Vol. 1, No. 1, April 2017
Welcome to the inaugural issue of ABA Newsbytes: C&I Lending, which provides insights on trends
in commercial and industrial lending from a regulatory perspective. This email will be distributed four
times a year, after quarterly issuances from regulators. Please contact Barry Mills in ABA’s Office of
Regulatory Policy with your editorial feedback and questions.
Contents:
OCC, FDIC, and Federal Reserve Board Issued Data and Analysis on Underwriting Standards
and Commercial Credit Trends
OCC Issues Third-Party Examination Procedures
OCC, FDIC, and Federal Reserve Board Issued Data and Analysis on
Underwriting Standards and Commercial Credit Trends
Executive Summary

According to the OCC’s Fall 2016 Semiannual Risk Perspective, total commercial loan
commitments, including standby letters of credit, increased at a slower pace in the first half of
2016 with a 7.4 percent year-over-year increase. Funded commercial commitments (loans)
increased 11.3 percent year-over-year. Funded growth was concentrated in domestic C&I
loans (11.8 percent), loans to non-owner-occupied commercial mortgages (17.4 percent),
nondepository financial institutions (23.5 percent), and multifamily loans (16.4 percent).

In an article, entitled “Credit Risk Trends and Supervisory Expectation Highlights,” the FDIC
observed loan growth at many banks, although not as dramatically as it did in the lead-up to
the 2008 financial crisis. The agency viewed CRE, agricultural, and oil and gas-related (O&G)
lending as worthy of additional attention given their growth, potential volatility, and importance
to the institutions FDIC supervises.

In the FDIC’s Fourth Quarter 2016 Quarterly Banking Profile, the agency indicated total loan
and lease balances in the fourth quarter increased by $72.3 billion (0.8 percent) while C&I loan
balances fell for the first time in 26 quarters, declining $7.7 billion (0.4 percent). During 2016,
C&I loans increased by 5.1 percent ($94.2 billion), roughly on pace with total loan and lease
growth of 5.3 percent ($466 billion). Community banks, in the fourth quarter increased loan and
lease balances by 1.5 percent. C&I loans in the quarter increased 1.8 percent. For 2016, loan
and lease balances increased 8.3 percent while C&I loans increased 7.5 percent.

The Federal Reserve Board's January 2017 Senior Loan Officer Survey viewed C&I lending
standards as basically unchanged in the fourth quarter of 2016, discussing responses from 70
domestic banks and 23 U.S. branches and agencies of foreign banks.

Furthermore, the FRB reported that demand for C&I loans from large and middle-market firms,
alongside small firms, was little changed, on balance, while a moderate net fraction of banks
reported that inquiries for C&I lines of credit had increased.
The OCC’s Take

Specifically, in the OCC’s 2016 Survey of Credit Underwriting Practices, analysis that covered
the 12-month period ending June 30, 2016, saw decreases in the number of national banks
and federal savings associations that had reported underwriting standards had eased in the
following categories of lending: large corporate lending, leveraged lending and small business
lending.

The most notable degree of commercial credit easing occurred in large and midsize banks,
driven largely by lower pricing, reduced guarantor requirements, and weaker loan covenants.

The OCC reported an increasing number of banks reporting that middle market underwriting
standards had eased.

In its Semiannual Risk Perspective, OCC noted that oil- and gas-related loan portfolios
experienced significant deterioration over the past 12 months as depressed oil prices affected
borrower ability to repay and liquidity.

In the past two years, loan growth has continued (and even accelerated for large banks). Given
sluggish GDP growth and lending activity rebounding in response to the recovery, loan growth
momentum may be hard to maintain – especially should the slowdown in GDP persist.
The FDIC’s View on Credit Risk Trends and Supervisory Expectations

Nearly 33 percent of institutions grew their loan portfolios in excess of 10 percent year-overyear as of September 30, 2016, compared to 48 percent as of June 30, 2005.

An increasing percentage of banks have potential concentration in, and high growth of, CRE
and Ag loans. While not captured via Call Report data, signs of stress in O&G lending have
materialized.

The data shows lending concentrations may necessitate enhanced attention and risk
management, particularly in instances of excessive reliance on potentially volatile funding
sources. Institutions should also ensure they hold sufficient capital commensurate with the
level and nature of risk exposure.
The FRB’s Input on Q4 2016

Changes to terms on C&I loans for large and middle-market firms were mixed. Specifically, a
moderate net percentage of banks reportedly increased the maximum size of credit lines, while
a modest net percentage of banks reportedly eased loan covenants, reduced the cost of credit
lines, and narrowed spreads of loan rates over their cost of funds.

The remaining terms surveyed remained, on net, basically unchanged. Banks also indicated
that changes in the terms of loans to small firms were mixed. Specifically, a modest net
percentage of banks reported increasing the maximum size of credit lines and narrowing
spreads of loan rates over their cost of funds, while the remaining terms surveyed remained, on
net, unchanged.

Most domestic banks that reported stronger C&I loan demand cited increases in customers'
investment in plant or equipment and increases in customers' merger or acquisition financing
needs. Meanwhile, most banks that reported weaker C&I loan demand noted the following
reasons: decreases in customers' investment in plant or equipment, decreases in customers'
accounts receivable financing needs, increases in customers' internally generated funds, and
decreases in customers' merger and acquisition financing needs.
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OCC Issues Third-Party Examination Procedures
Executive Summary

The OCC issued examination procedures to supplement OCC Bulletin 2013-29, “Third-Party
Relationships: Risk Management Guidance,” issued October 30, 2013.

The examination procedures appear to largely be aligned with the 2013 OCC Guidance, but
have an enhanced focus on credit risk associated with third-party relationships. The
procedures also reference marketplace lending.

These examination procedures continue the apparent trend of regulators issuing third-party
guidance independent of the Federal Financial Institutions Examination Council, which is a
coordinating mechanism for the federal banking agencies. The FDIC issued Proposed Thirdparty Lending Guidance in July 2016. The ABA commented that the FDIC should coordinate
with other federal banking agencies on common guidance regarding third-party activities.
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