WASHINGTON - More national banks loosened than tightened credit standards as they responded to increased competition for structured finance and syndicated credits, the Office of the Comptroller of the Currency said Tuesday in its annual survey of credit underwriting.
The difference between them was small - 13% eased and 12% tightened - but it was a major turnaround.
In 2003, 47% tightened standards and only 5% eased. This year the number of national banks that tightened underwriting standards for commercial credits reached its lowest point in at least five years, and standards at three-quarters of banks did not change.
Retail standards were generally stable, though standards for credit card and home equity products were less rigorous.
"We have a directional shift in terms of underwriting," said Barbara Grunkemeyer, the OCC's deputy comptroller for credit risk, in an interview Tuesday. "We are moving toward more easing. It's fairly consistent with what we are seeing in the economy and the improvement in loan portfolios, but banks need to keep an eye on the prudent risk management practices they have put in place the last few years."
But the OCC acknowledged that risk trends in commercial portfolios have abated.
"This is the first time that survey results indicate that more banks experienced a net decrease of credit risk in the commercial portfolio," the agency wrote in a summary accompanying the survey. "The shift in risk is attributed to improvements in portfolio quality, external conditions, and portfolio management practices."
The examiners said diminished risk was most pronounced in syndicated loans - not a surprising discovery given that large banks were more likely than small ones to relax underwriting standards - and that banks expect credit risk to continue to decline over the next year.
The OCC study covered the year that ended March 31. The agency surveyed its examiners at the 72 largest national banks, which held loans of $2.3 trillion at Dec. 31 - 91% of all loans held by national banks at the time.
The survey concluded that stronger competition was the primary reason for looser commercial standards. Common results of the move were lower prices, longer maturities, larger credit lines, and adjusted covenants.
"There are many more investors looking for loan assets than we have companies wanting to borrow," Ms. Grunkemeyer said. "You've got a very competitive market, particularly in the syndicated market."
In the current cycle, loan funds and other nonbank lenders are "having a growing influence on the market," she said, "both in how deals are structured, and to a degree, when credit deteriorates, how they are being worked out."
Retail credit trends tend to be more stable than commercial trends, generally because smaller loans and more borrowers mean more granularity.
"None of the retail products have the volatility of the commercial products," Ms. Grunkemeyer said. "When you start to see deterioration in a retail product, it builds gradually and you know it's coming."
But again, the trend was toward softening - generally by reducing debt service, extending amortization schedules, and lowering collateral requirements -- and it was most marked in credit cards and home equity loans.
"Home equity is certainly a very different product, because it has had stellar performance, but it has been somewhat untested and there has been a fair degree of liberalization of underwriting standards," Ms. Grunkemeyer said. "It is a product to keep your eye on."
The OCC said in the summary that overall conditions are similar to 1995, the year it first conducted the survey, when competition forced banks to soften standards. But in this cycle, it said, banks "are in a better position to evaluate and manage the risk associated with easing underwriting standards," and it noted that the industry is well capitalized and earning record profits.
"At this phase in the credit cycle, some adjustments to underwriting criteria are to be expected," the agency said. "After several years of sluggish demand for commercial loans, banks are anxious to make deals."
Generally, though, Ms. Grunkemeyer said that willingness to do deals had not yet left evidence of a tendency toward bad ones.
"There is always going to be a wacky deal you can find, but I wouldn't say at this point that the underwriting is imprudent," she said.
But the OCC said in the summary that excessive leverage fed credit problems in commercial portfolios during the last credit cycle, and it noted that "many observers have commented on how quickly creditors' tolerance for higher leverage has rebounded."
