A senior regulatory official on Wednesday continued the alarm bell over the brisk growth in auto lending, suggesting that some lending terms could be setting up banks for trouble.
Addressing risk managers, Darrin Benhart of the Office of the Comptroller of the Currency said risks are building from auto lenders extending payment terms, more loans going to consumers with low credit scores and higher loan-to-value ratios. He also warned banks about industries indirectly affected by the drop in oil prices, and reiterated the regulators' concerns about interest rate risk.
Benhart, deputy comptroller for supervision risk, said the OCC is already starting to see deterioration in auto lending portfolios. He said while some point to the strong performance of car loans during the crisis as an encouraging sign, "it is unclear if this paradigm will persist in the future."
"So far, rapid growth in auto loan volume and low payments have offset the full impact of the risk by masking delinquency and loss rates as a percentage of total volume," Benhart said in prepared remarks for a New York conference of the Global Association of Risk Professionals. "We will have to wait and see how those investments perform over time, but institutions should take care to manage these risks carefully."
In his speech, Benhart also repeated concerns about strategies banks have employed to strengthen profits in the low interest rate environment. Banks may feel pressure to be more aggressive with their margins currently squeezed, but he said some lenders may be venturing into new territory without fully evaluating or understanding the risks they are incurring.
"The prolonged low interest rate environment continues to encourage strategies and actions that could contribute to future vulnerability," Benhart said.
He echoed earlier statements by officials urging banks to develop a healthy risk culture. The fear among regulators is that banks may be tempted to disregard risk management practices in the pursuit of profits, he said.
"Promoting a healthy risk culture is something that we have been speaking a good deal about at the OCC. It is in our DNA," Benhart said. "I have examined institutions of all sizes-ranging from assets of a few million to our largest national banks. They all have one thing in common, the need for sound risk management processes."
He also noted a concern from "correlation" risk, which is the danger of industries not directly tied to a market event still being vulnerable. He cited as an example the drop in oil prices, which can affect borrowers in industries ranging from commercial real estate to trucking companies to restaurants.
"If oil prices remain deflated for an extended period it presents a whole host of issues for industries and communities directly involved in oil and gas as well as those indirectly tied to supporting the boom in parts of the country and globally," he said.