WASHINGTON (Reuters) - Credit risks have risen in U.S. commercial real estate as lenders compete more fiercely in a low rate environment, a federal banking regulator said on Monday, adding that it was stepping up its scrutiny of the sector.
The Office of the Comptroller of the Currency (OCC) said in its semiannual risk report that while the financial performance of lenders improved in 2015 compared to a year earlier, credit risks were higher across the industry.
The U.S. Federal Reserve has kept interest rates low for more than seven years to help the U.S. economy recover from the 2008 financial crisis. But that policy is also weighing on bank profits and pushing lenders to compete more fiercely for worthy borrowers. That competitive pressure is increasing risk, the OCC said.
“It’s at this stage of the cycle that we also see strong loan growth combined with easing underwriting to result in increased credit risk,” Comptroller of the Currency Thomas Curry said in prepared remarks.
The agency has escalated its oversight of commercial real estate risk from ordinary monitoring to “additional emphasis.” It also flagged risks in commercial and industrial loans, and said concerns remain about indirect auto lending and leveraged lending, which are both issues the OCC has flagged in the past.
Curry also mentioned financial technology and marketplace lending as areas the OCC is keeping a close eye on.
Small U.S. banks are delivering healthier profits than their bigger peers, the report noted. Banks with less than $1 billion in total assets delivered return on equity above 10 percent last year while larger banks only delivered single-digit returns.
Reporting By Patrick Rucker; Editing by Jeffrey Hodgson