The Office of the Comptroller today issued a bulletin for banks on managing credit risk associated with refinance risk. The bulletin does not address other risks, such as interest rate risk, the agency said.
Specifically, the bulletin discusses the effect of refinance risk on credit risk in commercial loan transactions and portfolios, according to the OCC. It also provides guidance on transaction and portfolio-level refinance risk management.
“Refinance risk affects individual loans and portfolios of loans,” the agency said. “A concentration in such loans could increase the cost and complexity of problem loan resolutions when borrowers are under stress. In addition, if a significant volume or amount of loans refinance during adverse economic conditions, it could constrain a bank’s capital or liquidity, threaten earnings, or hinder strategic initiatives.”