Credit risk on rise, OCC panel says in semiannual report

Rising credit risks, elevated operational and compliance risks, and factors driving interest rate risk for national banks and federal savings associations are detailed in a semiannual report issued Monday by a panel charged with monitoring system risk for the Office of the Comptroller of the Currency (OCC).

The Semiannual Risk Perspective for Fall 2018, produced by the OCC’s National Risk Committee, is based on data as of June 30, 2018. The report focuses on issues that pose threats to financial institutions regulated by the OCC and is intended to be a resource to the industry, examiners, and the public.

The report summarizes the panel’s latest risk findings as follows:

  • Credit quality remains strong when measured by traditional performance metrics. Nonetheless, credit risk is increasing because of accumulated risk in loan portfolios from successive years of incremental easing in underwriting, risk layering, concentrations, and rising potential impact from external factors. The OCC continues to monitor the effects of strong competition, within and outside the federal banking system, particularly on the origination quality of new loans. In addition, the OCC is monitoring for any increased levels of lender complacency within credit risk identification and management.
  • Operational risk is elevated as banks respond to an evolving and increasingly complex operating environment. Cybersecurity continues to be a key operational risk, especially in light of the continually evolving threat landscape. Innovation in the banking industry emphasizes the need for banks to effectively manage operational changes as technology advances. Banks increasingly rely on third-party service providers to deliver key services, which presents distinct risks. Further, there are examples of core activities for the industry that are concentrated in a handful of third-party service providers. Additional factors contributing to elevated operational risk are the expected increase in mergers and acquisitions activity as well as rising trends in fraud and attempted fraud. Operational disruptions underscore the need for effective change management when implementing new products, services, and emerging technologies.
  • Compliance risk remains elevated as banks seek to manage money-laundering risks in a complex, dynamic operating and regulatory environment. In addition, the adoption of new technologies and other innovations and implementing changes to policies and procedures to comply with amended consumer protection requirements are challenging banks’ compliance risk management processes.
  • Interest rate risk poses potential challenges given the current rising rate environment, competitive pressures, changes in technology, and untested depositor behavior. All of these factors make it difficult to forecast liability costs. The advances in technology, such as online banking, mobile banking, and the acceleration of fintech, have made it easier to move money, potentially causing depositors to switch financial institutions or switch to nonbank competitors. Banks may experience unexpected shifts in liability mix or increasing costs that could reduce earnings or increase liquidity risk.

Among the issues noted that could develop into key risks is the implementation of the current-expected-credit-loss (CECL) standard, which the report says may pose operational and strategic risk to some banks when measuring and assessing the collectability of financial assets.

The report also highlights the emerging risk posed by the growth in nonfinancial corporate debt, and includes a credit underwriting assessment supplement.

OCC Report Discusses Key Risks for Federal Banking System

Semiannual Risk Perspective, Fall 2018 – by OCC National Risk Committee

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