Risky Business: What’s Putting Banks in Peril?

Though their overall performance is improving, federal banks are increasingly concerned about strategic, operational, compliance, and credit-related risks, according to the Semiannual Risk Perspective released by the Office of the Comptroller of the Currency today. The report sheds light on the risks faced by federal banks and savings institutions across the country.

According to the report, total revenue for the federal banking system was up 3.6 percent year-over-year as of December 31, 2016, while net income was up 3.9 percent—the largest gain in this category in seven years.

Profitability for federal banks was down—and below its historical average—while overall loan growth rose over the year in all categories, including in the construction and multi-family sectors.

“Today, the federal banking system remains healthy,” said Keith A. Noreika, the Acting Comptroller of the Currency. “As outlined in the report, however, the OCC again identifies issues related to strategic, credit, operational, and compliance risks as top concerns.”

Strategically, the report found that banks find risk in expanding their products and services, competing with FinTech and nonfinancial firms, and creating earnings on low-interest loans.

“Strategic risk is elevated, as banks make decisions to expand into new products or services, consider new delivery channels, or otherwise search for sustainable ways to generate returns in a persistent low-interest rate environment,” Noreika said. “Net interest margins remain under pressure despite recent increases in the Fed funds rate. As the Federal Reserve increases its rates, we see a need for banks to be aware of how their strategic decisions and balance sheet structure may affect earnings.”

Looser underwriting standards—likely a result of increasing competition in the industry—are posing a credit risk to many federal institutions, while cybersecurity threats pose the biggest operational hazard.

“Operational risk remains elevated as we see more sophisticated cybersecurity threats and the need for sound governance over product service and delivery,” Noreika said. “Cybercriminals are using a variety of evolving tactics, including sophisticated ransomware variants, denial of service, business e-mail compromises, and theft of sensitive business and customer information in extortion schemes. It remains critical that banks focus on employee awareness of phishing schemes and keep all system patches up to date.”

Compliance remains one of the biggest risks for federal banks, according to the report—particularly as new consumer protection regulations like TILA-RESPA and the Home Mortgage Disclosure Act take effect.

“Evolving compliance risks and increasing complexity of the risk environment present significant challenges for bank compliance risk management systems,” Noreika said. “Some banks also face change management challenges as they adapt to new or amended consumer-focused regulations.”

Though all these issues were common across the entire banking system, Noreika noted that risks differ greatly based on an institution’s size, region, and business model.

“Compliance, governance, and operational risk issues remain leading risk issues for large banks while strategic, credit, and compliance risks remain the leading issues for midsize and community banks,” he said. “The OCC employs a risk-focused approach to supervision and tailors examination strategies to the individual risks of each of its supervised institutions and will pay close attention to these key risk areas over the next six months.”

Read the full report at OCC.gov.