The Office of the Comptroller of the Currency (OCC) has issued a warning about emerging risks in US commercial real estate lending, cautioning that loosening underwriting standards are increasing credit risk.
A new report from the oversight agency notes that, while CRE portfolios have seen rapid growth, particularly among small banks, underwriting standards have loosened.
The report shows that, at the end of 2015, 406 banks had CRE portfolios that had grown more than 50 percent in the prior three years, with 180 of those more than doubling them.
At the same time, the OCC is seeing “looser underwriting standards with less-restrictive covenants, extended maturities, longer interest-only periods, limited guarantor requirements, and deficient-stress testing practices,” according to prepared remarks from Comptroller of the Currency Thomas Curry.
The OCC, which oversees US banks alongside the Federal Reserve Board and the Federal Deposit Insurance Corp., has also noted that these loosened standards are most prevalent in gateway cities.
Income and profitability were up in 2015, particularly at banks with less than $1 billion in assets, which had return on equity that exceeded 10 percent on average; while net income also improved at larger banks, but with higher “provisioning expenses [which] partially offset gains in net interest income and lower overhead.”
The OCC was implemented to caution banks on emerging risks and to make sure risk management and credit administration departments are operating efficiently. In May the group said it would also be focusing more attention on capital flows from large national bank lenders to their non-bank counterparts.