A US financial regulator has warned that the number of analysts in banks who can spot bad loans has dropped over time.
The Office of the Comptroller of the Currency flagged the issue in its spring report on the federal banking system.
It said the current operating environment for US banks “remains challenging” due to the sharp hike in interest rates, and that credit risk is increasing as a result of higher rates in the commercial real estate sector.
This is primarily in the office property space and some multifamily property types that are experiencing stress.
According to the OCC, such stress “could strain” the resources of credit risk review and loan workout functions at banks.
The watchdog also pointed out that the number of staff who can spot such credit risk and deteriorating loans is falling in number. “Retirements and other attrition, coupled with an extended benign credit period, have decreased the number of credit risk professionals with problem loan identification and mitigation experience. It is important for banks to ensure that staffing plans for workout functions,” it said.
It added that it is important for banks to ensure that risk models are as up to date as possible.
The OCC did find some signs of improvement with CRE loan growth slowing throughout 2023.
But loan concentrations in certain sectors and geographical areas continue to present heightened risk where banks have exposure to them.
New York City and California have rent control regulations and buildings with rent-regulated units. These units might experience greater net operating income compression due to a limited ability to offset rising costs.
On the other hand, Nashville in Texas and Salt Lake City in Utah are overbuilding luxury properties, which leads to further devaluation for older properties.
The OCC’s survey is based on data as at December 31 2023 and covers risks facing national banks, federal savings associations and federal branches.
“The outlook for the remainder of 2024 relies on banks’ ability to manage funding costs, weaker loan growth, and higher credit costs,” it said.
Reacting to the paper, Fitch Ratings senior director for North American banks, Mark Narron, said: “The rated universe of US banks generally has strong credit risk management departments headed by professionals with multi-cycle experience. However, at the 4,700 or so smaller banks, not to mention credit unions, I imagine that there could be a talent shortage.
“Generally speaking, many observers have noted that the 14 or so years since the financial crisis means that a generation of experienced credit risk professionals have retired, while a new generation of rising professionals have never seen a real credit cycle.
“From what I’m seeing at the large banks, collections and workouts are proceeding smoothly.”
