WASHINGTON – Federal regulators say risk remains heavy in large loans made by banks and other financial institutions, though lending standards have improved.
The Federal Reserve and other agencies cite increasing risks in loans to oil and gas producers as oil prices have fallen to three-month lows. The regulators said their latest examinations also showed continued high risk from loans made to companies that are already heavily in debt.
The steep decline in oil prices has hurt many energy companies, making it harder for them to repay their loans. The amount of large oil and gas loans that are at risk of failing or already in default doubled in the first quarter from the same period in 2015, according to the agencies’ semi-annual review released Friday. Those loans jumped to $77 billion from $38.2 billion.
Overall, the review found that loans at risk of failing or already in default, plus those showing potential weakness, remained high at 10.3 per cent of the total $4.1 trillion in large loans.
That was up from 9.5 per cent of a total $3.9 trillion a year earlier.
The review found that the level of problem loans remained higher than in previous periods of economic recovery and growth, raising concern that future loan losses could increase significantly in the near future.
The regulators said banks have improved their lending standards for loans to heavily indebted companies — something they have been pushing banks to do.
Loans in the oil and gas industry represent 12.3 per cent of total large loans outstanding.
U.S. banks posted increased loan losses in the first quarter driven by a huge jump in delinquent energy loans.
Oil prices have fallen dramatically over the past couple of years, touching levels not seen since the depths of the recession in 2009. They now are running around $41 a barrel for crude oil, down from a $100 high in mid-2014 — slicing into the profits of energy companies and putting projects on hold. As cash flow from oil sales has trickled, some companies are straining to repay their loans.
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 the periodic reviews, 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 financial overhaul law that responded to the crisis.
The semi-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.