Faced with slow growth under new regulations, U.S. banks have turned to strategies that have gained the Office of the Comptroller of the Currency’s (OCC) attention, and not in a positive light. As banks return to risker lending practices as the country moves further away from the recession, the OCC released a report on what it considers threats facing the national banks it oversees.
“Credit risk is now building after a period of improving credit quality and problem loan clean-up,” the OCC wrote in its Semiannual Risk Perspective. “Given these trends, the OCC will increase its attention on underwriting standards and encourage banks to diligently assess their credit risk appetite in this stage of the credit cycle.”
Experts expect the agency’s attention to be focused on leveraged loans, where the most significant declines in underwriting standards have been seen.
After the Federal Reserve and Federal Deposit Insurance Corp. released revised leveraged-lending guidelines in March of 2013, there has been a surge in popularity of leveraged lending, leading to increased competition and laxer credit risk assessments. Merger and acquisition as well as auto loans have been seeing dramatic increases in terms, and institutions have begun originating loans to borrowers with lower credit scores.
The trend points to signs of investors lowering their standards in the $750 billion leveraged-loan market, according to Bloomberg. The big banks, concerned over their capital commitments, began pushing leveraged loans to satisfy the growing demand for debt.
Now, with the OCC’s increased scrutiny, foreign banks that fall outside their oversight are taking advantage of the Federal Reserve’s more relaxed stance on the issue. According to Reuters, Credit Suisse, Barclays and Deutsche Bank took the top three loan underwriting positions, respectively, for large U.S. corporate leveraged buyout deals in the second quarter. Domestic banks, such as J.P. Morgan, Wells Fargo and Citibank, who used to be the top three underwriters, have fallen to fourth place, 11th place and 10th place, respectively.
Even with the increased OCC supervision, leveraged lending shows no real signs of slowing. In the face of intense competition and lowering standards, institutions must be sure to protect themselves against unnecessary risk, especially if they intend to join the leveraged lending trend. Having access to alternative data sources during credit application processing can protect lenders from unnecessary risk, and help guide decisions during times of increased regulation and oversight.
