WASHINGTON - The Federal Reserve this week warned its examiners to keep an especially close eye on credit risk at the banks they regulate.
"Current loan delinquency and default rates reflect, in part, the relatively recent vintage of many loans, as well as the prevailing economic environment, and may not be indicative of the performance of the loan portfolio over time," wrote Richard Spillenkothen, director of the Fed's division of banking supervision and regulation, in a letter sent Monday to supervision chiefs at the 12 Federal Reserve banks.
"As part of the credit risk management process, banks should consider the potential effect of a wide range of borrower default rates and losses on the institution, especially on loans with more relaxed terms."
Mr. Spillenkothen then detailed areas of focus for bank examiners. They include the independent oversight over lending provided by a bank's board of directors, the quality of the bank's internal credit scoring system, and the identification of changes in credit underwriting standards since the last exam.
The banking agencies have been warning for more than a year now that they are beginning to see the first signs of slippage in credit underwriting. In an April speech, Comptroller of the Currency Eugene A. Ludwig reiterated his concerns, and said regulators and lenders need to work hard to "make sure standards do not slip further."