WASHINGTON – Federal regulators say they’re still seeing a heavy dose of risk in large loans made by banks and other financial institutions, despite the recovering U.S. economy.
The Federal Reserve and other agencies cite ongoing loose lending standards and an increase in loans made for financing takeovers of companies. Those loans are risky because they can greatly exceed the amount of a firm’s earnings.
The steep decline in oil prices over the past year has hurt many energy companies. Loans in the industry are at greater risk of souring or are already in default, according to the agencies’ 2014 annual review.
The review found that banks are making progress in improving their credit standards. But there are “continuing gaps” between industry practices and standards of bank safety, it said.
Overall, the review found that loans at risk of failing or already in default, plus those showing potential weakness, remained high at 9.5 per cent of the total $3.9 trillion in large loans. Loans in that category were up 9.4 per cent from $340.6 billion last year.
Loans in the oil and gas industry represent about 7 per cent of total large loans outstanding. The credit problems could spread to the service companies that cater to the industry and banks should closely watch that area, agency officials said in a conference call with reporters.
Oil prices have fallen dramatically over the past year, touching levels not seen since the depths of the recession in 2009. They have slid from near $100 a barrel to $38 in September. Against a backdrop of rising global supplies came mounting evidence from around the world that demand for oil would be far less than expected.
Regulators are worried about a heavy load of risky loans weighing on institutions’ financial soundness and the potential threat to the broader banking system. By conducting an annual review, they are seeking to prevent the kind of risk-taking that touched off the financial crisis in 2008.
Through a series of rules for banks’ increased capital cushions against losses and other requirements, regulators have put into effect the tougher standards mandated by Congress in a 2010 law responding to the crisis.
Because of what they found in the 2014 review, the regulators said they will continue to monitor leveraged lending and lending in the oil and gas industry.
The annual review is conducted by examiners from the Fed, the Federal Deposit Insurance Corp. and the Treasury Department’s Office of the Comptroller of the Currency. It examines large loans, defined as those worth at least $20 million that are made jointly by three or more financial institutions.
For 2014, the examiners reviewed $1.04 trillion of the $3.9 trillion in loans extended. U.S. banks held 43.3 per cent of the total loans, foreign banks with operations in the U.S. held 33.7 per cent and the remaining 23 per cent were made by lenders other than banks.