Federal banking agencies, in a review conducted under the Shared National Credit ("SNC") program, found increased risks associated with leveraged lending. The SNC program is conducted by the Federal Reserve Board, the FDIC and Office of the Comptroller of the Currency (collectively, the "agencies"). The program is a "review and assessment of risk in the largest and most complex credits shared by multiple regulated financial institutions."
The agencies reviewed loan commitments that originated before March 31, 2018. The agencies found that:
- risks associated with leveraged lending activities are going up;
- numerous leveraged loan transactions have "weakened transaction structures" and "increased reliance upon revenue growth or anticipated cost savings and synergies to support borrower repayment";
- non-bank entities have increased their involvement in the leveraged lending market "via both purchases of loans and/or direct underwriting and syndication of exposure";
- the level of loans with the lowest supervisory ratings have declined; and
- agent banks' risk management and underwriting practices have improved "in some respects" since 2013.
The agencies recommended that banks that are originating and engaging in leveraged loans make sure that risk management policies "keep pace" with changes in the leveraged lending market.
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