Banking Regulators Find Slight Increase in Risk Associated with Loan Commitments

The Federal Reserve Board (FRB), FDIC and OCC, as part of the Shared National Credit Program interagency review, found that the share and amount of loan commitments (a/k/a "special mention and classified commitments") with the lowest supervisory ratings experienced a slight increase within the last year.

According to the regulators, the review assesses risk in the "largest and most complex credits" shared among various regulated financial institutions. Specifically, the agencies found that:

• total special mention and classified commitments have maintained higher levels than during previous periods of strong economic performance and are mainly concentrated in transactions identified by agent banks as leveraged loans;
• risk within bank-identified leveraged loan structures has increased during "the long period of economic expansion"; and
• banks have mitigated risk by implementing credit risk management practices but have not been tested in an economic downturn.