Banks loosen lending standards to levels seen before financial crisis

The largest U.S. banks have lowered their standards for some of the riskiest lending in a sign that weak underwriting is returning to levels seen before the 2008 financial crisis, according to a regulator’s report.

The banks have continued to erode standards, especially in large corporate loans, consumer loans and in leveraged lending, according to an annual Office of the Comptroller of the Currency survey of examiners released Tuesday. Leveraged lending is the risky financing often used to fund corporate buyouts.

“As banks continue to reach for volume and yield to improve margins and compete for limited loan demand, supervisors will focus on banks’ efforts to maintain prudent underwriting standards,” said Jennifer Kelly, the OCC’s chief national bank examiner. She said the trends are “very similar” to those from 2004 through 2006.

The annual survey looked at 91 of the largest banks with loan portfolios amounting to about $4.9 trillion, or 94% of loans in the federal banking system. The report predicted that credit risk will continue to increase in 2015.

The OCC advised senior bank managers and boards to carefully consider whether their aggressive underwriting is appropriate.

Last month, the OCC and other banking regulators released a joint report warning of serious deficiencies in leveraged lending. The agencies promised more scrutiny.

Tuesday’s report said such lending showed the most loosening among commercial products, with 48% of banks that engage in the lending easing their standards. A particular area of concern is commercial real estate, as examiners cited rapid growth and uncertain collateral.