OCC Highlights Key Risks Facing National Banks and Federal Savings Associations

Summary

The Office of the Comptroller of the Currency (OCC) reports credit risk increased among national banks and federal savings associations during the first six months of 2014, according to its semiannual report on risks facing the federal banking system.

The OCC's Semiannual Risk Perspective for Fall 2014 noted declining revenues and profitability in OCC-supervised institutions contributed to the increasing credit risk within the banking sector.

Other key findings from the report include:

• Competition for limited lending opportunities is intensifying, resulting in loosening underwriting standards, particularly in direct and indirect auto lending, leveraged lending, asset-based lending, commercial real estate lending, and commercial and industrial loans. Increased risk layering is also occurring in commercial loans.
• The prolonged low interest rate environment continues to lay the foundation for future vulnerability. Banks that extend asset maturities to pick up yield, especially if relying on the stability of non-maturity deposit funding in a rising rate environment, could face significant earnings pressure and capital erosion depending on the severity and timing of interest rate moves. The Risk Perspective includes a special section outlining data compiled in a recent study of bank reported interest rate sensitivities conducted as part of the OCC's ongoing work in this area.
• Many banks continue to re-evaluate their business models and risk appetites to generate returns against the backdrop of low interest rates. OCC examiners will focus on banks' strategic planning to ensure banks establish and follow appropriate risk management processes.
• Evolving cyber threats and information technology vulnerabilities require heightened awareness and appropriate controls to identify and mitigate the associated risks. Banks are expected to implement third-party risk management controls commensurate with the complexity and criticality of the arrangement.
• Bank Secrecy Act and Anti-Money Laundering risks remain prevalent as money-laundering methods evolve, and electronic bank fraud grows in sophistication and volume. Banks are expected to incorporate appropriate controls to oversee new products and services, and higher-risk customers.

The report presents data in five main areas: the operating environment; bank condition; key risk issues; the range of practice in interest rate risk modeling; 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, 2014.