Office of Comptroller of Currency Report Highlights Strategic, Credit, Operational, and Compliance Risks
The persistence of low interest rates, the new technologies that offer opportunities to bankers—and, perhaps, also to cybercriminals—a weakened oil and gas industry, and an array of new laws and their inevitable new regulations, all contribute to the risks that federally chartered banks and savings associations constantly must manage, according to the Semiannual Risk Perspective for Spring 2016, published this month by the Office of the Comptroller of the Currency.
Although net income for the federal banking system rose by eight percent over the previous year, driven by strong loan growth and lower noninterest expense, according to the report, risk management remains a critical function to maintenance of a safe and sound banking system.
Based on data through year-end 2015, the report was prepared by the OCC’s National Risk Committee, which monitors the condition of institutions supervised by the OCC to identify emerging threats. The NRC meets quarterly, the report says, and "issues guidance to examiners that provides perspective on industry trends and highlights issues requiring attention." The OCC issues such reports twice each year.
Key risk issues identified in the current report are not markedly different from those that were discussed in the fall 2015 risk assessment: the top concerns are strategic, credit, operational, and compliance risk, while interest-rate risk is said to warrant continued monitoring.
The report says strategic risk has grown as institutions operating in an environment of continued low rates offer innovative products and services that are aimed at retaining existing customers and attracting new ones, while those institutions face increased competition, not only from other banks but also from nonbanks and from financial technology companies.
Many new products and services involve new technologies, or partnering with third parties, which can increase operational risk by creating new vulnerabilities to cybercrime, as well as possible new threats to institutions' BSA/AML risk management.
The report attributes increased credit risk to the stronger loan growth in 2015, coupled with an easing of underwriting standards. Indirect auto lending, leveraged lending, and continued growth in CRE lending are cited as areas where there is a need to implement prudent risk-management practices, "and to maintain capital levels commensurate with the level and nature of an institution’s concentration risk."
Banks are subject to new compliance risks as a result, among other things, of new regulations affecting residential mortgage lending and certain loans to members of the military. As of October 3, 2015, residential mortgage lenders became subject to the requirements of the new integrated mortgage disclosures mandated by the Truth-in-Lending Act. On October 3, 2016, other new requirements, under the amended Military Lending Act, which will apply to certain extensions of credit to members of the armed forces and their dependents, are slated to take effect, and lenders should have commenced reviewing and updating their policies, procedures, and systems, to be prepared to comply with those requirements.
Banks are urged to carefully monitor their interest-rate risk, as continued low rates may tempt some to "reach for yield by extending asset duration," the report says, and institutions also should be wary of "risk from a sharp upward move in funding costs as the sustained period of low interest rates transitions to a period of rising rates."