Fed, OCC, FDIC: US Bank Loan Risk On The Decline

For big bank loans taken out before April of 2018, prospects of repayment are good, federal banking regulators said on Friday (Jan. 25). However, the portion of loans owed by strongly leveraged borrowers is still high.

Reuters reported that the U.S. Federal Reserve, Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) all released a joint report saying that due to a healthy economy, prospects for loan repayment look good.

“Federal banking agencies find that risk in the portfolio of large, syndicated bank loans has declined, due to improving conditions in most sectors,” the agencies said in a statement that was released with a scheduled biannual review of big loans.

The statement also said there was a bigger share of loans that were rated “below pass” when compared to previous economic periods. Below pass loans are generally flagged by creditors because they come from borrowers who have higher leverage levels than the average loan, or there are other reasons to doubt repayment.

“Risks associated with leveraged lending activities are building in contrast to the portfolio overall,” the report said.

In stock market news, Goldman Sachs warns that in regards to the recent selloff, wealthy households could feel some of the pain.

According to a report in Bloomberg, citing a research report Goldman Sachs Economist Daan Struyven wrote on Tuesday (Jan. 15), the economist warned that the declining stock market could result in half a percentage point coming off the U.S. gross domestic product (GDP) growth for this year. Struyven also predicted expansion being restricted by about 1 percentage point because of tighter financial conditions. Bloomberg noted that in October, the positive wealth effect from stock gains in 2017 and early last year have all but disappeared.

“The hit to the wealth level from a 1 percent decline in stock prices is now about three times larger than in the late ’80s for the top 10 percent of households, and a third larger for those in the 50-90th percentiles,” Struyven wrote.