Credit quality of loans in US worsens in '09

Mirroring the shaky American financial situation, the credit quality of loans extended by various federally-supervised institutions deteriorated drastically this year, with the volume of doubtful assets and losses alone soaring to $110 billion.

The credit quality of loan commitments worth over $20 million of all such entities, according to the Shared National Credit Review for 2009.

A Shared National Credit (SNC) is any loan or formal loan commitment, among others, extended to borrowers by a federally supervised institution, its subsidiaries, and affiliates that aggregates to $20 million or more and is shared by three or more unaffiliated federally supervised institutions.

The report noted that the declining credit quality is attributed to weak economic conditions affecting most industries and weak credit underwriting standards leading up to 2008.

Triggered by the sub-prime mortgage crisis, the recession-hit US economy is grappling with one of the worst financial turmoils in nearly 80 years.

"The volume of SNCs classified as doubtful and loss rising to $110 billion, up from $8 billion in 2008 — a 14-fold increase. In addition, non accrual loans increased nearly eight times from $22 billion in 2008 to $172 billion in 2009.

According to the report, criticised assets — those including doubtful and loss making ones — were worth $642 billion in 2009.

"Criticised assets, which include SNCs rated special mention, substandard, doubtful, and loss, reached a record level of $642 billion and represented 22.3 per cent of the SNC portfolio compared with 13.4 per cent in 2008," it noted.

Going by the report, the review took into account $1.2 trillion worth credit commitments.

The review looks into loans and loan commitments held by US bank organisations, foreign bank organisations (FBO), and non-banks such as securitisation pools, hedge funds, insurance companies, and pension funds.

"Results of the review are based on analyses prepared in the second quarter of 2009 using credit-related data provided by federally supervised institutions as of December 31, 2008, and March 31, 2009," it added.