WASHINGTON Regulators raised more concerns on Thursday that some institutions might take on heightened risk by seeking profits from locking into longer-term fixed yields and diving into complicated growth markets such as oil, gas and leveraged lending.
The Office of the Comptroller of the Currency's semi-annual risk report raised numerous concerns about strategic risks as banks have struggled with low margins for several years and many face added expenses. During a conference call on Thursday, OCC officials said they are increasingly worried banks are not properly gauging risks in new product markets.
"Within this environment of narrow growth opportunities and unusual interest rates, we continue to see that strategic risk remains elevated," said Darrin Benhart, deputy comptroller for credit and market risk at the OCC. "Our banks are looking at new products, weakening underwriting standards in some cases in order to try and improve that topline revenue number."
Of particular concern to the OCC was a boost in lending for more technical areas like oil, gas and asset-based industries. The oil, gas and coal sector was the largest growth area for commercial loans, increasing by 18.5% in the second quarter from a year ago, according to the OCC's latest Credit Analytics report.
"That tends to be a more technical product that banks maybe haven't especially small and mid-size banks haven't particularly emphasized yet and we are beginning to see some growth there," Benhart said.
The report said that banks are starting to increase their risk tolerance and loosening underwriting standards through methods that are difficult to quantify, particularly for leveraged loans and indirect auto lending. Earlier this year, the OCC, the Federal Reserve Board and the Federal Deposit Insurance Corp. jointly updated their guidance on leveraged loans, urging banks to use it when planning their risk management and stress testing processes. But OCC officials said on the call Thursday that it was still too early to tell whether that guidance would ease the OCC's concern on leveraged loans raised in the risk report.
"We have begun to emphasize the importance of implementation of the guidance through our supervisory process with our individual institutions so it's probably really too early to say," Benhart said. "But we are definitely addressing that at our individual banks as we speak."
While the report acknowledged that credit quality continues to improve as of June 30, it said banks also face "significant headwinds" in strategic risk, including added compliance costs due to cybersecurity and anti-money laundering processes. The report stated that core deposits could become "more sensitive" to rising interest rates than what has been assumed based on historical evidence. Last year, banks under $10 billion in assets had the first decline in core deposit share of total liabilities since the financial crisis, the report said.
"There's a flood of liquidity in the system right now and a lot of that is sitting in bank deposits. And so were trying to get our banks to get a handle and model various scenarios to see what could possibly happen with those deposits as rates go up," said Kerri Corn, director for market risk at the OCC. "Stability in these deposits and potential migration, either into other deposit categories or out of the bank completely, needs to be stress tested and modeled. And that's been a primary message we've been making to our bankers."