A new FDIC survey found that while bank underwriting
standards are generally sound, some institutions are engaging in
lending practices that could lead to future problems.
Nine out of 10 institutions examined by the FDIC in late
1996 and early 1997 showed no material change in underwriting
practices since their last examination, a finding that is consistent
with past surveys.
Twice as many institutions examined in the six months
ending March 31 tightened their underwriting standards compared
to those that loosened them. Just over 10 percent of the institutions
were characterized as having "above-average" risk in their
underwriting practices. However, most of those banks adjusted
their loan prices to compensate for the higher risk.
"We are pleased by the stability of credit underwriting
standards at banks we've examined since early 1995, but there are
some problems that deserve closer monitoring," FDIC Chairman
Ricki Helfer said today. "We will continue to use the survey to
provide an early-warning mechanism for identifying potential
Underwriting encompasses the terms and conditions of loan
agreements that determine the riskiness of a particular credit.
The review of the loan underwriting practices of banks,
obtained through an examiner reporting system implemented in
early 1995, is one of a number of FDIC initiatives aimed at
providing early warnings of potential problems in the banking
system. FDIC examiners provide a general assessment of an
institution's underwriting standards and comment on potential
problem areas specific to different types of loans.
The information gathered during the examinations also
helps to allocate future examiner resources and to identify potential
weaknesses in underwriting practices worthy of additional
attention during on-site examinations.
For the latest period, examiners reported on lending
practices at 1,277 state-chartered banks and savings institutions for
which the FDIC is the primary federal regulator. The results
cover reports filed during the six months ending March 31, 1997.
Most of the banks were small, community-based institutions. They represent 20 percent of the
institutions supervised by the FDIC, and hold 28 percent of the
assets of FDIC-regulated banks and thrifts.
The new FDIC report found that the vast majority of banks
surveyed (91 percent) had no material change in their underwriting
practices since the previous examination. Six percent were judged
to have tightened their lending practices, while only three percent
loosened their standards. When asked to report on specific
practices, FDIC examiners cited some areas of potential concern:
Thirteen percent of the institutions were characterized by
"above-average" risk in their loan administration -- typically the
supervision and management of the loan process, including
verifying information in applications and monitoring loan
payments. Examiners in each FDIC region cited this problem
more frequently than other underwriting weaknesses.
Approximately six percent of the banks examined were
characterized as "commonly" having high concentrations of loans
to one borrower or industry.
Nearly 22 percent of the 593 "active" construction lenders
examined customarily funded speculative construction projects.
Seven percent of the 619 banks that are active in agricultural
lending had portfolios tied "substantially" to major crops affected
by the phaseout of farm subsidies enacted by Congress last year.
Chairman Helfer said the FDIC is closely monitoring the
effect on agricultural banks of the phaseout of the farm subsidy.
"Those banks that are at risk still have several years to
adjust their portfolios before the subsidies are removed," she said.
"We urge them to take the necessary steps as soon as feasible."
Congress created the Federal Deposit Insurance Corporation in 1933 to restore
public confidence in the nation's banking system. The FDIC insures deposits
at the nation's 11,452 banks and savings associations and it promotes the
safety and soundness of these institutions by identifying, monitoring and
addressing risks to which they are exposed.
Copies of the latest Report on Underwriting Practices are available on the
Internet (via the World Wide Web at www.fdic.gov), by fax (dial 804-642-0003
on your fax machine and follow the voice prompts to request Document
No. 237), or by mail or messenger (contact the FDIC's Public Information
Center at 800-276-6003 or (703) 562-2200).