OCC: Banks Relaxing Commercial Standards: Competition and Optimism on Economy Called Main Causes
Davenport, Todd, American Banker
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. …