieds as % of Commitments

US Banking Institutions
   Insured
   Uninsured(*)
FBOs
   Insured
   Uninsured(*)
Nonbanks
Totals

2001
5.1
4.6
0.5
4.7
0.8
3.9
14.4
5.7

2002
6.4
5.7
0.7
7.2
1.0
6.2
22.9
8.4

2003
5.8
5.1
0.8
9.0
0.9
8.1
24.5
9.3

Total Nonaccrual ($ billion)

US Banking Institutions
   Insured
   Uninsured(*)
FBOs
   Insured
   Uninsured(*)
Nonbanks
Totals

2001
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.

2002
22.5
19.4
3.1
30.5
3.9
26.6
21.1
74.1

2003
18.4
16.5
1.9
29.5
3.2
26.3
20.5
68.4

(*) Uninsured refers to organizations that do not take consumer deposits such as holding

companies, brokerage firms, finance companies, etc.
Note: Figures may not add to totals due to rounding.
Risk Management by Banks
Strong market competition and a highly liquid secondary loan market have contributed to
easing of credit underwriting standards in large corporate and leveraged loans. Demand for
bank loans from non-bank institutional investors has influenced underwriting terms and
pushed credit spreads lower. Of note is the increasing volume of term loans with nominal
amortization required prior to maturity and loosened financial loan covenants such as
leverage and fixed charge coverage ratios.
Although credit risk in SNC portfolios of U.S domiciled banking organizations is low and
generally stable, rapid portfolio growth, easing of underwriting standards, and the increase in
adversely rated commitments over the past year are indicative of increasing credit risk.
Banking organizations should ensure that competitive pressures and easing of underwriting
standards do not unduly compromise their tolerance for credit risk. In addition, advanced
credit risk management systems should exist to appropriately measure, monitor and control
risks in large corporate portfolios.
Media Contacts: FRB
OCC
FDIC
OTS

Deborah Lagomarsino
Robert Garsson
David Barr
Katie Fitzgerald

(202) 452-2955
(202) 874-5770
(202) 898-6992
(202) 906-6677

Appendix A
Committed and Outstanding Balances
(Dollars in Billions)
Year Special
Sub- Doubtful Loss Total
Total
Total
Total
Mention standard
Classified Criticized Committed Outstanding
1989 24.0
18.5
3.5
0.9
22.9
46.9
692
245
1990 43.1
50.8
5.8
1.8
58.4
101.5
769
321
1991 49.2
65.5
10.8
3.5
79.8
129.0
806
361
1992 50.4
56.4
12.8
3.3
72.5
122.9
798
357
1993 31.4
50.4
6.7
3.5
60.6
92.0
806
332
1994 31.5
31.1
2.7
2.3
36.1
67.6
893
298
1995 18.8
25.0
1.7
1.5
28.2
47.0
1,063
343
1996 16.8
23.1
2.6
1.4
27.1
43.9
1,200
372
1997 19.6
19.4
1.9
0.9
22.2
41.8
1,435
423
1998 22.8
17.6
3.5
0.9
22.0
44.8
1,759
562
1999 31.3
31.0
4.9
1.5
37.4
68.7
1,829
628
2000 36.3
47.9
10.7
4.7
63.3
99.6
1,951
705
2001 75.5
86.9
22.6
7.8
117.3
192.8
2,050
769
2002 79.0
112.0
26.1
19.1 157.1
236.1
1,871
692

2003
2004
2005
2006

55.2
32.8
25.9
33.4

112.1
55.1
44.2
58.1

29.3
12.5
5.6
2.5

10.7
6.4
2.7
1.2

152.2
74.0
52.5
61.8

207.4
106.8
78.3
95.2

1,644
1,545
1,627
1,874

600
500
522
626

Appendix B7
Summary of Shared National Credit Industry Trends
(Dollars in Billions)

Industry
2001
Telecommunication & Cable
Commitment
197.5
Classified
6.9
Special Mention
10.0
  % Classified
3.5%
  % Special Mention
5.0%
Manufacturing
Commitment
540.5
Classified
58.1
Special Mention
27.0
  % Classified
10.8%
  % Special Mention
5.0%
Professional, Scientific, & Other Services
Commitment
157.9
Classified
11.9
Special Mention
4.5
  % Classified
7.5%
  % Special Mention
2.8%
Oil, Gas, Pipeline & Utilities
Commitment
222.8
Classified
4.3
Special Mention
7.0
  % Classified
1.9%
  % Special Mention
3.1%
Construction & Real Estate
Commitment
100.1
Classified
4.7
Special Mention
1.9
  % Classified
4.7%
  % Special Mention
1.9%
Lodging & Transportation

2002

2003

2004

2005

2006

174.1
38.1
9.0
21.9%
5.1%

149.7
35.7
7.0
23.8%
4.7%

120.2 123.7 149.8
13.1
17.0
14.6
10.8
2.5
6.2
10.9% 13.7% 9.7%
9.0% 2.0% 4.1%

494.8
60.9
26.2
12.3%
5.3%

424.4
42.6
22.8
10.0%
5.4%

400.1
19.6
6.9
4.9%
1.7%

409.7
10.7
16.6
2.6%
4.0%

444.3
26.4
12.2
5.9%
2.7%

124.9
8.8
2.3
7.0%
1.9%

122.4
6.8
1.8
5.5%
1.5%

107.3
3.3
1.1
3.1%
1.0%

102.2
1.5
1.3
1.5%
1.3%

125.4
1.0
0.3
0.8%
0.3%

229.5
17.1
15.5
7.4%
6.8%

200.5
38.1
12.3
19.0%
6.1%

175.7
24.2
10.1
13.8%
5.8%

186.4
14.1
1.9
7.5%
1.0%

208.9
9.7
2.0
4.6%
1.0%

96.7
4.1
3.2
4.2%
3.3%

87.5
3.6
2.3
4.1%
2.6%

90.2
2.5
0.9
2.8%
1.0%

107.9
0.7
0.3
0.6%
0.2%

124.0
0.4
0.6
0.3%
0.5%

Commitment
99.1
82.9
Classified
3.1
6.6
Special Mention
6.7
5.3
  % Classified
3.1%
7.9%
  % Special Mention
6.8%
6.4%
Financial Services & Insurance
Commitment
420.0 376.5
Classified
11.9
8.9
Special Mention
4.4
2.9
  % Classified
2.8%
2.4%
  % Special Mention
1.1%
0.8%
All Other
Commitment
310.8 291.6
Classified
16.5
12.7
Special Mention
13.9
14.6
  % Classified
5.3%
4.4%
  % Special Mention
4.5%
5.0%
All Industries (Total)
Commitment
2,048.9 1,871.0
Classified
117.5 157.1
Special Mention
75.4
79.0
  % Classified
5.3%
4.4%
  % Special Mention
4.5%
5.0%
Note: Figures may not add to totals due to rounding.

74.8
7.7
1.8
10.3%
2.4%

74.1
5.2
0.7
7.1%
1.0%

76.5
3.7
0.8
4.9%
1.1%

80.8
2.5
4.5
3.1%
5.6%

343.3
6.7
2.5
1.9%
0.7%

337.1
2.1
0.5
0.6%
0.2%

336.0
0.1
0.2
0.0%
0.1%

424.0
0.8
2.8
0.2%
0.7%

241.0
11.0
4.7
4.6%
2.0%

240.4
3.8
1.8
1.6%
0.7%

284.2
4.7
2.4
1.6%
0.8%

316.7
6.4
4.8
2.0%
1.5%

1,643.5 1,545.2 1,626.7
152.2
72.4
52.5
55.2
32.8
25.9
4.6%
4.8% 3.2%
2.0%
2.1% 1.6%

1,873.9
61.8
33.4
3.3%
1.8%

Endnotes
1. Credits include syndicated loans and loan commitments, letters of credit, commercial
leases, as well as other forms of credit. Credit commitments include both drawn and undrawn
portions of credit facilities. This release reports only the par amounts of commitments; these
may differ from the amounts at which loans are carried by investors. Return to text
2. The Shared National Credit (SNC) Program was established in 1977 by the Board of
Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the
Office of the Comptroller of the Currency. In 2001 the Office of Thrift Supervision became
an assisting agency. With a few exceptions, the annual program, which seeks to provide an
efficient and consistent review and classification of large syndicated loans, generally covers
loans or loan commitments of at least $20 million that are shared by three or more regulated
financial institutions. Return to text
3. Nonbanks include a wide range of institutional investors including brokerage firms, mutual
funds, insurance companies, and hedge funds. Return to text
4. Adversely rated credits (also known as criticized credits) are the total of credits classified
substandard, doubtful, and loss – and credits rated special mention. Classified credits are only
those rated substandard, doubtful, and loss. Under the agencies’ Uniform Loan Classification

Standards, classified credits have well-defined weaknesses, including default in some cases.
Special mention credits exhibit potential weaknesses, which may result in further
deterioration if left uncorrected.
Excerpt from Federal Reserve’s SR Letter 79-556 defining regulatory classifications:
Classification ratings are defined as “Substandard,” “Doubtful,” and “Loss.” A Substandard
asset is inadequately protected by the current sound worth and paying capacity of the obligor
or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or
weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct
possibility that the bank will sustain some loss if the deficiencies are not corrected. An asset
classified as Doubtful has all the weakness inherent in one classified Substandard with the
added characteristic that the weaknesses make the collection or liquidation in full, on the
basis of currently existing facts, conditions, and values, highly questionable and improbable.
Assets classified as Loss are considered uncollectible and of such little value that their
continuance as bankable assets is not warranted. This classification does not mean that the
asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to
defer writing off this basically worthless asset even though partial recovery may be effected
in the future.
Excerpt from June 10, 1993, Interagency Statement on the Supervisory Definition of Special
Mention Assets:
A Special Mention asset has potential weaknesses that deserve management’s close attention.
If left uncorrected, these potential weaknesses may result in deterioration of the repayment
prospects for the asset or in the institution’s credit position at some future date. Special
Mention assets are not adversely classified and do not expose an institution to sufficient risk
to warrant adverse classification. Return to text
5. Nonaccrual loans are defined for regulatory reporting purposes as “loans and lease
financing receivables that are required to be reported on a nonaccrual basis because (a) they
are maintained on a cash basis due to a deterioration in the financial position of the borrower,
(b) payment in full of interest or principal is not expected, or (c) principal or interest has been
in default for 90 days or longer, unless the obligation is both well secured and in the process
of collection.” In Table 1, nonaccrual classifieds are those funded or outstanding portions of
loans classified as substandard and doubtful which are not accruing interest. Return to text
6. Note that the current industry totals categorize borrowers using 2002 NAICS codes, in
contrast to prior release of SNC data which categorized borrowers using 1997 NAICS codes.
Return to text
7. NAICS groupings of industries identified in Appendix B are as follows:
Telecommunication & Cable - 5132 through 51339; Manufacturing - 31 through 33 and 5121
through 5131; Professional, Scientific, & Other Services - 54, 55, 56, 61, and 62; Oil, Gas,
Pipelines, & Utilities - 21 (oil- & gas-related only), 22, and 486; Construction & Real Estate 23 and 53; Lodging & Transportation - 48 (excluding 486), 49, and 72; Financial Services &
Insurance - 52; and All Other - remaining NAICS codes. Prior year data has been restated to
reflect industry categorizations using 2002 NAICS groupings rather than 1997 NAICS
groupings used in prior data releases. Return to text
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