5 risks the OCC is watching closely
Dec 22, 2015
Examiners with the Office of the Comptroller of the Currency (OCC) in upcoming months will emphasize review of financial institutions’ strategic, underwriting, cybersecurity, compliance, and interest rate risks, the OCC has announced.
“Our priorities for large bank examiners include governance and oversight, credit and underwriting, and in the area of compliance, we’ll focus on cyber, [Bank Secrecy Act/anti-money laundering, or] BSA/AML, fair access, and operational risk,” Comptroller of the Currency Thomas Curry said in prepared remarks releasing the OCC’s Semiannual Risk Perspective for Fall 2015. “For community banks, examiner priorities include strategic planning and governance, underwriting, interest rate risk, as well as the compliance issues mentioned for large banks.”
Risks tied to underwriting and cybersecurity are increasing, but risks related to strategy, compliance and interest rates remain stable, the report said.
“Generally, we are seeing banks continue to make concessions on pricing, weaker or non-existent loan covenants, and maturities lengthening,” Curry said. “We have also seen increases in underwriting exceptions and risk layering. All of which combine to introduce risk at origination. Bankers with long memories will remember the worst loans are made in the best of times, and the growing credit risk in their banks should be managed very closely.”
Here is how the report described the top risks facing national banks and federal savings associations at this point:
- Strategic: “Many banks continue to face strategic challenges growing revenues to meet target rates of return in a slow-growth, low interest rate economic environment. Many banks are reevaluating risk tolerances and business models.”
- Underwriting: “Banks are easing credit underwriting standards and practices, including structure, terms, pricing, collateral, guarantors, and loan controls in response to competitive pressures and growth objectives. This easing is particularly evident in high-growth loan segments, such as indirect auto, C&I, and multifamily CRE.”
- Interest rate risks (IRR): “The ongoing low interest rate environment poses additional concerns as banks reach for yield by extending asset duration trends. Deposit stability, a significant component of IRR modeling, is difficult to assess because of recent deposit inflows and the potential for increased competition for retail deposits. The low interest rate environment continues to pressure net interest margins as asset yields decline and the cost of funds has stabilized at historic lows.”
- Cybersecurity: “Cyber threats, reliance on service providers, and resiliency planning remain concerns particularly in light of heightened global threats.”
- Compliance: “Regulatory amendments and reliance on third parties continue to create challenges for bank consumer compliance functions. Bank Secrecy Act (BSA) risk also continues to increase as criminal behaviors evolve and criminals leverage technology innovations.”
“As the economic cycle turns, we see banks and thrifts reaching for yield and growth, sometimes extending their reach at the expense of sound underwriting, strong risk management, and adequate loan loss provisioning,” Curry said. “OCC examiners will be paying close attention to each of those areas in the coming months. Regulators and bank management need to act now to prevent those risks from becoming reality. We can’t afford to wait until the warning lights turn red.”
Allowance for loan and lease losses (ALLL) levels and increasing loan concentrations in the multi-family commercial real estate market are also among the risks that will be monitored, according to the report. The OCC said these issues warrant awareness at financial institutions. The issues “have the potential to develop into broader systemic issues and may already raise concern at individual banks,” the report said.
For example, a key risk facing community and mid-sized banks, the OCC said, is exposure to oil and gas exploration and production firms as well as businesses related to the oil and gas industries, such as service businesses, offices and hotels. “Problem energy loans have increased,” Curry said in his remarks. “Losses from these loan have been moderate so far, but we are likely to see some increases in the months ahead.”
Examiners are also monitoring the appropriateness of ALLL levels and methods “given loan growth, easing in underwriting, and layering of credit risk,” according to the report.
Read the full remarks by Thomas Curry, Comptroller of the Currency:
Read the full OCC report, Semiannual Risk Perspective: