The Office of the Comptroller of the Currency (OCC) is warning that the safety and soundness of the banking industry is slipping. Wall Street is all gaga for bank stocks, even Meredith Whitney has turned bullish, thinking the worst is over.
The regulators, who generally aren’t early to any party, see it differently. Banks are like anyone else in Bernanke’s ZIRP world. They need yield to pay the bills. The American Banker reports,
“The low interest rate environment continues to make banks vulnerable to rate shocks. Small banks, in particular, are increasingly adding to investment portfolio positions and increasing duration to obtain higher yields,” the report said.
As a result, some banks are pursuing new business lines – such as indirect auto, asset-backed and oil and gas lending, for which they might not be fully prepared, OCC officials said.
The big banks are picking up business from their European competitors that are suffering with the collapse in Europe, but small banks don’t have that option. But the big guys are not home free. The legal, repetitional, and operational costs of the mortgage crisis are still with them.
Bankers are relaxing underwriting standards to get deals according to the OCC. Banks that used to load up on real estate are now loading up on C & I loans “without appropriate control processes.” Banks are vulnerable to deposit runoff if interest rates increase. And then there’s Dodd-Frank and Basel III. “The unprecedented volume and scope of change in the domestic and international regulatory environment challenges business models and revenues.”
“This is probably the biggest emerging risk area that we try to emphasize,” said Darrin Benhart, deputy comptroller for credit and market risk at the OCC, in a conference call with reporters. “Banks are looking for ways to have higher earnings. How do you get that? Oftentimes you have to go out on the risk curve.”
But that’s what Bernanke’s ZIRP is all about–taking more risk and hiring more people to do it. The Fed has its foot on the gas, bank regulators have their foot on the brake.