At this fall’s annual conference of the Risk Management Association in Boston, I heard Thomas Curry, head of the Office of the Comptroller of the Currency express his growing concern about higher concentrations of risk at financial institutions, and vowing more regulatory oversight of banks’ lending practices. Evidence of Curry’s promise came with a just-released OCC report based on its survey of bank examiners. The key finding is that “underwriting among national banks eased for the third consecutive year, reflecting trends similar to those seen from 2005 through 2007.”
Other findings from the OCC’s 2015 Annual Survey of Credit Underwriting Practices include:
- Banks have eased underwriting standards and increased levels of credit risk in response to competitive pressures and abundant market liquidity.
- Examiners reported a level of continued easing in commercial credit underwriting standards that is comparable to the 2006 underwriting survey results.
- Changes in risk appetite and revisions to market strategies, coupled with changes in economic outlook, contributed to banks relaxing their underwriting standards.
- Large banks, as a group, reported the most easing of underwriting standards, with the most easing occurring in commercial real estate construction, other CRE, leveraged loans, indirect consumer and credit cards.
- For commercial loans, examiners cited real estate lending products as the most frequent area of concern, regardless of bank size.
- Commercial construction, other CRE, and residential construction loans are a growing concern in 75 percent of the banks, particularly in midsize and community banks.
- Examiners also noted increasing exceptions to banks’ loan policies, although these practices are being “adequately documented.”
“We are seeing trends very similar to those that examiners reported just prior to the most recent financial crisis.”
~Jennifer C. Kelly, Senior Deputy Comptroller and Chief National Bank Examiner, OCC
Moving ahead, institutions regulated by the OCC are warned that the agency’s examiners will “remain focused on evaluating new loan originations to assess banks’ and federal savings associations’ efforts to maintain prudent underwriting standards and practices through this stage of the credit cycle.” Risk managers should consider the impact of eased underwriting standards on their loan portfolios, particularly for products that have already seen considerable easing over the past several years, including CRE loans.
About the Survey
The survey is a compilation of examiner observations and assessments of credit underwriting standards and practices at 95 of the largest banks and federal savings associations supervised by the OCC. The survey results cover the 12-month period ending June 30, 2015. The survey covers loans totaling $5.1 trillion, representing 94 percent of all loans in the federal banking system.