Banks may take on excessive risk to make up for a dragging housing market and low revenues, a U.S. banking regulator said on Thursday.
In its first "Semi Annual Risk" report for Spring 2012, the Office of the Comptroller of the Currency (OCC) said the slow economic recovery, low interest rates and bad loans continue to drag down profits, which may encourage banks to boost leverage and lower underwriting standards to increase profitability.
"Top risks facing national banks and federal savings associations include the lingering effects of a weak housing market, revenue challenges related to slow economic growth and market volatility, and the potential that banks may take excessive risks in an effort to improve profitability," the OCC said in a statement.
Banks have been under pressure to reduce risk since the financial crisis after risky lending and derivatives bets at top financial institutions nearly toppled the U.S. financial system and led to massive taxpayer bailouts.
The overhang of severely delinquent loans and in-process foreclosures on residential mortgages is a big drag on banks, the report said.
Low interest rates limit the ability of many banks to reduce funding costs and make banks vulnerable to rate shocks, the OCC added.
The eurozone's sovereign debt crisis and the threat of a eurozone break-up have lowered credit quality and increased market uncertainty, increasing the cost of long-term debt and equity for large U.S. banks, the report added.
"These issues continue to weigh on market confidence and the economic recovery in Europe and the United States," the OCC said in a statement.
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