The quality of large syndicated bank loans showed marked improvement this year, according to the Shared National Credit (SNC) review released on September 15, 2004, by federal bank and thrift institution regulators. (1) Adversely rated loans continue to subside, although certain industries continue to have a high concentration of them.

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 2004 and reflect business and economic conditions at that time.

Total loan commitments classified as either substandard, doubtful, or loss fell $78.2 billion, or 51 percent, from the previous year, compared with a net decrease of $4.9 billion, or 3 percent, the year before. (2) Commitments rated special mention decreased $22.4 billion, or 41 percent, in contrast to 2003, when they fell $23.8 billion, or 30 percent. None of these figures includes the effects of hedging or other techniques that organizations often employ to mitigate risk.

The ratio of classified loan commitments to total commitments fell to 4.8 percent, the lowest level since 2000, as industry charge-off trends and demand in the secondary market for lower quality assets removed many of the weakest loans from the banking system. Total adversely rated credits (classified and special mention combined) also fell considerably, to 6.9 percent of total commitments.

Adversely rated credits (also known as criticized credits) are the total of loans classified substandard, doubtful, and loss--and loans rated special mention. Classified credits are only those rated substandard, doubtful, and loss. Under the agencies' Uniform Loan Classification Standards, classified loans have well defined weaknesses, including default in some cases. (3) Special mention loans exhibit potential weaknesses, which may result in further deterioration if left uncorrected.

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