October 5, 1997
Regulator Cautions Banks About Loan Standards
BOSTON, MA — Comptroller of the Currency Eugene A. Ludwig today cautioned bankers that loan underwriting standards have continued to slip. In a speech to the American Bankers Association annual convention in Boston, the Comptroller announced a series of actions his office will take to address this slippage.
"Our examiners tell me that, over the past year, underwriting standards have continued to loosen in most lending categories," Mr. Ludwig said. "The trend is particularly pronounced in commercial lending, but there has also been some loosening in segments of the retail market."
The Comptroller said sources outside the Office of the Comptroller of the Currency (OCC) confirmed examiners' assessments of loan underwriting standards. He cited data from the Loan Pricing Corporation that showed non-rated and non-investment grade syndicated credits now account for more than half the total market. The data also show that the price spread between BB- and AA-rated credits has narrowed by almost 40 percent since the first half of 1991 and that the pay-back time for these large loans has increased.
Mr. Ludwig noted similar trends in retail lending. "Our examiners have found that banks have tightened credit card lending standards," he said, "but this tightening is offset by an easing of terms for home equity and residential real estate loans." In addition, he said, examiners report an increase in credit risk in almost every category of loans except for agricultural loans.
In response to this slippage, the Comptroller announced actions the OCC will take to ensure banks identify and address any weaknesses in their loan portfolios:
- Examiners will review credit underwriting standards with senior management at every national bank.
- Examiners will personally meet with the chief executive officer of every national bank to discuss any loans that demand the CEO's attention.
- Examiners will 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.
- The OCC and other federal financial institution regulators will move quickly to review comments and decide how to act on a proposed rule on classification and charge-off policies for retail credit.
- The OCC will complete definitive guidance for national banks on techniques to manage risk for loan portfolios as a whole.
"The maintenance of sound credit standards and supervisory vigilance today will have little or no noticeable impact on economic growth now and will avoid more serious consequences in the future," the Comptroller said.