Banks Making Riskier Loans, Regulators Say
Banks are lowering commercial lending standards in response to competition even though the risk that business borrowers will default on loans is rising, federal bank regulators say in a report scheduled for release today.
The four-year trend is causing concern among regulators that the nation’s banks will be hit by a wave of sour domestic loans over the next 18 months--similar to the problems faced by the industry in the early 1990s, when Donald Trump and other real estate developers forced banks to renegotiate billions of dollars in loans or face defaults.
“Projecting risk over the next 12 months, credit risk is expected to further increase in all commercial portfolios,” the Office of the Comptroller of the Currency said in its report, which was obtained by the Washington Post. “Banks are leaving themselves with fewer options to control the risks associated with commercial lending should the economy falter.”
Usually there is a lag of a year or more between the lowering of lending standards and the appearance of troubled loans.
Banking analysts said Wednesday that they are confident that regulators and bankers learned a lesson eight years ago and will not let lending practices--or loans--deteriorate to the levels of 1990 and 1991. They point out that regulators now have legal authority to move in sooner at banks to correct problems before they become severe and that the cash cushion that federal law requires banks to keep on hand to absorb losses is much higher than it was a decade ago.
But the analysts said they expect the lowering of credit standards to continue as banks compete for fewer and fewer good customers. Lower credit standards will likely lead to an increase in problem loans, especially if there is a recession, and that could lower banks’ earnings in the months ahead, they said.
The survey of 77 of the nation’s largest banks was conducted in April, May and June by examiners in the Office of the Comptroller of the Currency, a Treasury Department unit that regulates national banks.
“For the fourth consecutive year, underwriting standards for commercial loans have eased,” the report said. “Examiners again cite competitive pressure as the primary reason for easing underwriting standards.”
Acting Comptroller Julie L. Williams knew the results of the report in June and gave a speech at a conference warning bankers to halt the “slide” in standards.
She is expected to issue an even sterner warning to a gathering of top executives from the nation’s largest banks Friday in Washington.
The report shows that banks are lowering credit standards on domestic business loans even as economic worries such as global securities problems and an increase in personal bankruptcies have led bankers to tighten standards on foreign loans and most domestic loans to consumers.
“Examiners at 69% of the surveyed banks--compared with 59% in 1997--report eased underwriting standards for one or more types of commercial loans,” the report said. “This trend was most pronounced in . . . national, middle market and commercial real estate lending.”
The comptroller’s office found that “banks are continuing to tighten their lending standards for most retail loans,” but that “home equity products, where eased standards prevailed, are an exception.”
