While community banks have good reason to be optimistic about future opportunity (especially with the prospects of “regulatory relief” at both the regulatory and legislative levels), there are a number of risks that should be watched closely, the deputy comptroller of the currency told a Chicago audience Friday.
Speaking at the Joint Community Bank Symposium, Blake Paulson, deputy comptroller for the central district office of the Office of the Comptroller of the Currency (OCC) said bankers, industry representatives, regulators, and legislators are “having conversations today that would not have been possible just a few months ago” about regulatory relief.
He cited introduction of legislation in the Senate, proposals to relax Volcker Rule requirements, and a proposed simplification of capital requirements for smaller institutions.
However, he also told the group that strategic, credit, operational, and compliance risks remain ahead. In particular, he cited succession planning, greater risk appetite in commercial and retail credit underwriting, and compliance with upcoming Home Mortgage Loan Disclosure Act (HMDA), Military Lending Act (MLA) and integrated Truth in Lending Act and Real Estate Settlement Procedures Act disclosures (TRID) requirements.
“We see too many family-owned and operated banks reach a point where the next generation chooses to leave banking and as a result more small banks disappear,” Paulson said, calling succession planning “one of the most significant strategic risks facing community banks.”
Regarding commercial real estate (CRE) lending, Paulson said growth is evident in all sizes of banks. “But the CRE concentration build-up is primarily in community banks,” he said.
He cited results from recent supervisory activities which has raised OCC concern over the quality of CRE risk management.
“Credit risk is increasing because of increased risk layering, rising loan policy exceptions, higher loan-to-value ratios, and weaker loan controls or covenant protections,” he said. “At the same time, CRE investment has shifted from multifamily to retail sector projects, and the condition of the local economy can have a profound effect on the performance of these credit assets.”
On compliance risk, Paulson said the agency will be focusing over the next six to 12 months on the various changes involving HMDA, MLA and TRID. He said adapting to the changes in each of the areas would prove “challenging,“ but noted that “these are risks that should sound very familiar to all of you.”
The deputy comptroller (who was filling in for former Acting Comptroller Keith Noreika, who resigned Thursday following the confirmation by the Senate of permanent Comptroller Joseph Otting) also told the group that bank implementation of effective Bank Secrecy Act (BSA) compliance can be difficult for some banks, “creating a source of compliance risk.”