To the Chief Executive Officers of All State Member Banks, Bank Holding
Companies, Edge and Agreement Corporations, and State-Licensed
Branches and Agencies of Foreign Banks, in the Second Federal Reserve District:
The Federal Reserve, in response to concerns raised both within the industry and in the supervisory community, recently undertook an intensive study of lending terms and standards. This Loan Quality Assessment Project, involving several hundred loans from across the country and many of the Federal Reserve's most experienced examiners, compared loans made in late 1995 with loans made in late 1997. The study concludes that intense competition for loan customers has led to significant easing of pricing and some non-price terms, but that, on balance, the overall quality of loans being made has in general not changed significantly over the period, due in large measure to favorable economic conditions.
To assist examiners in their evaluations of the quality of credit risk management processes within banking organizations, the Federal Reserve has developed additional guidance that reflects the benefit of this study. The Supervisory Letter outlines the Federal Reserve's new guidance, describing the indications of easing in bank lending, the Loan Quality Assessment Project itself, issues identified by the project as warranting increased supervisory attention, and certain sound practices in loan underwriting and approval processes that contribute to maintaining an institution's loan quality. This guidance is in keeping with the risk-focused frameworks for the supervision of community banks and large complex banking organizations.
Along with the Supervisory Letter is a supervisory staff report entitled "The Significance of Recent Changes in Bank Lending Standards: Evidence from the Loan Quality Assessment Project," (pdf) describing the project's findings in more detail.
Any questions you may have on this guidance should be directed, at this Bank, to a member of the portfolio management team responsible for your organization.