LPC: US bank regulator softens view of leveraged lending

NEW YORK, Jan 5 (Reuters) - The Office of the Comptroller of the Currency (OCC) has tempered its view of systemic risk posed by US leveraged lending.

The bank regulator changed its characterization of leveraged lending to an “issue warranting continued monitoring” from a “key risk,” according to its semi-annual risk report for fall 2016 released on Thursday.

“Capital, liquidity, and leverage are all vastly improved since the dark days of the (financial) crisis,” said Comptroller of the Currency Thomas J. Curry on a call with reporters.

The OCC, along with the Federal Reserve and the Federal Deposit Insurance Corp last year increased the frequency of their loan underwriting standards examinations, known as Shared National Credit reviews, to twice a year.

Scrutiny over leveraged lending intensified after the three agencies in 2013 released updated Leveraged Lending Guidance meant to curb system risks posed by lending to highly indebted, lower-rated companies. Of concern was that leveraged lending was escalating while prudent lending practices were deteriorating.

Despite improvement, weak underwriting and erosion of covenant protection remain supervisory concerns in leveraged lending, according to the report.

The revised view in the latest OCC risk report is “a clear recognition that the inter-agency guidance we put out has had some success, and the banks are complying with the guidance to a greater degree,” another OCC official said on the call.

“Yet we want to keep it on the front of the radar screen at least from a risk perspective because we continue to see instances of weaker underwriting in that area, and given the high risk in that type of lending it’s something we’ll always want to monitor,” the official said. RISKS REMAIN

Credit underwriting is among the top risk priorities for the OCC over the next 12 months as banks feel more comfortable lending due to “perceived improvements in general economic conditions.”

The OCC reports underwriting terms loosened in 28 percent of commercial loan products though this is a slight improvement over 2015 when underwriting eased for 30 percent of commercial loan products.

The agency will be “reviewing commercial and retail credit underwriting practices, especially for leveraged loans, auto loans, loans to nondepository financial institutions, and CRE loan sectors that have experienced higher growth and weakening underwriting standards,” according to the report.

Continued incremental easing in underwriting standards is a concern as banks strive for loan growth and to maintain or grow market share, the OCC said.

Other risks highlighted included easing underwriting standards in commercial loans, commercial real estate, and auto lending, as well as cybersecurity threats, increased reliance on third party relationships, and the need for sound governance over sales practices.

The impact of low energy prices on broad economic and credit quality in some regions, and operational and strategic risks resulting from the United Kingdom’s vote to exit the European Union, are also being monitored.

Low oil prices hit energy companies when it came to liquidity and cash flows, but the OCC said the number of classified and special mention energy loans found support and stabilized in the second quarter as the price of oil increased.

Energy portfolios “did remain stable in the third quarter, and we would expect if prices were US$50 and above that we would continue to see stabilization or maybe some improvement,” the OCC official said.

The OCC noted that the number of outstanding “Matters Requiring Attention” (MRA) letters, which alert banks of the regulator’s concerns about safety and soundness practices, peaked in 2012 and has declined through the first half of last year. Data in the report is through June 2016. Enforcement actions issued by the OCC against banks have also steadily declined in that time and both formal and informal issued enforcement actions are at all time lows, “reflecting overall improvement in banks’ financial conditions and risk management practices,” according to the report. (Reporting By Lynn Adler and Jonathan Schwarzberg; Editing by Michelle Sierra)