The Office of the Comptroller of the Currency has released its Semiannual Risk Perspective for Spring 2018. Key themes include: credit, operational, compliance, and interest-rate risks for the federal banking system.
The OCC’s risk assessment is published twice a year. The current edition spotlights the risks posed by rising interest rates. The good news, according to the report, is that “the condition of the federal banking system is strong.”
“The financial performance of banks making up the federal banking system improved in 2017 compared with 2016,” the report says. “That improvement continued into early 2018. The economic environment through the end of the first quarter of 2018 continued to support loan growth and bank profitability. Asset quality, as measured by traditional metrics such as delinquencies, nonperforming assets, and losses, is sound. Capital and liquidity are at or near historical highs, and earnings are improving.”
Also noted is that “recent examination findings indicate incremental improvement in banks’ overall risk management practices.”
The key risks facing the federal banking system have changed only modestly since the fall 2017 Semiannual Risk Perspective. The current report does note, however, that “competition for quality loans is strong as examiners note evidence of eased underwriting.” The accommodating credit environment warrants a continued focus on underwriting practices to monitor and assess credit risk and lender complacency.
Among the observations in the risk report:
Operational risk is elevated as banks adapt business models, transform technology and operating processes, and respond to evolving cyber-threats.
Compliance risk is elevated as banks manage money laundering risks and implement changes to policies and procedures to comply with amended Bank Secrecy Act and consumer protection requirements.
The continued increase in market interest rates may eventually lead to higher funding costs for banks, as economic growth increases loan demand and competition for funding pressures banks to raise deposit yields.
The report covers risks facing national banks and federal savings associations based on data as of March 31, 2018. It was published in late May. The report presents data in five main areas: the operating environment, bank performance, special topics in emerging risk, trends in key risks, and supervisory actions. It focuses on issues that pose threats to financial institutions regulated by the OCC and is intended as a resource to the industry, examiners, and the public.
The OCC charters, regulates, and supervises national banks and federal savings associations, and licenses, regulates, and supervises the federal branches and agencies of foreign banks. Its National Risk Committee monitors the condition of the federal banking system and identifies key risks. The NRC also monitors emerging threats to the system’s safety and soundness. It meets quarterly and issues guidance to examiners that provides perspective on industry trends and highlights issues requiring attention.