The FDIC released its Winter 2015 issue of Supervisory Insights. The issue includes three articles highlighting important areas the FDIC views as concerns for the financial services industry: A Framework for Cybersecurity; Marketplace Lending; and Results from the FDIC’s Credit and Consumer Products/Services Survey.
A Framework for Cybersecurity
Cyber-attacks have increased in frequency and sophistication during the last decade. Cybersecurity risks include malicious software, referred to as “malware,” distributed denial-of-service (DDoS) attacks, and compound attacks. The FDIC notes that financial institutions must have a framework in place, from management down, to address cybersecurity risks and to implement strategies to safeguard valuable data. The FDIC views education and an institutional cultural awareness of cyber risk as key in combating these attacks, and training should be available not only to bank personnel and contractors, but also to customers, merchants, and other third parties who are other access points to a bank’s data systems. The FDIC provides several training and informational videos, as well as a training simulation exercise, Cyber Challenge.
Marketplace lending is the pairing of lenders and borrows through an online platform without the traditional bank intermediary. A prospective borrower applies for a loan online. The marketplace lending company assesses the loan application and assigns the prospective borrow an interest rate based on the company’s own credit scoring tool. The marketplace lending company then advertises the loan to retail investors so they can review it and pledge funds. If enough investors pledge sufficient capital within the loan request deadline, the loan will fund. Alternatively, institutional investors can fund loans through whole loan purchases or direct securitizations. The marketplace company then either lends the funds directly or partners with a traditional bank to extend the loan. Investors receive either registered or unregistered security notes in exchange for their investments to fund the loan. The borrower makes payments to the direct marketplace lender and the security notes are the direct marketplace lender’s obligation, with the investors as its unsecured creditors.
The FDIC identified various risks for investors, including third-party, credit, compliance, liquidity, transaction, servicing, and bankruptcy risks. However, the market is young and has been in an environment of primarily low and steady interest rates so the risks may not be fully identified. The FDIC expects banks to evaluate each marketplace lending company individually, for compliance with applicable state and federal laws regarding fair lending and other related laws, and underwriting and pricing policies and procedures.
Results from the FDIC’s Credit and Consumer Products/Services Survey
The FDIC’s risk-management examiners have assessed lending conditions and risks through the Credit and Consumer Products/Services Surveys (Credit Surveys) completed through the first half of 2015. Bank loan growth demonstrates that recovery from the financial crisis continues to pick up. Credit Survey respondents assess the risk in most lending portfolios as “low” to “moderate,” with “high” risk portfolios declining substantially.
The FDIC sees some early signs of emerging risk with this growth. Nearly all portfolios demonstrate an improving trend, but some portfolios report a slight increase in the proportion of “high” risk designations in the first half of 2015. Out-of-area loans are increasing, a practice that grew dramatically in the years prior to the crisis. These loans deteriorated quickly because of weak due diligence, lack of knowledge about the area where the loan was made, and reliance on poorly managed credit by third parties. Banks began making fewer of these loans after the crisis, but the Credit Survey results show that out-of-area lending increased during the first half of 2015. Funding concentrations are also on the rise. The FDIC expects banks to continue to evaluate their loan growth strategies to remain competitive while mitigating these risks.
The FDIC Winter 2015 issue of Supervisory Insights is available here: https://www.fdic.gov/regulations/examinations/supervisory/insights/siwin15/SI_Winter2015.pdf.