Banks Taking Steps to Mitigate Energy Loan Losses

Many financial institutions surveyed by the Fed expect the quality of energy loans to deteriorate in 2015.
Matthew HellerMay 5, 2015
Banks Taking Steps to Mitigate Energy Loan Losses

While U.S. banks don’t have much credit exposure to oil and gas firms, they are taking steps to protect themselves from declining oil prices, according to the Federal Reserve.

The Fed’s April survey of senior loan officers found that for the majority of banks, loans to energy firms currently outstanding represented less than 10% of their commercial and industrial loan portfolios. Energy loans did not account for more than 20% of any bank’s C&I portfolio.

Of those banks with energy loan exposure, 45% expect loan quality to deteriorate somewhat during the remainder of this year, and an equal number sees loan quality remaining around current levels.

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“Banks indicated they were taking a variety of actions to mitigate loan losses, including restructuring outstanding loans, reducing the size of existing credit lines, requiring additional collateral, tightening underwriting policies on new loans or lines of credit, and enforcing material adverse change clauses or other covenants,” the Fed said.

Among the possible loss-mitigation measures, respondents stressed in particular the importance of tightening underwriting policies and reducing credit lines.

Fifty-one senior loan officers responded to the central bank’s survey, including 33 at the largest banks. Elsewhere in the C&I sector, the survey found little change in lending standards and banks reported little change in demand for C&I loans in the first quarter.

In commercial real estate lending, on balance, survey respondents reported having eased standards on loans secured by non-farm nonresidential properties. There was also some easing of standards for a number of categories of residential mortgage loans over the past three months on net, while demand for mortgages and home equity lines of credit rose in the first three months of the year.

Among the reasons for softening CRE loan standards were more aggressive competition from other lenders and an improving outlook for commercial property vacancy rates, the survey found.