Two of the more common deficiencies we see are the failure to obtain independent confirmation of a borrower’s income and failure to test a borrower’s capacity to keep making repayments if, over the course of the loan, interest rates were to increase. As competition intensifies, the strength of banks’ risk management systems for commercial and consumer loans is likely also to be tested.
We have already expressed our concern that some current lending practices do risk sowing the seeds of future credit quality problems for banks. This concern has not increased in recent months. Nor has it diminished. Despite their various and strenuous efforts to maintain recent profit performance, banks’ earning rates are likely to remain under strong downward pressure in coming years.