The Office of the Comptroller of the Currency or OCC in the course of its annual survey, discovered bigger US banks loosening their underwriting standards. These are done mostly in case of residential mortgages, conventional home equity and commercial real estate loans. In doing so, these banks have exposed themselves to increased risks. This lowering of lending standards are being done for the fourth successive year. The OCC witnessed double-digit rises in percentage of banks which relaxed the underwriting practices in such products from 2015. It added that a number of banks want to continue in lowering standards. The report warned that the continuation of such trends will result in more credit risks.
Greater risk appetite
The survey further elaborated that the bank examiners only concern themselves with extra credit risk only in about six percent of banks having commercial products and about three percent of banks having retail products. The OCC did not mention the name of the institutions. In the words of Grace Dailey, the chief examiner of national bank, the banks are now more tolerant of looser underwriting and proceed from conservative to moderate underwriting practices. She went on to say that although such movement is in tandem with the past credit cycles observed at similar stage, the credit risk will surely rise if such trends continue unabated.
The risks are real. Weak underwriting practices were mass prevalent during he time prior to the financial crisis in 2008. Junk mortgages flooded the banking system during that time. The OCC, during its survey, went through about 90 percent of federal banking system debt and found that banks are easing their lending standards due to intense competition from peer banks and also non-financial firms. It also helped that those banks have now a greater risk appetite. The banks also wants to give more number of loans. When it comes to the energy companies, the continuation of low oil prices makes repaying debts a tougher affair.
According to the OCC, it’s more concerned with the brash growth of lending, erosion of the energy related portfolios and concentration. More loosening of underwriting is now commonplace. In its statement, the regulatory body reminded its readers that banks usually relax lending standards at times of economic expansion. Liquidity is plentiful in the market from 2012, thus larger amount of dollars available for the purpose of lending. Banks now actively seek more borrowers.