By J. Preston Carter, J.D., LL.M.
“There’s no sense of alarm,” regarding banks’ oil and gas portfolios, according to a recent Federal Reserve Bank of Cleveland publication written by Michelle Park Lazette on what low oil prices might mean for loans made to the sector. Lazette pointed to the Federal Reserve Board’s April Senior Loan Officer Opinion Survey, which reported that although bankers expect the quality of loans made to the oil and natural gas drilling or extraction sector to deteriorate somewhat this year, their exposures are small and they are taking actions to mitigate the risk of loan losses.
Of the banks that made loans to oil and gas firms, more than 80 percent indicated that such lending accounted for less than 10 percent of their commercial and industrial (C&I) loans outstanding. That’s a relatively small portion of a bank’s portfolio, according to the Cleveland Fed’s assistant vice president Jenni Frazer. The risk that we are hearing from the bankers is that should oil prices stay low for a much longer period of time, then there’s more reason to worry. In the short term, she added, the oil and gas industry can withstand these lower prices.
Bankers’ actions. The survey reported that bankers expect to write off some loans made to the energy sector. However, Lazette noted, it also reported that bankers are restructuring outstanding loans, reducing the size of existing credit lines, and requiring additional collateral. Frazer added that bankers have increased their oversight and monitoring of impacted borrowers.
Regulators’ roles. Frazer stated that regulators have two roles when a particular risk escalates. “It’s our job to make sure that bankers have the right risk management processes in place to know their exposures and where the risks lie,” she says. “If we don’t see that, we could exercise our authority and direct bankers to establish the right infrastructures and controls.”
“We also have a responsibility to use broader information like what we’re getting from the Senior Loan Officer Opinion Survey to understand the risks nationally or even globally for the industry to make sure there isn’t a systemic risk that would impact financial stability,” Frazer added.
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