New Regulator Report Warns Against ‘Lender Complacency’

OCC points to easing of commercial loan standards as a top risk in banking industry

“The worst loans are often made in the best of times.”

~Comptroller of the Currency Joseph Otting

While the news coverage last week focused on the major rollback of Dodd-Frank, a risk report by a key bank regulator got far less attention.

Late last week, the Office of the Comptroller of the Currency (OCC) released its Semiannual Risk Perspective for Spring 2018. Within the report is evidence of the major risks now facing the federal banking system.

The Good News…

The report starts with the positive elements in today’s lending environment: “The condition of the federal banking system is strong.”

In 1Q18, the economy allowed for continued loan growth and bank profitability. Commercial loan delinquencies and losses are at or near historical lows, while capital and liquidity are at or near historical highs. Bank earnings are improving.

The total volume of loans in the federal banking system grew by 3.6 percent in 2017, but it was the second consecutive year of slowing growth. By bank size, there are differences worth noting:

  • Large banks, which hold more than 83 percent of all loans, saw commercial loan growth fall to 4.2 percent last year—down from 10 percent two years ago.
  • Midsize and community banks continued to experience strong loan growth, particularly in CRE and other commercial lending, which grew almost 9 percent in 2017.

…The Words of Warning

Based on recent credit underwriting assessments, here’s what OCC examiners are seeing:

  • Competitive pressures from banks and nonbanks are contributing to eased underwriting (notably, diminished protective financial covenants, generous cash flow adjustments, limited or no guarantees, longer amortization periods, extended interest-only terms, and higher loan-to-value ratios or advance rates).
  • Evidence of increased CRE concentration limits is growing.
  • The number of outstanding MRA (matters requiring attention) concerns involving underwriting commercial loans increased 24 percent from the first quarter of 2017 through the first quarter of 2018. (These are the number of citations the OCC gives when it wants a bank to modify its practices.)  MRAs involving banks making exceptions to their typical policies governing commercial lending rose 45% over that same period.

While the majority of banks operated within a moderate risk appetite and maintained satisfactory underwriting standards, banks continued to ease underwriting practices more often than examiners noted tightening (see graph). This easing began in 2013 after a period of substantial tightening after the recession.

The OCC’s National Risk Committee is warning banks that

“the accommodating credit environment warrants a continued focus on underwriting practices to monitor and assess credit risk and lender complacency.”

Rising interest rates are also a concern. In this year’s environment of multiple rate increases, banks need to pay closer attention to the impact on commercial property asset valuations and refinancing risk, underwriting behavior, and credit terms.


The red flags in last week’s OCC report are not new. In fact, they are very consistent with the last few semiannual risk reports,  which highlight the importance of sound risk management practices at banks, particularly as competition heats up among lending sources. The full report also gives attention to the operational risks banks face as they latch onto more technology-oriented systems and processes and as cyber threats increase. The OCC highlights effective cyber controls and strong vendor risk management frameworks to ensure banks conduct due diligence when working with third-party providers.


The full OCC report,   Semiannual Risk Perspective for Spring 2018, contains detailed information on the four key risk themes for the federal banking system:

  • Credit risk: given aggressive competition for quality loans, banks are easing underwriting.
  • Operational risk: elevated as banks adapt business models, transform technology and operating processes, and respond to evolving cyber threats.
  • Compliance risk: elevated as banks manage money laundering risks and implement changes to policies and procedures to comply with amended Bank Secrecy Act and consumer protection requirements.
  • Interest rates: increases may lead to higher funding costs for banks.