| NEW YORK
NEW YORK Jan 5 The Office of the Comptroller of
the Currency (OCC) has tempered its view of systemic risk posed
by US leveraged lending.
The bank regulator changed its characterization of leveraged
lending to an "issue warranting continued monitoring" from a
"key risk," according to its semi-annual risk report for fall
2016 released on Thursday.
"Capital, liquidity, and leverage are all vastly improved
since the dark days of the (financial) crisis," said Comptroller
of the Currency Thomas J. Curry on a call with reporters.
The OCC, along with the Federal Reserve and the Federal
Deposit Insurance Corp last year increased the frequency of
their loan underwriting standards examinations, known as Shared
National Credit reviews, to twice a year.
Scrutiny over leveraged lending intensified after the three
agencies in 2013 released updated Leveraged Lending Guidance
meant to curb system risks posed by lending to highly indebted,
lower-rated companies. Of concern was that leveraged lending was
escalating while prudent lending practices were deteriorating.
Despite improvement, weak underwriting and erosion of
covenant protection remain supervisory concerns in leveraged
lending, according to the report.
The revised view in the latest OCC risk report is "a clear
recognition that the inter-agency guidance we put out has had
some success, and the banks are complying with the guidance to a
greater degree," another OCC official said on the call.
"Yet we want to keep it on the front of the radar screen at
least from a risk perspective because we continue to see
instances of weaker underwriting in that area, and given the
high risk in that type of lending it's something we'll always
want to monitor," the official said.
Credit underwriting is among the top risk priorities for the
OCC over the next 12 months as banks feel more comfortable
lending due to "perceived improvements in general economic
The OCC reports underwriting terms loosened in 28 percent of
commercial loan products though this is a slight improvement
over 2015 when underwriting eased for 30 percent of commercial
The agency will be "reviewing commercial and retail credit
underwriting practices, especially for leveraged loans, auto
loans, loans to nondepository financial institutions, and CRE
loan sectors that have experienced higher growth and weakening
underwriting standards," according to the report.
Continued incremental easing in underwriting standards is a
concern as banks strive for loan growth and to maintain or grow
market share, the OCC said.
Other risks highlighted included easing underwriting
standards in commercial loans, commercial real estate, and auto
lending, as well as cybersecurity threats, increased reliance on
third party relationships, and the need for sound governance
over sales practices.
The impact of low energy prices on broad economic and credit
quality in some regions, and operational and strategic risks
resulting from the United Kingdom's vote to exit the European
Union, are also being monitored.
Low oil prices hit energy companies when it came to
liquidity and cash flows, but the OCC said the number of
classified and special mention energy loans found support and
stabilized in the second quarter as the price of oil increased.
Energy portfolios "did remain stable in the third quarter,
and we would expect if prices were US$50 and above that we would
continue to see stabilization or maybe some improvement," the
OCC official said.
The OCC noted that the number of outstanding "Matters
Requiring Attention" (MRA) letters, which alert banks of the
regulator's concerns about safety and soundness practices,
peaked in 2012 and has declined through the first half of last
Data in the report is through June 2016.
Enforcement actions issued by the OCC against banks have also
steadily declined in that time and both formal and informal
issued enforcement actions are at all time lows, "reflecting
overall improvement in banks' financial conditions and risk
management practices," according to the report.
(Reporting By Lynn Adler and Jonathan Schwarzberg; Editing by