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USA: 48% of banks lower lending standards

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This is a very important piece of news. Reported in LA Times, the largest of US banks have lowered their lending standards and the level is approaching the levels of 2008 financial crisis! As per the Office of the Comptroller (OCC), the largest US banks are going after profits and have been loosening their underwriting standards. In short, taking on higher risks for more profits. The few areas of concern would be the lending to large corporate loans, consumer loans and in leveraged lending. Leveraged lending is the risky financing often used to fund corporate buyouts. More often than not, the corporate buyouts would involve a higher valuation and then a reorganisation with an eye for improvements in performance. This does not always happen. When it happens, the funds get huge returns. When it does not, everyone takes a ‘haircut’.

Fortunately, for now, this is the only negative part. It also said that the quality of the mortgages have improved along with the better economic condition. In short, we can say people who borrow generally can pay back easily. Defaults are on a downtrend thus far. This survey from OCC looked at 91 of the largest banks with loan portfolios of about US$4.9 billion of 94% of loans in the federal banking system. I repeat. Lending standards are lowered for 94% of total loans. Yes, now you can see the risks. OCC reported that the credit risk will continue to increase in 2015. So, would the recession really happen end of 2015 as predicted? Read here: 65% probability – recession by end 2015. Only time would tell because no economist or analyst can tell you the exact day that the crisis will unfold.

Oh yeah, dissecting the numbers further, OCC said that 48% of all the banks that lend for commercial products showed the MOST loosening of standard. Remember some of the adverts in Malaysia which says, ‘blacklisted also can apply?’. Okay, it’s not this bad but loosening of standards are not a good thing. There are reasons why those standards were set in the first place. While it is fortunate that the lending guidelines in Malaysia is stricter and it’s much harder to get a loan these days. Rejection are higher than 50% of the time for the new mortgage applications. Ask any developer and they would tell you this sad case. Their buyers booked but had to cancel as their loan applications were rejected. However, do be reminded that IF the financial crisis happens again in the world’s largest economy, it will affect everyone. Just look at the current currency volatility and you should know. The extent? It depends on our exposure thus far. Over-exposure may just ‘kill’ us. Happy managing our risks.

written on 18 Dec 2014

Next suggested article: Speculators, Interest Rates and Over-Leveraging

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