WASHINGTON, D.C. — The credit quality of large loan commitments owned by U.S. banking organizations, foreign banking organizations (FBOs), and nonbanks — which could include accounts such as subprime auto loans — have improved this year for the second consecutive year, according to the latest Shared National Credits Review.

This review is compiled by the Federal Reserve Board in conjunction with the Federal Deposit Insurance Corp. (FDIC) and the Office of the Comptroller of the Currency (OCC). These agencies define a loan commitment as the obligation of a lender to make loans or issue letters of credit pursuant to a formal loan agreement.

The government agencies also determined total criticized loans declined more than 28 percent to $321 billion in 2011, although the percentage of criticized assets remained high compared to pre-financial crisis levels. They indicated a criticized loan is rated special mention, substandard, doubtful, or loss.

Furthermore, officials pointed out loans rated as doubtful or loss — the two weakest categories — fell 50 percent to $24 billion in 2011.

"Reasons for improvement in credit quality included better operating performance among borrowers, debt restructurings, bankruptcy resolutions and ongoing access to bond and equity markets," the federal agencies said in their review.

"Industries that led the improvement in credit quality were real estate and construction, media and telecommunications, and finance and insurance," they continued.

Despite this progress, officials acknowledged poorly underwritten loans originated in 2006 and 2007 continued to adversely affect the SNC portfolio.

Approximately 60 percent of criticized assets were originated in these years, according to the review.

The agencies went on to mention the refinancing risk remained elevated as nearly $2 trillion, or 78 percent of the SNC portfolio, matures by the end of 2014. Of this maturing amount, they said $204 billion was criticized.

"Although nonbank entities, such as securitization pools, hedge funds, insurance companies and pension funds, owned the smallest share of loan commitments, they owned the largest share (58 percent) of classified credits (rated substandard, doubtful, or loss)," officials explained.

In other highlights of the review:

—Total SNC commitments increased less than 1 percent from the 2010 review. Total SNC loans outstanding fell $93 billion to $1.1 trillion, a decline of 8 percent.

—Criticized assets represented 13 percent of the SNC portfolio, compared with 18 percent in 2010.

—Classified assets declined 30 percent to $215 billion in 2011 and represented 9 percent of the portfolio, compared with 12 percent in 2010.

—Credits rated special mention, which exhibited potential weakness and could result in further deterioration if uncorrected, declined 25 percent to $106 billion in 2011 and represented 4 percent of the portfolio, compared with 6 percent in 2010.

—Nonaccruals declined to $101 billion from $151 billion. Adjusted for losses, nonaccrual loans declined to $92 billion from $137 billion, a 33 percent reduction.

—The distribution of credits across entities — U.S. banking organizations, FBOs and nonbanks — remained relatively unchanged. U.S. banking organizations owned 42 percent of total SNC loan commitments, FBOs owned 38 percent and nonbanks owned 20 percent.

The share owned by nonbanks declined for the first time since 2001. Nonbanks continued to own a larger share of classified (58 percent) and nonaccrual (60 percent) assets compared with their total share of the SNC portfolio. Institutions insured by the FDIC owned only 17 percent of classified assets and 15 percent of nonaccrual loans.

—The media and telecommunications industry group led other industry groups in criticized volume with $70 billion. Finance and insurance followed with $37 billion, then real estate and construction with $35 billion. Although these groups had the largest dollar volume of criticized loans, the three groups with the highest percentage of criticized loans were entertainment and recreation, media and telecommunications, as well as commercial services.

—The 2011 review indicated that the number of credits originated in 2010 rose dramatically compared to 2009 and 2008. Although the overall quality of underwriting in 2010 was significantly better than in 2007, officials indicated some easing of standards was noted compared to the relatively tighter standards in 2009 and the latter half of 2008.

"Federal banking agencies expect banks and thrifts to underwrite syndicated loans using prudential underwriting standards, regardless of the intent to hold or sell the loans," officials surmised. "Poorly underwritten syndicated loan transactions are subject to regulatory criticism."

The Fed, FDIC and OCC reiterated the SNC program was established in 1977 to provide an efficient and consistent review and analysis of SNCs. They again noted a SNC is any loan or formal loan commitment, and any asset such as real estate, stocks, notes, bonds and debentures taken as debts previously contracted, 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 supervised institutions.

Officials noted many of these loan commitments are also shared with FBOs and nonbanks, including securitization pools, hedge funds, insurance companies and pension funds.

In conducting the 2011 SNC Review, agencies analyzed $910 billion of the $2.5 trillion credit commitments in the portfolio. The sample was weighted toward non-investment grade and criticized credits.

Officials added the results of the review are based on analyses prepared in the second quarter of 2011 using credit-related data provided by federally supervised institutions as of Dec. 31 and March 31.