WASHINGTON (Reuters) - Large U.S. banks raised their own risks by pushing down lending standards for a fourth consecutive year in 2016, one of the top federal banking regulators said on Tuesday.
The banks loosened underwriting standards mostly in direct consumer loans, conventional home equity, commercial real estate loans, and residential mortgages, the Office of the Comptroller of the Currency (OCC) found in its annual survey.
The office saw double-digit increases in the percentage of banks that eased underwriting practices in those products since 2015 and said many banks want to continue lowering the standards.
“If such trends continue, increasing credit risk could accelerate,” the report warned.
Weak underwriting practices were a red flag in the run-up to the 2008 financial crisis, when the banking system became awash in junk mortgages.
Looking at 90 percent of the debt in the federal banking system, equal to $5.2 trillion, the OCC found that banks are easing standards because of competition from other banks and nonfinancial firms, their appetite for risk is expanding, and they are seeking to make more loans
“An increasing tolerance for looser underwriting has resulted in a continued movement from more conservative to more moderate underwriting practices,” said Grace Dailey, the regulator’s chief national bank examiner, in a statement. ”While this movement is consistent with past credit cycles at a similar stage, credit risk is expected to increase if the trends we see today continue.”
According to the survey, though, bank examiners are only concerned about excessive credit risk in 6 percent of banks with commercial products and 3 percent of banks with retail products. It did not identify the institutions.
OCC added that banks are relying less on derivatives and loan sales to manage credit risks.
The regulator said its biggest worries are aggressive growth in lending, concentration, deterioration in energy-related portfolios, and further underwriting loosening.
During times of economic expansion, banks generally ease lending standards, the OCC said. Since 2012, there has been abundant liquidity in the market, making more dollars available to lend and pushing banks to hunt down more borrowers, it added.
At the same time, low oil prices continue to eat away at energy companies’ abilities to repay their debts.
For commercial loans, the OCC found looser standards in pricing, guarantor requirements, and loan covenants. In retail, easing was mostly in collateral, loan size, and debt-to-income requirements.
Approximately 24 percent of banks introduced new loan products this year, and another 23 percent plan on offering new ones next year, the survey found.
Reporting by Lisa Lambert; Editing by Tom Brown