OCC report highlights key risks for federal banking system.
The Office of the Comptroller of the Currency has released its semiannual report that addresses key issues facing banks. The OCC’s "Semiannual Risk Perspective" for spring 2019 noted that "condition of the federal banking system is strong."
Key risk themes. The report highlighted key risk themes which included: credit, operational, compliance, and interest rate risk. The OCC’s report also noted that rapid growth in financial technology (fintech) and regulatory technology (regtech) touch each of these risk themes; and that agency is "monitor[ing] these risks closely and implements actions to address concerns."
Specific findings in the Semiannual Risk Perspective included:
- the need to assess the quality and timeliness of credit risk identification, risk mitigation, and loan loss reserve methodology;
- elevated operational risk as banks adapt to a changing and increasingly complex operating environment;
- high compliance risk related to Bank Secrecy Act/anti-money laundering (BSA/AML) and the challenges banks face to effectively manage money-laundering risks in a complex, dynamic global operating and regulatory environment; and
- potential challenges to earnings due to interest rate risk and liquidity risk.
Developing risks. The report also underscored other issues that warrant awareness among bankers and examiners that may develop into key risks. These included
- challenges to compliance management systems and change management processes because of new products, services, and technologies, and maintaining sufficient staffing and expertise to address these risks;
- low prices for agricultural commodities that result in lower cash flow and increased farm carryover debt for agricultural borrowers; and
- implementation of the current expected credit losses (CECL) standard, which may pose operational and strategic risk to some banks when measuring and assessing the collectability of financial assets.
Nonbank competition. Finally, the OCC noted that many banks face additional challenges that pose risks to the industry. These challenges include strong competitive pressures from nonbanks, embedded credit risk from successive years of easing in underwriting practices and low interest rates, and evolving technology in the financial services sector. Strategic risk may be elevated for some banks because of competition.
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