Credit risk, in the form of relaxed underwriting and increased loan concentrations, is on the rise, Comptroller of the Currency Thomas Curry said at a risk management conference in Boston today. Noting that credit risk has been steadily on the rise since 2012, he urged bankers to address it now “without supervisory action.”
“Risk is never static,” Curry said. “It rises and falls with the cycles of the economy and changes in technology and the evolving operational environment.”
This rise and fall can be illustrated by the recent economic decline and recovery, he explained. After the recession, demand for loans was down and banks exercised considerable caution in their lending, creating a lower-risk environment. As the economy recovered, banks began to increase their risk appetites, relaxing underwriting processes and extending more loans to less creditworthy customers in order to remain competitive.
Banks have also increased their loan concentration in sectors like commercial real estate, construction and energy, which Curry said also contributes to an higher-risk environment. In a speech last month, he addressed growing credit risk in auto loans.
Curry recommended that risk managers evaluate their loan loss allowance and adjust accordingly — going beyond the previous three years of historical experience if necessary. “At the end of the day, what we would expect, at minimum, is directional consistency: when credit risk rises, so should the allowance,” he said.