OCC Report Focuses on Risks Facing National Banks and Federal Savings Associations

Summary

National banks and federal savings associations continue to face a number of risks as they seek to improve profits in the face of slow economic growth and a prolonged low interest rate environment. Banks are layering risk back into the system in ways that are difficult to quantify at this point in the cycle. That is why risk management must remain a top priority according to the Office of the Comptroller of the Currency's semiannual assessment of risk.

The OCC's Semiannual Risk Perspective for Fall 2013 details risks facing the banking industry:

• Strategic risk remains elevated as many banks re-evaluate their business models and risk appetites to generate returns against the backdrop of slow economic growth and low interest rates. OCC examiners will focus on banks' strategic business and new product planning to ensure banks maintain appropriate risk management processes.
• Cyber threats are growing in sophistication and frequency, and require heightened awareness and appropriate resources to identify and mitigate the associated risks.
• Competition for limited lending opportunities is intensifying, resulting in increased risk tolerance and loosening underwriting standards, particularly in new or unfamiliar loan products. The recent rise in long-term interest rates underscores the vulnerability for banks that reach for yield, as they could face significant earnings pressure, possibly to the point of capital erosion, if interest rates increase further.
• Bank Secrecy Act and Anti-Money Laundering risks continue to rise as money laundering methods evolve, electronic bank fraud increases in volume and sophistication, and banks fail to incorporate appropriate controls into new products and services.
• Price volatility has been very low for a long time. Light securities dealer inventories suggest limited risk appetite for market making, raising the possibility of more significant market volatility and price risk as quantitative easing policies change.

The report presents data in four main areas: the operating environment; condition and performance of the banking system; funding, liquidity, and interest rate risk; and regulatory actions. It focuses on issues that pose threats to the safety and soundness of those financial institutions regulated by the OCC and is intended as a resource to the industry, examiners, and the public. The report reflects data as of June 30, 2013