SNC Revamp: A Window into Hedge Funds, Eventually
Davenport, Todd, American Banker
In the coming days federal banking regulators will kick off their annual review of syndicated lending, but they have yet to tackle an elaborate data-collection effort designed to bring the shared national credit review into the 21st century.
Regulators' vision of a new exam that would reflect modern risk measurement and analysis - as well as vastly changed credit markets - is still at least two years in the offing. The initial timetable, under which the system would have been implemented this year, became just another casualty of the usual, plodding pace of collaborative regulatory undertakings.
The industry has voiced sharp opposition to the proposed exam, arguing that another data request is particularly burdensome as bankers prepare for the Basel II capital regime, which has managed to remain the next big thing in bank regulation for the past four years. Bankers also note that the proposed exam would lean heavily on Basel concepts that have yet to be finalized.
While regulators perfect the new exam, the Bush administration and the Federal Reserve Board are touting indirect regulation as the appropriate way to limit systemic risks posed by hedge funds. That regulatory theory relies heavily on market discipline and transparency - precisely what a robust examination of large corporate credits could provide.
As hedge funds plow into the traditional fields of commercial banks, a souped-up database that details their activity could be an element of the "light regulatory touch" that Fed Chairman Ben Bernanke has endorsed.
Whatever the new system's future use, the Office of the Comptroller of the Currency, which is leading regulators' attempts to put the system in place, says the plan is certain to become a reality.
"The project is definitely green-lighted, and it's definitely moving forward," said Douglas Roeder, the agency's senior deputy comptroller for large-bank supervision, "but it will be two years behind what we thought."
The OCC hopes to release a package for vendors this quarter and review bids this summer. Though designing the database and its functionality is no simple affair, it will prove less of a challenge than gathering the data from banks. Regulators will require lenders to submit a host of new metrics taken straight from the Basel framework, including borrower risk ratings, default probabilities, exposures, estimated losses, collateral, and possibly guarantor data.
In fact, regulators said in their December 2004 proposal that they would collect the new data primarily from a pool of "expanded reporters" - the banks that are agents for at least 100 shared national credits and likely to fall under Basel II.
Because the updated exam is so closely aligned with Basel II philosophically, bankers have argued that they need more certainty about the scope and requirement of the new capital regime before committing to a rigorous data collection based on it.
But regulators are under pressure to overhaul an exam that is showing its age. Corporate loan portfolios at banks grew 12% last year, as residential mortgage growth fell beneath 7%, according to data from the Federal Deposit Insurance Corp. Given the developments in the credit market in the past couple of months, those trends are likely to be amplified this year.
Regulators noted surging corporate lending in the 2006 shared national credit review, released in September. The review covered over 7,000 credits totaling almost $2 trillion - the second-largest amount in history. They attributed much of the growth to record levels of global mergers and acquisitions, as well as the increasing preference among private-equity buyers to fund their deals with bank loans rather than corporate debt.
As private-equity shops continue to pursue mammoth leveraged buyouts, the task of monitoring the syndicated market is taking on impressive dimensions, and bankers competing for the loans predictably have ceded ground on pricing and other terms. …