In its Semiannual Risk Perspective for Spring 2023, the Office of the Comptroller of the Currency (OCC) reports on some of the key issues facing the federal banking system. In its findings, the OCC reports that the overall strength of the federal banking system is sound.
The OCC has closely monitored the condition of the institutions it supervises throughout the market stress this spring, and has engaged directly with its banks to ensure they are appropriately managing their risks and restoring confidence in the U.S. banking system. As reported, the banking system overall faced increased volatility due to a liquidity crisis in Q1 of 2023.
Semiannual Risk Perspective for Spring 2023 focuses on issues that pose threats to those financial institutions regulated by the OCC, and is intended as a resource to the industry, examiners, and the public.
“Housing markets cooled as the Federal Reserve increased interest rates to combat inflation,” said the report. “The average 30-year fixed mortgage rate grew more than 300 basis points in less than 12 months, from 3.21% in January 2022 to 6.69% in December 2022, but has fallen in the second quarter of 2023 to 6.35%. This is the fastest rise in mortgage rates since the 1980s. This rate spike, combined with the rapid increase in home prices in 2020-2022, pushed the average payment on a 30-year fixed rate loan to roughly one-third of median household income, up from one-fifth pre-COVID.”
In its Semiannual Risk Perspective for Spring 2023, the OCC highlighted liquidity, operational, credit, and compliance risks, among the key risk themes in the report, including:
- Liquidity levels have been strengthened in response to the failures of several banks and investment portfolio depreciation: Rising long-term rates caused significant depreciation in investment portfolios, focusing attention on banks’ liquidity risk profiles. In Q1 of 2023 alone, the failures of Silvergate Bank, Silicon Valley Bank (SVB), and Signature Bank dominated the headlines.
- Credit risk remains moderate in aggregate, but signs of stress are increasing, for instance in certain segments of commercial real estate: Overall, credit markets and loan portfolios remain resilient, and problem loan levels remain manageable. The persistent drag from high inflation and rising interest rates, however, is causing credit conditions to deteriorate.
- Operational risk is elevated: Cyber threats persist. Digitalization of banking products and services is expanding, especially as banks increase use of third parties. This expansion presents both opportunities and risks. The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), and the OCC recently issued final joint guidance designed to help banking organizations manage risks associated with third-party relationships, including relationships with financial technology companies.
- Compliance risk is elevated: Banks continue to operate in a dynamic environment in which compliance management systems are challenged to keep pace with changing products, services, and delivery channel offerings developed in response to customer needs and preferences.
The report also highlights the OCC’s initiative on managing climate-related financial risks to the federal banking system and discusses the challenges and costs associated with the continued use of aging technologies and systems reaching their end of life and the importance of banks investing and aligning technology with their business goals.
The Semiannual Risk Perspective for Spring 2023 covers risks facing national banks, federal savings associations, and federal branches and agencies based on data as of December 31, 2022, unless otherwise indicated. The report presents information in five main areas:
- Operating environment
- Overall bank performance
- Special topics in emerging risks
- Trends in key risks
- Supervisory actions
Looking ahead, the OCC sees a moderate recession on the horizon as 2023 continues into the second half of the year.
“Most forecasters predict a moderate, fairly short-lived recession in 2023 with unemployment expected to rise slightly to 4.6%,” said the report. “On an annual basis, however, gross domestic product (GDP) growth is only expected to slow in 2023 rather than to decline outright. Market participants still expect the Federal Reserve to maintain its inflation-fighting stance despite recent bank failures and pressures in financial markets. Real GDP grew at a 1.1% annual rate in the first quarter of 2023, down from the 2.6% pace in the fourth quarter of 2022. Consumer spending, which accounts for 70% of GDP, continued to support economic growth, contributing 2.5 percentage points to the first quarter’s annualized rate. However, this was offset by a slowdown in business capital spending and declines in housing investment and inventories.”