Regulators Warning of Increased Credit Risk Push For Stronger Underwriting

Credit Underwriting

The chairman of the Federal Deposit Insurance Corp. Martin Gruenberg has issued strong words for lending industry officials, warning regulators of the dangers of relaxed underwriting standards in lending sectors like auto, energy and multifamily homes. This comes in response to reports that banking industry revenues were stagnant in the third quarter of this year—even amidst competitive lending conditions.

“Revenue growth for the industry as a whole has been modest since 2009. This is partly a reflection of the challenging interest-rate environment,” said Gruenberg, pointing to low rates at the expense of increased interest-rate risk and credit risk. “History tells us that it is during this phase of the credit cycle when lending decisions are made that could lead to future losses. Timely attention by banks to address these growing risks will benefit banks and contribute to the sustainability of the current economic expansion.”

Improving economic conditions has largely emboldened lenders, according to James Chessen, chief economist for the American Bankers Association. Bank failure rates remain low: In 2015 so far, only eight U.S. banks have failed—on pace to be the lowest number since 2007. But with the Federal Reserve finding easing lending standards and the continued presence of leveraged loans, concerns about risk concentration in the auto, housing and non-financial firm industry remain at the forefront of regulators’ minds.

“At present, these concentrations flash yellow lights rather than red ones, and, as I’ve noted, credit quality has not suffered significantly as a result,” said Comptroller Thomas Curry earlier in November. “Our job as supervisors is to ensure that things stay that way.”

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