Oil Sector May Not Cause Financial Apocalypse After All
Across the oil patch, banks are starting to close off their exposure to some of the riskiest oil drillers.
A new monthly survey from the Federal Reserve finds that banks that have issued loans to oil drillers are projecting some of them to go bad. Over the course of 2015, the Fed says that oil loans could “deteriorate” and that banks “expected delinquency and charge-off rates.” At the same time, the overall exposure to such loans remained small.
Around 80 percent of the banks surveyed by the Fed indicated that their exposure to shaky oil companies accounted for less than 10 percent of their commercial lending. In that sense, a wave of defaults across the oil and gas country would appear unlikely to ripple through the financial industry. Still, over half of the banks who made loans to drillers expect their loan quality to deteriorate.
Related: Is This The Top For Oil Prices For Now?
In recent months, the biggest banks have stated that they have cut lending as they begin to see losses on the horizon. Citigroup and JP Morgan Chase, among others, have set aside around $100 million each in order to cover the losses they expect from oil and gas lending.
To shield themselves, banks are starting to restructure loans, cut credit lines to drillers, require more collateral, and stiffen their terms for new loans, the Fed survey finds. In other words, they are withdrawing somewhat from lending to fossil fuel companies, but for the new and existing loans that are on offer, banks are also exacting a higher price.
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