Competitive pressures from banks and nonbanks are contributing to easing in underwriting, increasing the risk that sound pricing structures and practices may be compromised, according to a new report from the Office of the Comptroller of the Currency (OCC).

In its Semiannual Risk Perspective for Spring 2018, the division of the Treasury Department tasked with chartering and supervising national banks and federal savings associations noted that strong competition for quality loans has led to evidence of eased underwriting, and that the "accommodating credit environment... warrants a continued focus on monitoring credit risk and lender complacency."

“The worst loans are often made in the best of times,” Comptroller of the Currency Joseph Otting warned last week.
 
According to reporting from The Wall Street Journal, competition is especially fierce in distressed debt lending, as banks are increasingly making loans to troubled firms they shied away from following the financial crisis. Some banks are now outbidding non-bank lenders, particularly in the areas of retail and energy, the paper said.

On the subject of interest rates, the OCC said that continued increase in market interest rates may eventually lead to higher funding costs for banks, as economic growth increases loan demand and competition for funding pressures banks to raise deposit yields.

"Rising interest rates generally benefit net interest margins at small banks but pose potential risks that warrant monitoring," the report notes. 

Total loans in the federal banking system grew 3.6 percent in 2017, the second consecutive year of slowing growth, according to the report. Large banks, which hold more than 83 percent of all loans, saw commercial loan growth fall to 4.2 percent, down from 10 percent two years ago. Midsize and community banks continued to experience strong loan growth, particularly in CRE and other commercial lending, which grew almost 9 percent in 2017. Such growth heightens the need for strong credit risk management and effective management of concentration risk.

Commercial loan delinquencies and losses are at or near historical lows. Delinquencies are increasing in agricultural loans due to low commodity prices and thin margins.

The OCC's Semiannual Risk Perspective for Spring 2018 report covers risks facing national banks and federal savings associations based on data as of March 31, 2018.