The downturn in the U.S. energy industry is spilling over to businesses and households in energy-dependent regions, affecting the credit quality of auto and other loans, according to the U.S. Federal Reserve.
The Fed’s April survey of senior loan officers found a majority of banks have taken steps to mitigate energy-related loan losses, including tightening lending policies on new loans or lines of credit made to energy firms, restructuring outstanding loans, requiring additional collateral, and setting aside additional reserves for a potential increase in loan losses.
A significant percentage of banks also reported hedging the risks arising from declines in energy prices through derivatives contracts.
The survey also showed there has been a spillover from the energy sector onto the credit quality of loans made to borrowers in energy-dependent regions.
In particular, the Fed said, “a significant net fraction of banks reported that credit quality deteriorated for both auto loans and non-energy-sector C&I loans somewhat over the past year. Furthermore, moderate fractions of banks indicated that [commercial real estate] loans, consumer credit card loans, and consumer loans other than credit card and auto loans made to businesses and households in these regions also deteriorated somewhat over the past year.”
Twenty-eight percent of banks have seen deterioration in C&I loan quality to non-energy borrowers in energy-dependent regions and 25% have seen deterioration in auto loan quality. Two-thirds of respondents expect the quality of loans to energy firms to deteriorate over the remainder of 2016.
Generally, banks tightened their lending standards on commercial and industrial and commercial real estate (CRE) loans over the first quarter of 2016, with most of those banks citing a less favorable or more uncertain economic outlook as well as a worsening of industry-specific problems affecting borrowers as important reasons.
Respondents also said they had eased lending standards on most types of residential real estate mortgages, while demand for these loans strengthened over the first quarter. Modest net fractions of banks reported easing lending standards on credit cards and other consumer loans, whereas lending standards for auto loans remained basically unchanged.