U.S. bank regulator sees rising risk from easier underwriting

By Pete Schroeder

WASHINGTON (Reuters) – A U.S. bank regulator said on Thursday that a competitive lending environment is driving “incremental” easing in commercial underwriting standards which in turn is increasing risk across the banking sector.

The Office of the Comptroller of the Currency (OCC) said in its Semiannual Risk Report that the overall financial performance of nationally-chartered U.S. banks improved in the first half of 2017 compared to one year ago, while capital and liquidity remain near historic highs.

But the regulator of national banks identified several areas of concern, including looser standards in commercial credit underwriting practices as banks compete for loans against non-bank lenders, and rising concentration in certain loan portfolios.

“The credit market continues to be influenced by strong competition, particularly from non-bank lenders and heightened asset valuations. In addition, the long economic recovery and expansion may collectively increase lender complacency,” the report said.

The OCC warned that if financial markets tighten quickly or the economy slows, banks could face greater risks from potential customer defaults.

The watchdog also highlighted increasingly complex cyber security challenges, banks’ growing reliance on third-party service providers, and ongoing difficulties complying with the Bank Secrecy Act as other key risks facing the industry.

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