Only about one in 10 banks can be considered at “high” credit risk, according to the FDIC’s most recent credit survey — down from 42 percent in 2010, when banks were working through a backlog of bad loans. Loan performance remains favorable — with loans past 30 days due or in non-accrual status nearing record lows — but the FDIC noted that increases in out-of-area lending, growing concentrations in acquisition, development and construction loans and commercial real estate, and loosening underwriting standards signal rising risk across the industry.
The share of banks that reported high credit risk in their acquisition, development and construction; permanent commercial real estate; and residential portfolios continued to decline, while it rose for consumer portfolios. The most pronounced increase in portfolios reporting high credit risk was in agricultural lending, reflecting a period of depressed commodity prices after a long farm boom.
Summarizing the survey results in the latest issue of its Supervisory Insights publication, the FDIC noted that 68 percent of banks had either a credit or funding concentration — up from 2015, when just 56 percent did. The increase was most noticeable in the area of volatile funding; concentrations in volatile funding sources were identified in 34.4 percent of banks, up from 15.2 percent in 2015. The FDIC added that it is beginning to see “layered risk” emerging at institutions with both credit and funding concentrations.
The publication also included an article on credit management information systems, which bank boards and senior management teams use to oversee lending activity and manage strategic decisions. When building a credit MIS, the agency emphasized the importance of incorporating forward-looking risk indicators, rather than relying solely on “lagging” risk indicators such as delinquencies and charge-offs.