FDIC Study: Community Banks Weathered Oil Downturn Well

Community banks exposed to the oil and gas business tended to weather the recent downturn in oil prices well, according to research released in the FDIC’s Supervisory Insights publication today. Despite a 75 percentage point decline in crude oil prices from January 2014 to January 2016, among banks that were subject to an increased FDIC focus on oil and gas risk management, “few developed problems of supervisory concern,” the agency said.

Although previous oil bust cycles — as in the 1980s — had been associated with spikes in bank failures, “banks now appear better positioned against the effects of lower and more volatile oil prices,” the FDIC said. “The oil price slide initially exposed some underwriting weaknesses, [but]for the most part, banks have taken steps to mitigate stress from oil price volatility.”

During the most recent oil boom cycle, banks were relatively conservative in concentrations. Banks subject to heightened oil and gas risk management supervision had direct oil and gas loan concentrations of 5 percent or less. “Only a handful of FDIC-supervised banks” — concentrated in the oil patch states of Texas, Oklahoma and Louisiana — “had more than 25 percent of loan volume held in direct O&G lending,” the agency said.