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 December 3, 1999

Commerical loan lending standards start to tighten

Results of The Office of the Comptroller of the Currency’s (OCC) “1999 Survey of Credit Underwriting Practices” show for the first time in five years that underwriting standards for commercial loans have begun to tighten.

The survey covers the 67 largest national banks that hold 90 percent of the loans in the national banking system.

The survey showed more banks tightened standards than eased standards this year than in 1998. Results also show banks continue to tighten standards for most retail loans. Home-equity loans remained the exception.

The OCC attributes the change in standards to several factors, including “a renewed sensitivity to credit risk among lenders following the credit market turbulence of the fall of 1998, the continued high delinquency and loss ratios for many retail lending products and the efforts of banking regulators to address trends in bank underwriting practices,” Comptroller of the Currency John Hawke Jr. said in a prepared statement.

The overall result of the survey appears to reflect a modest change in the risk tolerance of the banks as well as a renewed emphasis on risk-based returns.

Hawke said while he is encouraged by the survey’s findings, he is concerned about the quantity and quality of credit risk among banks. Despite the tightening of standards, bank examiners reported that the level of inherent portfolio credit risk continued to increase for all three of the surveyed commercial and retail products.

“For commercial loans, the cumulative effect of the past four years of easing standards is to expose banks to the risk of increased loss in the event of default,” Hawke said.

“This, combined with continued intense competition among credit providers, high earnings expectations by bank investors and analysts and fresh evidence that default rates are rising, warrants measured actions by both bankers and regulators.”

– Jeanie Straub

Results of The Office of the Comptroller of the Currency’s (OCC) “1999 Survey of Credit Underwriting Practices” show for the first time in five years that underwriting standards for commercial loans have begun to tighten.

The survey covers the 67 largest national banks that hold 90 percent of the loans in the national banking system.

The survey showed more banks tightened standards than eased standards this year than in 1998. Results also show banks continue to tighten standards for most retail loans. Home-equity loans remained the exception.

The OCC attributes the change in standards to several factors, including “a renewed sensitivity to…

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