US bank loan risks fall overall but leverage lending risks rise

Payment risks have declined for big bank loans taken out before April of last year but the share of loans owed by highly leveraged borrowers remains elevated, US banking regulators said on Friday.
The report from the US Federal Reserve, Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) said on the whole the prospects of loan repayment appeared to improve due to a strong economy.
“Federal banking agencies find that risk in the portfolio of large syndicated bank loans has declined, due to improving conditions in most sectors,” the agencies said in a joint statement accompanying a regular review of big loans made twice per year.
At the same time, the agencies said a larger share of total loans were rated as “below pass” relative to prior economic cycles.
Loans rated below pass are usually flagged by creditors because the borrowers have higher than average leverage levels or other reasons to doubt their ability to repay.
“Risks associated with leveraged lending activities are building in contrast to the portfolio overall,” according to the report.