Leveraged Lending Alarms Still Ring for U.S. Banking Regulators

U.S. banks are still taking on too much risk in providing funds for mergers and acquisitions even as leveraged lending declines from record levels, the Office of the Comptroller of the Currency said in a report Tuesday.

“The combination of higher initial leverage, weaker loan structures and riskier borrower profiles indicates increasing credit risk in this segment, which remains a significant supervisory concern,” the OCC said in releasing its Semiannual Risk Perspective, which looks at threats facing the national banks it oversees.

Into the first months of this year, “the market trends and the monitoring we’ve been doing have shown some positive signs,” said Darrin Benhart, the OCC’s deputy comptroller for supervision risk management, in a call with reporters. Banks are showing progress in complying with earlier demands from regulators to dial back risk, the agency said.

The new report, which looks at data through the end of 2014, also details other threats that have “the potential to develop into broader systemic issues,” including lending to the oil and gas industry and the regions that rely on it, bigger commercial real-estate portfolios tied to more lax underwriting standards and exposure to non-bank mortgage servicers.

As in previous risk reports, the OCC noted an ongoing threat from cyber attacks, interest-rate risk and from looser standards in indirect auto lending. The agency also highlighted home-equity lines of credit, which may see increased defaults as draw periods end and repayment phases begin on $131 billion in loans over the next three years.

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