What Is the Shared National Credit Program?
The Board of Governors of the U.S. Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) formed the shared national credit program in 1977 to provide an efficient and consistent review and classification of large syndicated loans. A syndicated loan is a loan that a group of lenders, working in tandem, provides for a single borrower.
- The shared national credit program was created by government agencies to provide an efficient and consistent review and classification of large syndicated loans.
- The goal is to analyze credit risks, trends, and risk management methodologies amongst large syndicated loans and the financial institutions that create them.
- The shared national credit program seeks to ensure that all loans are treated the same and to improve efficiency on credit risk analysis and classification.
- Loans and any other debts valued at $100 million or higher, issued by at least three lenders that are federally supervised, fall under the supervision of the shared national credit program.
- The 2019 shared national credit program review saw an increase in borrowers and loan valuations, as well as determining that credit risks remain high, with fewer protections for lenders.
- U.S. banks consisted of the highest percentage of commitments in the shared national credit program portfolio, at 44.4% of the portfolio.
Understanding the Shared National Credit Program
The shared national credit program seeks to analyze credit risks, trends, and risk management methodologies among the largest and most intricate loans that are issued jointly by various lending institutions. The objective is to ensure that all syndicated loans are treated on the same basis as well as to improve efficiency when it comes to credit risk analysis and classification that is shared amongst financial institutions.
The agencies which govern the program began a semiannual SNC examination schedule in 2016. These SNC reviews are scheduled for the first and third quarters of the year. Depending on the lending institution, some banks will be reviewed once annually, and others twice annually.
The shared national credit program looks at loans and any assets that are taken as debts that are valued at $100 million or higher. The debt must be issued by at least three separate institutions and these institutions must be federally supervised.
Shared National Credit Program and Syndicated Loans
The main goal of syndicated lending is to spread the risk of a borrower default across multiple lenders. These lenders can be banks or institutional investors (high net worth individuals, pension funds, and hedge funds). Because syndicated loans tend to be much larger than standard bank loans, the risk of even one borrower defaulting could cripple a single lender.
To break down syndicated loans even further, these structures are also common in the leveraged buyout community. A leveraged buyout is the acquisition of another company, using a significant amount of debt to meet the initial cost of acquisition. The assets of the company being acquired are often used as collateral for the loans, along with the assets of the acquiring company. The goal of a leveraged buyout is to allow companies to make large acquisitions without committing a great deal of capital.
Because of the complexities involved in syndicated loans, the shared national credit program seeks to ensure best practices amongst institutions and to ensure against any issues that could be detrimental to the financial markets at large.
Shared National Credit Program 2019 Findings
The 2019 portfolio of the shared national credit program consisted of 5,474 borrowers, valued at $4.8 trillion, increasing from $4.4 trillion in 2018. The largest holder of the portfolio were U.S. banks, with 44.4%, followed by foreign banks, and then other financial institutions, such as hedge funds and insurance companies. The consensus of the report was that credit risk amongst leveraged lending remained high, indicating that lenders have less protection while risks have increased. And although lenders have implemented policies to protect against this risk, many of these policies have not been tested for an economic downturn.
The loans in the program are classified by their risk levels; special mention, substandard, doubtful, or loss. The last three categories indicate loans of poor performance and are termed "classified." Loans that fell below the "pass" level made up 6.9% of the total portfolio. This was an increase from 6.7% from 2018. However, the overall growth of the portfolio came from investment-grade transactions.