US banking regulators warn of weakening lending standards

US banking regulators in recent weeks have given sustained attention to brewing problems they observe in banks’ weakening lending standards. 

Recently, Janet Yellen, chair of the Board of Governors of the Federal Reserve System (FRB), in her semiannual monetary policy report to Congress described looser lending standards for leveraged loans as a potential source of financial instability and noted ongoing efforts by the banking agencies to ensure bankers’ compliance with underwriting guidance. The centrepiece of this effort, however, is the Office of the Comptroller of the Currency’s (OCC’s) Semiannual Risk Perspective, which praised banks for their improved earnings but warned more forcefully than before of the dangers of weakening lending standards. Citing a growing number of underwriting and policy exceptions in the indirect auto lending market and weakening underwriting standards for syndicated leveraged loans, the OCC indicated it will pay closer attention to these and other loan underwriting practices in bank examinations during the next 12 months. Meanwhile, leveraged lending and sales of securitised leveraged loans continue at a record pace.

In its Semiannual Risk Perspective, released on 25 June 2014, the OCC painted a mixed picture of the banking industry’s health. While the OCC reported signs of economic improvement, better credit risk metrics (including a substantial decline in the level of problem assets) and a record level of net income among national banks in 2013, it tempered its enthusiasm by highlighting several warning signs. The new record was only five per cent higher than the previous record set seven years earlier; most of the improvement was the result of lower expenses while loan growth remained uneven; and returns on equity and assets were still below pre-recession levels. Furthermore, according to the OCC, banks face limited opportunities to raise revenue and operating profit amid still weak overall economic growth, low interest rates and other challenging conditions…

Click on the link below to read the rest of the Allen & Overy briefing.

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