OCC Identifies Risk in the Banking System

The Office of the Comptroller of the Currency (OCC) has reported the key issues facing the federal banking system in its “Semiannual Risk Perspective for Fall 2023.”

The OCC reported that the overall strength of the federal banking system remains sound, and expects banks to remain diligent and adhere to prudent risk management practices across all risk areas. Banks should continue to guard against complacency to ensure they maintain the ability to withstand potential future economic challenges.

In its “Semiannual Risk Perspective for Fall 2023,” the OCC highlighted credit, market, operational, and compliance risks, as the key risk themes in the report. Highlights from the report include:

• Credit risk is increasing due to higher interest rates, increasing risk in commercial real estate lending, prolonged inflation, declining corporate profitability, and potential for slower economic growth. Key performance indicators are beginning to show signs of borrower stress across asset classes.
• Rising deposit rates, broader market liquidity contraction, and increased reliance on wholesale funding started to impact net interest margins through the first half of 2023. Competition for deposits and higher interest rates are raising deposit rates. Deposit and liquid asset trends stabilized in the latter half of 2023, but these levels were supported by increased reliance on wholesale funding. Increases in interest rates are negatively impacting investment portfolio values.
• Operational risk is elevated. Cyber threats continue. Banks continue to leverage new technology to further digitalization efforts, offering innovative products and services to meet customer demands. Increasing digitalization efforts can also heighten risk of fraud and error, including fraud targeting peer-to-peer and other faster payment platforms.
• Compliance risk remains elevated. This is due to the heightened focus on ensuring equal access to credit and fair treatment of consumers, the expanded use of innovative technologies for product and service delivery, and expanded partnerships with third parties, such as financial technology firms, and increases in Bank Secrecy Act/Anti-Money Laundering risk.

The report highlights artificial intelligence (AI) in banking as an emerging risk. The potential for further benefits as AI gains more widespread adoption could be significant. Developments in the technology may reduce costs and increase efficiencies; improve products, services, and performance; strengthen risk management and controls; and expand access to credit and other banking services. Widespread adoption of AI, however, may also present significant challenges relating to compliance risk, credit risk, reputation risk, and operational risk.

“The U.S. economy proved more resilient than anticipated in the first half of 2023. Real gross domestic product (GDP) increased at an annual rate of 2.1% in the second quarter of 2023, easing just slightly from the first quarter’s 2.2% pace,” read the report. “Many economists expected a decline in second quarter GDP. Consumer spending, which accounts for almost 70% of economic growth, continued to support real activity, contributing 0.6 percentage points to the second quarter’s annualized rate. Second quarter GDP was also supported by an acceleration in nonresidential fixed investment. The Blue Chip Consensus expects real GDP growth to slow through early 2024, but avoid an outright decline.”

“Semiannual Risk Perspective for Fall 2023” covers risks facing national banks, federal savings associations, and federal branches and agencies based on data as of June 30, 2023, unless otherwise indicated. The report presents information in five main areas: the operating environment, bank performance, special topics in emerging risks, trends in key risks, and supervisory actions. The report 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.

The OCC’s National Risk Committee (NRC) 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 and ability to provide fair access to financial services and treat customers fairly. NRC members include senior agency officials who supervise banks of all sizes and develop bank supervisory policy. The NRC meets quarterly and issues guidance to examiners that provides perspective on industry trends and highlights issues requiring attention.