Does this sound familiar? I thought it would!
WASHINGTON—Intense competition in a slow-growth, low-interest-rate environment is continuing to fuel riskier lending by banks, a top U.S. regulator warned in a report released on Wednesday.
The Office of the Comptroller of the Currency highlighted two areas in particular where banks took on more risk in pursuit of profits: high-yielding loans issued to more speculative borrowers and indirect auto loans, in which banks provide financing through a car dealer. Banks also are easing lending standards in commercial loans, the report said.
The report cites “erosion in underwriting standards” for leveraged loans and said banks have taken on other kinds of risks, such as offering longer terms, in the area of indirect auto lending.
“The OCC sees signs that credit risk is now building after a period of improving credit quality and problem loan cleanup,” according to the report, which looked at bank data during the second half of 2013.
That buildup comes despite an effort by regulators to clamp down on so-called leveraged lending by warning banks against funding debt-laden deals. Leveraged-loan issuance reached a record in 2013, the report said, noting that the largest OCC-supervised banks reported the highest share of loosening underwriting standards among various size groups.
As long as the Federal Reserve Bank continues to lend money to banks at 0% interest, loans will get more and more risky. A large percentage of these high-yield loans will be repaid. The cost of the loans that default will be more than offset by the profits made from those that are repaid. Throw in loan insurance and the banks are taking very little overall risk. Risky loans didn’t bring the economic system down in 2008. Assets that were overvalued did.