FDIC cautions of increasing credit, interest-rate risks
Add FDIC Chairman Martin J. Gruenberg to the list of regulators and industry officials warning about growing credit risks in the U.S.
In prepared remarks for the release of the FDIC’s third-quarter version of the Quarterly Banking Profile, Gruenberg said growing interest-rate risk and credit risk warrant “timely attention” by banks and will “continue to be a focus of supervisory attention.”
Gruenberg said the industry reported another positive quarter overall, with most performance indicators showing improvement. “Earnings were up from a year ago, loan portfolios grew, asset quality improved, the number of problem banks declined, and only one insured institution failed.”
But institutions’ efforts to combat the hit to net interest margins from low interest rates continued. Banks’ net interest margin, on average, ticked slightly higher to 3.08 percent from 3.07 percent in the second quarter but was below the year-earlier margin of 3.15 percent.
“To mitigate the impact of low rates on net interest margins, banks continue to lengthen asset maturities, contributing to a growing mismatch between longer maturity assets and shorter maturity sources of funding,” he said. “This growing mismatch is important because when interest rates rise, the cost of funding liabilities tends to re-price more rapidly than the yield on assets, causing further compression to the net interest margin.”
The FDIC said that the percentage of loans and securities with maturities of three or more years hit the highest percentage in the 18 years of data records, rising to 34.6 percent in the third quarter from 34.2 percent during the second quarter. Community banks have grown their share of longer-term assets even more quickly than the rest of the industry, according to the FDIC.
He called out the federal banking agencies’ most recent Shared National Credits Review, which pointed to high credit risk in large syndicated loans. “It noted a significant increase in leveraged lending volumes and continued loose underwriting,” Gruenberg said. In addition, loan portfolios dependent on oil and gas revenue are increasingly at risk due to the significant drop in energy prices, according to the SNC Review.
Meanwhile, banks haven’t seen corresponding growth in overall revenue, adding to the concern.
“These signs of growing interest-rate risk and credit risk are important because – as history tells us – it is during this phase of the credit cycle when lending decisions are made that could lead to future losses,” Gruenberg said. “Timely attention by banks to address these growing risks will benefit banks and contribute to the sustainability of the current economic expansion. These risks will continue to be a focus of supervisory attention.”
Comptroller of the Currency Thomas Curry recently warned of increasing credit risk as banks start to reach for additional loan growth by lending to less creditworthy borrowers and by increasing loan concentrations. Standard & Poor’s in early November warned of credit risks tied to excessive leverage in the buyout market.
The American Bankers Association, however, said banks are “well prepared” to manage the slow and gradual increase in interest rates expected of the Federal Reserve. In addition, the ABA said in a news release, “Bankers understand that an increase in energy-sector defaults could pose some downside risk and have taken precautionary measures to ensure they’re prepared for any local economic downturn.”
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