Potential uncertainty and volatility in interest rates and loan performance in the face of inflation and other potential market issues should encourage banks to assess exposures and adjust risk profiles, the regulator of national banks said Tuesday.
Speaking at the Bloomberg Risk & Regulation Week 2022, Acting Comptroller of the Currency Michael Hsu said financial assets and other market indicators have been sending decidedly mixed signals. He said the banking system remains well positioned to “handle a range of scenarios” with high capital and liquidity levels but added that “now is the time for banks to take a fresh look at their exposures and take actions to adjust their risk positions – to “trim their sails,” so to speak – ahead of potential uncertainty and volatility.” He cited the war in Ukraine, commodities and supply chain disruptions, uncertainty in China, and the recent correction in the tech market as examples.
“Empowering risk managers and enforcing discipline in risk-taking will enable banks to better navigate the rate environment and will lower the chances of nasty surprises as quantitative tightening occurs,” Hsu said. “Actions today to defease high-impact tail risks can temper the need to go full ‘risk-off’ tomorrow, ensuring that the banking industry can remain a source of strength to the economy, as it has throughout the pandemic and recent market turbulence.”
In other comments, Hsu:
- Discussed risk mitigation for counterparty and sector concentrations, noting that default of a single counterparty can lead to large, unexpected losses and, in some cases, to broader contagion, and that large sector concentrations can cause banks considerable losses when markets turn. For counterparty concentrations, Hsu said risk aggregation and accommodations for priority clients warrant special attention. For sector concentrations, he said loans to non-depository financial institutions (NDFIs), and for commercial real estate (CRE) are of particular concern, noting that CRE remains the most significant sector concentration for midsize and community banks.
- Noted that some banks are increasing risk appetite in retail credit, loosening some underwriting practices to obtain new customers and volume growth, and that inflation has outpaced wage growth, possibly diminishing consumers’ ability to qualify for credit products or maintain their capacity to pay existing debt