US banks face underwriting challenge

Issuance of commercial real estate (CRE) loans has risen significantly in recent years, leaving many banks exposed to concentration risks, the Office of the Comptroller of the Currency (OCC) said in its recent semi-annual report.

“CRE loans increased more than 16 per cent in the four quarters ending 30 June 2016, as banks exhibited a strong risk appetite for this type of lending,” the organisation said.

“As of 30 June 2016, many banks saw robust growth in their CRE portfolios, as defined by the interagency CRE guidance, with 378 banks (up by 40, or 12 per cent, from a year ago) having at least 25 per cent of capital in CRE and experiencing three-year growth rates of 50 per cent or more.”

Additionally, underwriting practices have “incrementally eased” over the past four years, the OCC’s researchers found, with 28 per cent of banks offering commercial real estate and retail loan products easing their standards in 2016.

“Examiners reported that the leading reasons for easing underwriting practices since the 2015 survey are increased competition, higher credit risk appetites, and perceived improvements in general economic conditions,” the body said.

The OCC warned that the lessening underwriting standards coupled with the increasing volume of loans also increased the US banking sector’s exposure to credit risks, and said that it would make underwriting standards a priority for 2017.

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