OCC: Credit Risk Is Building in the Indirect Auto Market and Syndicated Leveraged Loan Market

Source: Office of the Comptroller of the Currency's Semiannual Risk Perspective for Spring 2014 (PDF, emphasis mine)
The OCC sees signs that credit risk is now building after a period of improving credit quality and problem loan clean-up. Examiners have observed erosion in the underwriting standards for syndicated leveraged loans, as well as loosening of standards and increased layering of risk in the indirect auto market. Recent examinations of commercial loan portfolios have identified an increase in policy and underwriting exceptions, including some examples of risk layering (e.g.,increasing collateral advance rates, waiving or loosening of guarantees, and more liberal repayment terms such as extended periods of interest-only payments). A recent horizontal review of midsize and community bank asset-based lending (ABL) found evidence of gradually loosening credit policies in response to competitive pressures. Further, bankers are speaking out increasingly regarding their concern with competitive pressures.

Here are important charts and information from the report:

1. Auto loan risk
The average loss per vehicle has risen substantially in the past two years, an indication of how longer terms and higher LTVs can increase exposure. Average charge-off amounts are higher across all lender types over the last year (see figure 27). These early signs of easing terms and increasing risk are noteworthy, and the OCC will continue to monitor product terms and risk layering practices to ensure that banks manage growth and exposure prudently.
Source: OCC's Semiannual Risk Perspective for Spring 2014 (PDF)

2: Covenant-lite loan risk
Investor demand for high-yield products continued to surge, with more relaxed structures incorporating fewer covenants and lender protections. New-issue covenant-lite loans totaled $258 billion in 2013, nearly equal to the total cumulative amount issued from 1997 to 2012 (see figure 24). Accordingly, the quality of underwriting in the syndicated leveraged loan market remains a supervisory concern.
Source: OCC's Semiannual Risk Perspective for Spring 2014 (PDF)

Read the full report at occ.gov.

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