OCC highlights key risks affecting the federal banking system in semiannual risk report
On December 9, the OCC released its Semiannual Risk Perspective for Fall 2019, identifying and reiterating key risk areas that pose a threat to the safety and soundness of national banks and federal savings associations, including credit, operational, and interest rate risks. While the OCC commented that “bank financial performance is sound,” it also advised that “[b]anks should prepare for a cyclical change while credit performance is strong,” emphasizing that “[c]redit risk has accumulated in many portfolios.” The OCC also highlighted that competition with nonbank mortgage and commercial lending could pose a risk as well.
Specific areas of concern that the OCC described include: elevation of operational risk as advances in technology and innovation in core banking systems result in a changing and increasingly complex operating environment; increased use of third-party service providers that contribute to continued threats of fraud; need for prudent credit risk management practices that include “identifying borrowers that are most vulnerable to reduced cash flows from slower than anticipated economic growth”; “volatility in market rates [leading] to increasing levels of interest rate risk”; LIBOR’s anticipated cessation and whether banks have started to determine the potential impact of cessation and develop risk management strategies; and strategic risks facing banks as non-depository financial institutions (NDFI) use evolving technology and expand data analysis abilities (the OCC commented that NDFIs “are strong competitors to bank lending models”). The OCC also noted that there is increased interest from banks in sharing utilities with NDFIs to implement Bank Secrecy Act/anti-money laundering compliance programs and sanctions processes and controls.