Bank regulators worried about riskier lending


WASHINGTON -- Increasingly concerned that American banks are taking more risks, top regulators are moving to rein in aggressive competition among banks seeking to make business and consumer loans.

The Office of the Comptroller of the Currency, a Treasury Department agency that oversees the nation's 3,400 federally chartered banks, announced yesterday that its most experienced credit analysts would form a committee to double-check whether the nation's large banks are taking excessive risks.

The committee will work with the agency's bank examiners, who already conduct periodic reviews of banks' business practices.

Banks are charging many customers, particularly large companies, interest rates that barely exceed the banks' own borrowing costs. Banks are also offering more generous terms on loans, such as longer periods for repayment. There is even some evidence that banks are offering more loans to companies and people with bad credit records, although regulators disagree on the extent to which this is a problem.

In recent months, Eugene Ludwig, the comptroller of the Currency; Alan Greenspan, the chairman of the Federal Reserve, and other regulators have been giving speeches to bankers urging restraint.

But the actions of the comptroller's office in creating a new credit-review committee raise those relatively mild warnings to a new level.

If the new committee or the examiners find excessively risky loans, the examiners responsible for the bank will request -- or, if necessary, order -- changes in bank lending policies, Mr. Ludwig said in a speech to bankers yesterday.

He also warned in the speech about a trend among banks to issue credit cards, auto loans and second mortgages to borrowers with such bad credit histories that they previously had to turn, in some cases, to finance companies and other lenders catering to risky borrowers.

Separately, the Federal Reserve has urged its bank examiners to be thorough. "I am concerned that there has been some pursuit of market share at the risk of not getting properly compensated for the risk in the loan," John LaWare, the Federal Reserve governor who heads the central bank's committee on bank regulation, said in an interview Friday.

Mr. LaWare said he was concerned about banks' offering low interest rates and generous loan terms but was less worried that banks might be making loans to customers with bad credit histories.

Bankers have also begun talking about their fears that intense competition for business is forcing them to take too many risks and causing some of them to lose sight of more cautious practices instituted after the collapse of the commercial real estate market in the late 1980s.

Banks and their regulators have been on a roller-coaster ride in recent years. Lax regulation was blamed for allowing much of the savings and loan debacle of the 1980s, which wound up costing taxpayers $200 billion as the government seized and shut insolvent institutions.

Since then, as banks and savings institutions adopted much stricter standards during the economic downturn of the early 1990s, they were blamed for causing the credit crunch that left many small and medium-sized businesses struggling to find loans.

The regulators' worries follow shifts in bank activities prompted by rising interest rates. Banks have sought to increase their commercial lending as profits on government securities have dwindled.

At the same time, the most creditworthy companies have been raising money by selling notes and bonds instead of seeking bank loans.

While regulators do not have the power to dictate specific standards of creditworthiness or profit margins on loans, they have considerable influence over bank policies.

Mounting evidence reinforces the regulators' concerns. A recent survey by the National Association of Home Builders found that 61 percent of its members were able to borrow money to build homes without lining up buyers in advance.

The latest indication of aggressive bank lending came late Friday afternoon, when the Federal Reserve announced that automobile loans rose at an annual rate of 10.5 percent in February, while outstanding balances on revolving consumer loans -- mainly credit cards -- shot up at an annual pace of 22 percent.

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