Report: Cybersecurity threats raise operational risk at banks as they act to adapt to changing technology

Operational risk, elevated among banks as they adapt to changing technology needed to counter cybersecurity threats, is among the hazards facing the banking industry, the regulator of national banks said Monday in its semiannual report on risk perspective.

The Office of the Comptroller of the Currency (OCC) also noted rising credit and interest-rate risks in its Semiannual Risk Perspective for Fall 2019.

“Technology advances and innovation in core banking systems result in a challenging operational environment and potential risks if not effectively understood, implemented, and controlled,” the report notes about operational risks. It also points out that “other drivers include the increasing use of third-party service providers,” which the report states require effective planning and ongoing oversight. It also cites “the continued threat of fraud” as another operational risk. “The potential for operational disruptions underscores the need for effective controls and operational resilience to help ensure the ongoing delivery of financial products and services in a safe and sound manner,” the report states.

Regarding credit risk, the report states it has “accumulated in many portfolios.” The report recommends that banks prepare for a cyclical change while credit performance remains strong. That includes maintaining robust credit control functions, particularly credit review, problem loan identification and workout, collections, and collateral management, the report states.

As for interest-rate risk, the report notes that recent volatility in market rates has increased this risk area. “The complexity of asset/liability management is exacerbated by the recent yield curve inversions,” the report adds.

In other areas, the report notes:

  • The London InterBank Offered Rate (Libor) will likely cease to be an active index by the end of 2021. “Accordingly, the OCC is increasing regulatory oversight of this area to evaluate bank awareness and preparedness.”
  • Banks face strategic risks from non-depository financial institutions, use of innovative and evolving technology, and progressive data analysis capabilities.

The report also highlights cybersecurity and technology management as a special topic in emerging risks.

The OCC report covers risks facing national banks and federal savings associations based on data as of June 30, 2019. It presents information in five main areas: the operating environment, bank performance, special topics in emerging risk, trends in key risks, and supervisory actions.

OCC Semiannual Risk Perspective for Fall 2019