Credit risk on rise, operational risk remains elevated for banks as consumers face challenges, report contends

Credit risk is rising and operational risk is elevated, as a “maturing economic cycle may cause consumer headwinds,” the regulator of national banks said Tuesday.

In its Semiannual Risk Perspective for Spring 2024, the Office of the Comptroller of the Currency (OCC) said the overall condition of the national banking system remains sound. However, given the expected challenges for consumers, “continuous risk management improvement remains appropriate as this allows banks to guard against complacency.”

Regarding credit risk, the OCC said commercial real estate is “experiencing stress due to a higher rate environment and structural changes.” The agency singled out the office sector and some multifamily property types. “Office and multifamily loans, particularly those with interest-only terms, set to refinance over the next three years pose additional risk,” the OCC said. “Sticky inflation and elevated interest rates may increase consumer financial stress in some households and weigh on overall consumption growth.”

On operational risk, the OCC cited “an evolving and and increasingly complex operating environment.” The agency singled out ransomware and other attacks from malicious actors targeting banks and others. “Increasing digitalization, new and innovative product and service adoption, and third-party use increase bank operating environment complexity creating both opportunities and risks,” the OCC said. “Continued check and wire transfer fraud and increased payment fraud incidents both underscore the importance of fraud risk management.”

The report also contended:

  • Net interest margins (NIMs) are under pressure due to strong deposit competition. However, recent trends “indicate that pressure on funding costs and NIMs may be nearing a peak.”
  • Risks are compounded if products and services, including changes, are not delivered or implemented in a fair and equitable manner. “It remains important for banks to maintain a compliance risk management framework that is commensurate with their risk profiles and capable of growing and evolving as their risk profiles change.”
  • Fraud continues to be significant risk for banks. “Effective processes to prevent, identify and file suspicious activity reports on fraudulent activity in a timely manner remain important to protect both banks and consumers,” the agency said. It singled out check and wire fraud, and P2P transaction scams as having become more prevalent.

The report is based on data as of year-end 2023, unless otherwise indicated, the agency noted.

OCC Report Highlights Key Risks in Federal Banking System