On July 27, 2016, the Federal Deposit Insurance Corporation (“FDIC”) issued a Financial Institution Letter regarding Prudent Risk Management of Oil and Gas Exposures. The letter states that due to the complex and highly specialized nature of loans to borrowers in the oil and gas industry, banks should be adequately prepared to deal with the accompanying volatility of this industry. Conservative underwriting, appropriate structuring, experienced and knowledgeable lending staff and sound loan administration practices were cited as prudent risk management tools to protect the bank against the inherent volatility.
To reduce the risk to FDIC supervised institutions, the letter reminds banks to spread their risk by geography, industry or borrower concentrations, whenever possible. If a bank cannot spread its risk accordingly, it is recommended that the bank assess whether setting the capital level higher than the regulatory minimum would be prudent.
The letter encourages banks that are affected by significant downturns in commodity prices to work with the afflicted companies towards a mutually-advantageous workout plan, while maintaining effective internal controls to manage such loans.
To view the full text of the FDIC guidance, click here.