Warning of deteriorating credit standards, the Federal Reserve Board has sent guidance to examiners instructing them to scrutinize loan quality.
The guidance, released Monday, was previewed in May at a Federal Reserve Bank of Chicago conference. It instructs examiners to ensure banks analyze whether the borrower's business will remain healthy and whether the bank is charging high enough rates to cover the riskiness of the loans.
Examiners also should check if banks have formal credit policies, require loans to be approved by seasoned credit officers, use internal rating systems to rank loans by risk, and communicate data about credit quality to senior management.
The Fed developed the guidance after comparing loans made in 1995 and 1997. It found that significant competition has caused banks to cut rates, but over all the strong economy has ensured that loan portfolios remain healthy.
A copy of the guidance is being sent to every Fed-supervised bank and holding company.