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Net Net: Promoting innovation and managing change

Here we go again? Report cites loose bank lending

The Federal Reserve Building in Washington D.C.
Elizabeth Schulze | CNBC

A newly unveiled review by key federal banking regulators raises red flags about risks in the nation's lending system, noting that credit risk in the U.S. remains high despite a benevolent economic backdrop.

Examiners who took part in an annual national lending review noted that at a time when shaky underwriting standards and stressed credits are problematic, leveraged loans and borrowing by oil and gas companies were areas of particular concern.

"The agencies noted a significant increase in leveraged lending volumes and continued loose underwriting," the report stated, "as evidenced by weak capital structures and provisions that limit the lenders [sic] ability to manage risk."

The report was issued Thursday afternoon by the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency.

The shared national credit review included in the report occurs annually and examines the "largest and most complex credits" shared by multiple financial institutions, including loans issued by banks as well as by nonbank creditors such as insurance companies, private equity firms, hedge funds or other issuers of collateralized loan obligations.

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This past year's review looked at more than $1 trillion in credit commitments, or about a third of the overall shared national credit portfolio. The suite of loans involved more than 10,600 individual credit facilities and more than 6,500 different borrowers.

Of the credits reviewed, 28 percent contained weaknesses, a figure driven primarily by leveraged loans, the report stated.

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Moreover, the precipitous decline in oil prices over the past year and a half and its impact on the U.S. credit system was also a trouble spot, according to both the report and to banking officials on a Thursday afternoon conference call with reporters.

Oil and gas credits "are in the initial stage of a downturn," the document noted. Still, "while many companies have hedged against price declines, this revenue is non-recurring and will run-off," the report added, "thus potentially affecting future operating cash flows and long-term loan serviceability."