To no surprise, inflation, rising interest rates, cited in report as key risks facing banks

Inflation, a rising interest-rate environment, and ongoing pandemic and geopolitical events are among the key risks facing the performance of the nation’s banks, according to a report issued late Thursday by the national bank regulator.

On the other hand, the report notes, credit risk remains moderate.

In its spring 2022 semiannual risk perspective, the Office of the Comptroller of the Currency (OCC) said interest rate increases and efforts to address inflation concerns pose increasing risk to banks’ investment portfolio valuations, noninterest income sources, and deposit stability.

“Bank management should understand and maintain vigilance on how a rising rate environment could impact the risk profile,” the report states. “Investment portfolios are at risk of depreciation as rates rise, particularly portfolios where duration was extended over the last two years to offset net interest margin (NIM) compression.”

The report also asserts that operational and compliance risks remain higher. Under operational risks, the report states that cyber threats are elevated and continue to evolve, with an observed increase in attacks on the financial services industry. Further, the report states, the geopolitical situation “further heightens the importance of cyber threat monitoring and effective defensive capabilities.” The report asserts that banks’ “increasing reliance on third-party relationships, development and adoption of innovative products, services, and technologies, and ongoing changes to banks’ staffing and the operating environment increase operational risk.”

In compliance risks, the report asserts that banks are “navigating the complexity of sanctions imposed” in response to the Russian invasion of Ukraine. At the same time, the OCC said it has observed an increase in competition for compliance subject matter experts, at both the bank management and staff levels. “In addition, banks continue to manage the impact of forbearance programs and the elevated volume of customers on deferred payment and loss mitigation programs. Supervisory focus remains on fair lending risk identification and management, regulatory changes, and policy initiatives,” the report states

Perhaps a bright spot in the report: credit risk overall remains moderate, with problem loan levels remaining manageable.

“Loan portfolios have been resilient, and widespread credit deterioration has not materialized due to improvements in economic activity, lingering benefits from pandemic-related government actions and relief programs, and prudent bank risk management,” the report states. “The near-term outlook for credit quality is positive, as gross domestic product (GDP) is forecasted to remain strong in the near term and unemployment is below historical averages.”

There remains some uncertainty, the report makes clear, with medium- to long-term impacts of inflation, the war in Ukraine and its impact on global commodities markets, and the interest-rate environment.

OCC Reports on Key Risks Facing Federal Banking System