US banks face the prospect of tougher stress tests next year because of their exposure to oil, underlining how the falling price of crude is transforming the outlook not just for energy companies but the financial sector.

The Opec last week lowered its long-term estimates for oil demand and said the price of crude would not return to the level it reached last year, $100 a barrel, until 2040 at the earliest. In its World Oil Outlook it said energy efficiency, carbon taxes and slower economic growth would affect demand. Crude oil’s price last Tuesday hit an 11-year low of under $36 a barrel, piling pressure on banks that have big loans to energy companies or significant exposure to oil on their trading books.

The US Federal Reserve subjects banks with at least $50bn in assets — including the US arms of foreign banks — to an annual stress test that is designed to ensure they could keep trading through a deep recession and a big shock to the financial system.

Oil prices are about 55pc below the level when the Fed set last year’s stress test scenarios. That test included looking at how banks’ trading books would fare in the event of a one-off 68pc fall in oil prices before the end of 2017. Banks’ loan books were not tested against falls in oil prices.

Banks including Wells Fargo have recently spoken about the dangers of low oil prices that could make exploration companies and oil producers unable to pay their loans.

There were now five times as many oil and gas loans in danger of default as there were a year ago, US regulators warned in November.

Michael Alix, who leads PwC’s financial services risk consulting team in New York, warned that the price of oil would weigh much more heavily on the assessors when drawing up next year’s bank stress tests.

“It would test those institutions for both the direct effects [of oil price falls] on their oil or commodity trading business but importantly the indirect effects [of] lending to energy companies, lending in areas of the country that are more dependent on energy companies and energy-related revenues,” he said.

Published in Dawn, Business & Finance weekly, December 28th, 2015