US watchdog warns banks for rising risks in lending

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A top U.S. regulator warned of the dangers of banks attracting clients by easing loan standards as the economy ticks up after the financial crisis.

Loosening underwriting standards was a problem in leveraged lending—a type of loan often used for private equity firms, which use the debt to buy companies, the Office of the Comptroller of the Currency said.

It was also happening in indirect auto loans that banks provide through car dealers, and in commercial loans.

"Bankers are speaking out increasingly regarding their concern with competitive pressures. Given these trends, the OCC will increase its attention on underwriting standards," the bank regulator said in a semi-annual report.

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Leveraged loans were rising closer to a critical benchmark identified by the OCC and the Federal Reserve, which also oversees banks, the report showed.

The size of the leveraged loans was, on average, 4.7 times the core profit—or earnings before interest, taxes, depreciation, and amortization of goodwill—of the companies that the borrowers bought with the money.

That level was last exceeded in 2007, the OCC said, and was getting closer to the 6 times EBITDA the bank regulators have identified as a red flag indicating undue risk.

Rising interest rates posed another threat for banks, who have lent money in longer-term loans to earn more money, but may be facing a rapid withdrawal of deposits once interest rates start rising as clients take their money out of cash.

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—By Reuters