Regulators: Concerned that lenders approving too many risky loans

WASHINGTON – Federal regulators say they’re concerned about a continued heavy risk in large loans made by banks and other financial institutions, with the amount of risky loans remaining at double the levels before the financial crisis.

The Federal Reserve and other agencies say that a large portion of the risk comes from loans made to investment firms for financing takeovers of companies. Those loans, called leveraged loans, accounted for 22.6 per cent of total large loans outstanding and 74.7 per cent of the loans deemed risky by the regulators, according to the agencies’ latest annual review.

The review found “serious deficiencies” in credit standards for making leveraged loans and in managing their risk.

Overall, the review found that $340.8 billion, or 10.1 per cent, of big loans outstanding were deemed risky — enough for the examiners to criticize them in writing to the lenders. That’s about double the levels preceding the crisis that struck in 2008.

Regulators are worried about a heavy load of risky loans weighing on institutions’ financial soundness and the potential threat to the broader banking system. They are seeking to prevent the kind of risk-taking that touched off the 2008 crisis and nearly toppled the global financial system.

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 financial crisis.

Because of what they found in the review, the regulators said they plan to conduct more frequent examinations of leveraged loans “to ensure the level of risk is identified and managed.”

The annual review, started in March, 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.

This year the federal examiners reviewed $975 billion of the $3.39 trillion in loans extended. U.S. banks held 44.1 per cent of the loans, foreign banks with operations in the U.S. held 33.5 per cent and the remaining 22.4 per cent were made by lenders other than banks.

The regulators say they found some improvement in the latest examination but that lenders still need to tighten their practices for reducing the risk of losses on loans.