‘Risk perspective’ paints grim picture for banks’ financial performance for year due to impact of pandemic

Weak financial performance and increasing credit, operational, and compliance risks resulting from the financial impact of the coronavirus crisis are among the “key risk themes” outlined in a report issued Monday by the federal bank regulator.

The Office of the Comptroller of the Currency (OCC) said its Semiannual Risk Perspective for Spring 2020 that banks entered the COVID-19 pandemic in sound condition but face weak economic conditions resulting from the economic shutdown in response to the pandemic that will stress financial performance in 2020.

Among other things, the report states that bank profitability will suffer as interest rates (now at historic lows), past-due loans and provisions for loan losses increase at the same time that operational expenses are rising.

The report asserts that an uncertain credit environment that “will test the resiliency of commercial and retail loan portfolios” will be created. “Credit risk management practices will need to be flexible and proactive to meet the challenges of the current environment,” the report states.

The agency said operational risk is elevated at banks as they apply new processes and procedures, adopt pandemic-related continuity plans, and respond to increased fraud and cyber risk. The report points to banks amending business processes and engaging third parties to support widespread remote work capabilities as examples of operational risk, with risks related to increasing technological capacity, and solutions to maintain operations under elevated operational volumes also at play.

And the report stated that compliance risk for banks increases due to new assistance programs for consumers and small businesses, resulting in high call volumes and reassigned staff implementing new practices and procedures.

“Compliance risk is elevated because of a combination of altered operations, employees working remotely, and several new federal and state programs designed to support consumers such as the CARES Act, Paycheck Protection Program, and a variety of forbearance and deferred payment programs,” the report states. “Among other challenges, these conditions complicate the compliance responsibilities associated with managing high volumes and various programs of consumer and business lending in a weakened economy.”

OCC Semiannual Risk Perspective for Spring 2020