Banks with lowest ratings at lowest point in eight years, comptroller’s risk report finds

The number of banks and mutual savings associations with exam ratings of 4 or 5 is at its lowest level since 2011, continuing a decline that began eight years ago, the federal regulator for the institutions reported Monday.

The number of lowest-rated national banks alone, the agency also noted, is at its lowest since 2005.

In its Semiannual Risk Perspective for Spring 2019, the Office of the Comptroller of the Currency (OCC) said the decline in low-rated banks and savings associations “results from a variety of factors that include recapitalizations and improvements in risk management and merger and acquisition activity.”

Graphics in the report (which do not reveal precise numbers) indicate that the number of banks rated 4 or 5 was about 10 as of the end of the first quarter 2019 – about the same number as for all of 2018. In 2011, just fewer than 200 banks and thrifts were rated 4 or 5.

Also, the OCC report showed that the number of outstanding enforcement actions (EAs) against the institutions under supervision is also on the decline (since 2010, when the actions peaked). The agency said the decline in EAs reflects “improvement in banks’ risk management practices, recapitalization efforts, and other factors.” The agency noted that compliance or operational failures continue to be the leading cause of EAs at banks and thrifts, addressing “a lack of appropriate governance, oversight, and risk management systems and controls.”

In other areas, the report states:

  • Risk is accumulating in bank and thrift loan portfolios following successive years of growth, incremental easing in underwriting, risk layering, and building credit concentrations.
  • Persistent cybersecurity threats as well as innovation in financial products and services, and increasing use of third parties to provide and support operations that are not effectively understood, implemented, and controlled, is elevating operational risk at the financial institutions.
  • Challenges to effectively managing money laundering risks related to Bank Secrecy Act/Anti-Money Laundering (BSA/AML) is making compliance risk “high” in that area.
  • “Interest rate risk and the related liquidity risk implications pose potential challenges to earnings given the uncertain rate environment, competitive pressures, changes in technology, and untested depositor behavior,” the report notes.

OCC Report Highlights Key Risks for Federal Banking System