Higher interest rates are increasing credit risk to the nation’s banks, including in commercial real estate, the federal regulator of national banks said Thursday, noting that “key performance indicators are beginning to show signs of borrower stress across asset classes.”
The Office of the Comptroller of the Currency (OCC) indicated in itsSemiannual Risk Perspective for Fall 2023 that amplified credit risk is also prolonging inflation, impinging on corporate profitability, and raising potential for slower economic growth.
Other key risks noting in the report include:
- Elevated operational risk. Cyber threats continue, the report states, adding that although banks continue to leverage new technology to further digitalization efforts, “increasing digitalization efforts can also heighten risk of fraud and error, including fraud targeting peer-to-peer and other faster payment platforms.”
- Higher compliance risk. The report blamed the higher hazard on greater focus for ensuring equal access to credit and fair treatment of consumers, the expanded use of innovative technologies for product and service delivery, and expanded partnerships with third parties, such as financial technology firms, and increases in Bank Secrecy Act/Anti-Money Laundering (BSA/AML) risk.
- Emerging artificial intelligence (AI) risk. “The potential for further benefits as AI gains more widespread adoption could be significant,” the report asserts. It noted what while developments in the technology may reduce costs and increase efficiencies, as well as to improve products, services, and performance and expand access to credit, “widespread adoption of AI, however, may also present significant challenges relating to compliance risk, credit risk, reputation risk, and operational risk.”
Additionally, the report assets that rising deposit rates, broader market liquidity contraction, and increased reliance on wholesale funding affected net interest margins through the first half of 2023. “Competition for deposits and higher interest rates are raising deposit rates,” the report stated. “Deposit and liquid asset trends stabilized in the latter half of 2023, but these levels were supported by increased reliance on wholesale funding. Increases in interest rates are negatively impacting investment portfolio values.”
OCC Report Identifies Key Risks Facing Federal Banking System