Credit risk is growing in U.S. commercial real estate with some banks exposed to “froth” in the apartment market in New York, Boston, Washington D.C., and San Francisco, a top U.S. banking regulator said on Monday.
The Office of the Comptroller of the Currency (OCC), which supervises large national banks, wants lenders to tighten up loan terms to property developers and it recently reissued its guidance on how banks should approach commercial real estate lending.
“That was meant to flag the issue for the banks so they can take corrective action now on their own before going through any type of examination cycle,” Comptroller Thomas Curry told the Reuters Financial Regulation Summit in Washington, D.C.
“The actual loan terms and covenants are weakening,” he said. He added that he did not expect the market to go into free fall despite rising vacancies and overbuilding in some cities.
“We are keeping a watchful eye. We don’t necessarily expect to have the bottom fall out as it did in other areas during the recession,” Curry said.
The OCC took banks to task about their energy loans after noticing an uptick in lending to oil and gas firms two years ago. Curry said he hopes that a twice-yearly review of their portfolios, due to be published in the coming months, will show that they have tightened up terms.
Under pressure from the OCC and falling energy prices, U.S. banks have cut loans to oil and gas producers and hiked their provisions for potential losses from souring credits.
Banks have also cut back on loans to highly indebted companies, known as leveraged lending, after a regulatory crackdown in recent years. But there has been an increase in bank loans to nonbank institutions such as hedge funds, insurers, mortgage originators and investment banks, which then use the funds for direct lending or securitization.
Curry said the OCC wanted to examine the links between banks and non-bank lenders, often referred to as “shadow banks.”
“And that’s really something that as part of our on-site bank examination process we’re looking to get behind at individual banks: what’s actually happening,” he said.
LET’S TALK ABOUT FINTECH
Curry has been vocal about the need for regulators to embrace the growing financial-technology sector, ranging from online lending to digital currencies.
The OCC oversees the national bank chartering system so it theoretically has the power to designate fintech firms as banks and bring them into the federal regulatory regime.
Curry said he was open to the possibility.
“Internally we want to be open to rethinking things that we’ve reflexively said ‘No’ to or maybe made it so highly conditional it was an effective ‘No’,” he said.
“The message we’re trying to give is… we’re open to working through those things. We’re not guaranteeing the result, but we’re ready to talk and to think.”
A big part of the fintech world—so-called marketplace lenders which sell their consumer and small business loans on to investors—has been rattled this month by the resignation of the founder and chief executive of Lending Club over alterations to the wording of some of the company’s loans. Some institutional investors, a key source of funding, have become wary of buying loans.
Curry said the episode showed the benefit of marketplace lenders, once known as peer to peer lenders, teaming up with traditional banks.
“If you have secure and reliable sources of funding and you have a capital base to absorb potential credit losses you don’t have that type of volatility,” he said.
“I would only speculate that, you know, partnerships or other types of relationships with traditional banking organizations may make more sense from a strategic standpoint.”