3. THE FDIC SPEAKS “ A decline in loan underwriting standards belongs on any list of the factors responsible for the current crisis.” Summary of comments from George French, Deputy Director of Supervision and Consumer Protection in, FDIC Supervisory Insights, Summer 2009, Vol. 6, Issue 1
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5. G-20 Leaders Summit November 15, 2008 “Declaration of the Summit on Financial Markets and the World Economy” “ During a period of strong global growth, growing capital flows, and prolonged stability earlier this decade, market participants sought higher yields without an adequate appreciation of the risks and failed to exercise proper due diligence. At the same time, weak underwriting standards, unsound risk management practices, increasingly complex and opaque financial products, and consequent excessive leverage combined to create vulnerabilities in the system.”
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9. What are the Basics? Asset Based Lending: Back To Basics
Deputy Director French also had this warning for regulated institutions: Over the years, the banking agencies have issued a number of supervisory guidance documents regarding adverse credit risk trends. These guidance documents indicate that the agencies were generally aware of, and concerned about, emerging potential credit risks. A future focus of supervision in responding to such emerging risks may well include a careful look at where the line should be drawn between guidance and informal supervisory expectations on the one hand, and more tangible requirements on the other. Ignore this FDIC warning at your own risk – - Cease and Desist Orders, other negative regulatory consequences for the institution
Any commercial bank , and even traditionally non-bank lenders that opted to change to bank holding company status during the recent crisis, should consider the FDIC an important constituency. The FDIC issues numerous …….. Supervisory Highlights is published periodically by the FDIC and contains several articles intended to promote best practices of bank supervision, and thereby, bank management. Following is an excerpt from the introduction to the Summer 2009 issue: In the annals of bank supervision, 2008 will be remembered as a year in which some old assumptions were shattered and some old truths relearned. Some of the old banking basics— prudent loan underwriting, strong capital and liquidity, and the fair treatment of customers—re-emerged as likely cornerstones of a more stable financial system in the future. Comments from George French, Deputy Director, FDIC Division of Supervision and Consumer Protection A look back on the buildup to the financial crisis reveals similarities to earlier cycles of boom and bust. During the expansion, financial firms engage in a competitive relaxation of credit standards and risk tolerances to gain and maintain revenue growth. Easy credit allows borrowers to refinance ever-greater obligations in lieu of repayment, driving down default rates. This fuels the perception that credit risk is minimal, stimulating further loosening of credit terms in a self-perpetuating cycle. To some banks operating in such an environment, traditional lending standards can appear an unnecessary impediment to revenue growth. To varying degrees, subprime mortgages, other consumer loans, construction loans, loans to leveraged corporate borrowers, and commercial real estate loans, have all exhibited weakness in underwriting standards. Underwriting weaknesses have contributed to investor uncertainty about the quality of bank assets and amplified the adverse impact of the economic downturn on bank performance. A decline in loan underwriting standards belongs on any list of the factors responsible for the current crisis.
The Office of the Comptroller of the Currency (OCC) conducted its 15th annual underwriting survey to identify trends in lending standards and credit risk for the most common types of commercial and retail credit offered by national banks. The survey covers the 12-month period ending March 31, 2009. This is the most recent survey available. The 2009 survey includes examiner assessments of credit underwriting standards at the 59 largest national banks with assets of $3 billion or more. This population covers loans totaling $3.6 trillion as of December 2008, approximately 84 percent of total loans in the national banking system.
Three C’s of Credit – Character, Capital and Capacity
