U.S. bank regulators say pandemic drove up risk in leveraged lending

FILE PHOTO: A packet of U.S. five-dollar bills is inspected at the Bureau of Engraving and Printing in Washington March 26, 2015. REUTERS/Gary Cameron//File Photo

WASHINGTON (Reuters) - The credit risk for large, syndicated loans, including leveraged loans, remains high and increased in 2020 as the COVID-19 pandemic took an economic toll, U.S. bank regulators cautioned on Thursday.

A new regulatory report found that the level of “non-pass” loans nearly doubled in 2020, rising to 12.4% from 6.9%, with most of those riskier loans held by nonbanks. U.S. banks accounted for 45% of the $5.1 trillion in large, syndicated loans but held less than 25% of all non-pass loans.

The report found loan performance particularly struggled in areas affected by the pandemic such as retail and transportation. The rate of “non-pass” loans, which regulators identify as loans that pose a greater risk of not being repaid, rose to 29.2% from 13.5% in those industries in 2020.

However, regulators noted that many banks have improved their risk management systems since the 2008 financial crisis and substantially increased loan-loss reserves in response to heightened risks from the pandemic.

The report was jointly issued by the Federal Reserve, Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency.

Reporting by Pete Schroeder; Editing by Steve Orlofsky