The US regulator responsible for ensuring the soundness of the country's banking sector said on Wednesday it is ratcheting up its scrutiny of risks posed to institutions by fluctuating energy prices and interest rate changes. In a report laying out its objectives for the second half of its fiscal year, the Office of the Comptroller of the Currency said it "will assess the spillover effect of continued low oil prices and evaluate the banks' practices for stress testing affected loans."
Stress testing of banks involves calculating how an institution's balance sheet would be affected by various hypothetical situations. The practice is aimed at identifying areas of vulnerability. A sharp fall in oil prices during the last two years has squeezed the energy sector, making it difficult for companies to pay back loans from banks made during earlier boom times.
In March the comptroller's office released a handbook on oil and gas lending, saying credit problems could arise from "commodity volatility and other specialised risks" even though energy loans tended to be "well-managed and conservatively underwritten." During the second half of its fiscal year, which started on October 1, the agency also plans to focus on how banks measure interest rate risk to ensure they properly assess "vulnerability to changes in interest rates."
It added that it will emphasise the "funding pressure that may arise with deposits." The US Federal Reserve raised rates for the first time in nearly a decade last December and projected that another four rate hikes would occur in 2016. That forecast has since been scaled back to two hikes for the year. Higher rates generally mean banks pay more in interest to depositors and charge borrowers more in interest on loans. The comptroller's office also said it plans to analyse how well banks are complying with anti-money laundering laws, handling cybersecurity threats, managing their concentrated risks, planning their business strategies and meeting "heightened standards for risk governance.