Comptroller of the Currency Thomas J. Curry has issued a clear warning to U.S. banks about the dangers of easing underwriting standards as part of the the Office of the Comptroller of the Currency (OCC)'s Semi-Annual Risk Perspective. The low-rate interest environment and a substantial increase in lending over the last three years has reached levels where the Comptroller's office is saying the banking market is sacrificing needed credit risk management if weak underwriting continues.
"Regulators and bank management need to act now to prevent these risks from becoming reality. We can't afford to wait until the warning lights turn red."
"In the area of credit risk, the warning lights are flashing yellow," said Curry in the report. "Regulators and bank management need to act now to prevent those risks from becoming reality. We can't afford to wait until the warning lights turn red."
The problem as Curry identifies it is that banks keep "reaching for yield and growth" at the expense of security and strong underwriting. Bolstered by a strong economy and growth in bank loans to nonbank financial institutions, the report cautions that the 217 percent growth in lending is overly broad — sacrificing stability for profits.
"Generally, we are seeing banks continue to make concessions on pricing, weaker or non-existent loan covenants, and maturities lengthening," said Curry. "We have also seen increases in underwriting exceptions and risk layering. All of which combine to introduce risk at origination. Bankers with long memories will remember the worst loans are made in the best of times, and the growing credit risk in their banks should be managed very closely."
These are echoing comments made by Fed governor Lael Brainard, who months ago noted that banks need to make sure they aren't exposed to violations of fair lending laws and other potential problems as they loosen their lending standards.