The Office of the Comptroller of the Currency will release a study in the next few weeks that will demonstrate weakening credit underwriting standards at big banks.
"The results of that survey will show that at many of our banks we believe that credit risk continues to increase," Ralph Sharpe, senior adviser in the OCC's Office of Supervision Policy, told attendees of the annual Robert Morris Associates conference in San Antonio last week.
The trends spotted by the study, namely thinner pricing, longer terms, less-restrictive covenants, and weaker collateral positions, have already been noted by Comptroller Eugene A. Ludwig and were cited in the OCC's advisory letter 97-3 issued earlier this year.
"We're not saying that the walls are tumbling down or that these concerns have risen to the level where anyone needs to panic, but they are disturbing trends," said Mr. Sharpe, who urged lenders to give the report their attention upon its release.
To head off further weakening in underwriting, the Comptroller has directed Comptroller's Office examiners to review credit underwriting standards with banks' senior management and to personally meet with the chief executive officer of every national bank to discuss problem loans, said Mr. Sharpe.
"Our job is to evaluate every national bank's ability to deal with increases in problem loans and follow up with bank management to make sure any weaknesses are corrected," he added.
Bankers acknowledged that underwriting standards in some areas have slackened.
"We've become more liberal in our lending standards over the last few years. The good economy in most parts of the country has protected us a bit from the consequences of that liberalization," said Paul M. Dorfman, executive vice president and head of credit policy and risk management at BankAmerica Corp., and chairman of Robert Morris, the national association of bank loan and credit officers."That protection is unlikely to continue for much longer."
The Federal Deposit Insurance Corp. is also completing a study of underwriting practices. But the FDIC, which primarily supervises community and small banks, is not expected to raise any red flags with its survey.
"Our underwriting surveys so far are not reflecting any particular depreciation or any harm that we can see in the underwriting standards," said Cary Hiner, associate director of the FDIC's Office of Policy.
To be sure, the FDIC is noticing trends in underwriting that its examiners will discuss with bankers, including the accurate assessment of borrowers' cash flow and lenders' reliance on secondary collateral in underwriting, said Mr. Hiner.
"Our examiners tell us bankers are still paying particular attention to cash flow but perhaps less so than several years ago, and perhaps a little more reliance on secondary collateral than there was a couple of years ago," said Mr. Hiner.
"We continue to caution our examiners to be sure to talk long and hard with bankers about that and be comfortable with where we're all going," he added.
The RMA's regulatory panel, which also featured Robert Hankins of the Dallas Federal Reserve Bank, focused on supervision by risk, the new approach to bank supervision and exams adopted by regulators a year ago.
Response to revised exam procedures has been good, said the regulators, noting that on-site exam time has been reduced by about 5% on average.
Changes to the exam process-especially the disclosure of a bank's score on each component of their Camel rating (capital, assets, management, earnings, liquidity, and sensitivity to market risks) which were previously kept secret-are giving bankers a better understanding of regulators' concerns, the panelists said. At the same time, they are making examiners give better justification for particular grades in their reports.