FOR IMMEDIATE RELEASE
September 20, 2000
Contact: Sam Eskenazi
The Level of Risk in Bank Portfolios Continues to Rise, OCC Reports in Annual Underwriting Survey
WASHINGTON — The OCC's sixth annual Survey of Credit Underwriting Practices found that the level of credit risk embedded in bank portfolios continues to rise and that loan standards for very large syndicated loans have eased. The survey also found that standards for home equity lending have eased for the sixth consecutive year.
"We remain quite concerned about the high levels of ‘embedded' credit risk on the books of some banks as a result of relaxed underwriting and risk selections in prior years," said John D. Hawke, Jr., Comptroller of the Currency. "We are also apprehensive about the continued growth of various types of highly-leveraged and sub-prime lending in the system, and the frequency with which these activities are being undertaken without adequate analysis and risk management systems at some banks."
Although there has been some modest tightening in standards for commercial loans, and standards for retail loans were essentially unchanged after some tightening last year, the embedded risk in portfolios remains high because of the higher level of risks that banks took on in previous years. "It takes time for risk to work its way through a loan portfolio," said David D. Gibbons, Deputy Comptroller for Credit Risk.
"This year's Shared National Credit results are confirming the higher risk that has been building in loan portfolios for some time," Mr. Gibbons said. Shared National Credits are loans of more than $20 million shared by three or more banks. This is the second straight year that both the dollar volume and the percentage of problem credits have increased. Adversely rated — classified and special mention — shared credits went from $45 billion in 1998 to $100 billion in 2000 and the percent of these loans more than doubled from 2.5 percent in 1998 to 5.1 percent in 2000.
The OCC will continue bank examination efforts designed to identify and communicate the increased risks associated with loans with underwriting and other weaknesses to bank management and boards of directors. "These regulatory efforts have had the salutary effect of incrementally tightening standards more than they otherwise would have been tightened during this continued positive economy," Mr. Gibbons said. "However, the heightened risk in bank portfolios will not wane based on the modest tightening done to date." He cited trends in underwriting and risk selection standards as characteristic of the competitive and earnings pressure facing banks today, and a strong leading indicator of potential credit problems.
The 2000 survey covered the 69 largest national banks with an aggregate loan portfolio of $1.9 trillion, or 89 percent of national bank loans. The Office of the Comptroller of the Currency's senior examiners complete the survey. They are in charge of supervising their respective banks and are intimately familiar with the loan portfolios in those institutions.
The 2000 OCC survey found that:
For a copy of the 2000 Survey of Credit Underwriting Practices (PDF), write to: Office of the Comptroller of the Currency, Communications Division, Washington, DC 20219. A copy is also available on the OCC's web site: www.occ.treas.gov.
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