The Office of the Comptroller of the Currency (OCC) released its Semiannual Risk Perspective Report, which features expert analysis of data collected through March 31, 2018. The report presents data in five main areas: the operating environment, bank performance, special topics in emerging risk, trends in key risks, and supervisory actions.
Trends in Credit Risk
The data shows that underwriting parameters are continuing to relax, due to increased competition for quality loans. While examiners saw a majority of financial institutions maintaining satisfactory underwriting standards, a greater percentage moved from conservative underwriting parameters to more moderate and liberal underwriting practices including weakened financial covenants, limited guarantees, longer amortization periods, and higher loan-to-value ratios. Increased loan volume has also lead to increased concentrations of credit further impacting credit risk management. The OCC recommends continued focus on underwriting practices in this accommodating credit environment to ensure credit risk is thoroughly assessed.
Trends in Operational Risk
Bank operations are changing in an effort to adapt to market demands, and consumer expectations around digital services are transforming the industry. However, adoption of new technology brings new risks, as cyber threats become more sophisticated.
The OCC report notes that the level and severity of cyber threats is increasing through social engineering attacks such as phishing or baiting. These are permitting unauthorized parties access to customer data and theft of funds. Failure to maintain proper cybersecurity controls including the use of outdated software and unsupported applications has increased the overall risk of a successful cyber-attack.
The consolidation of third-party vendors has also increased operational risk. A few large vendors are providing the majority of services for financial institutions. Maintaining sound risk management practices such as due diligence, change management, and ongoing monitoring are essential to limit operational risk.
Trends in Compliance Risk
Complying with the Bank Secrecy Act remains challenging because of the ever-changing nature of money laundering and terrorism risks. Organizations are tasked with managing the evolving risk thorough an effective risk management system (ERM) that includes up to date policies and procedures and compliance with related laws and regulations. Weaknesses in compliance management processes can place financial institutions at a high risk for compliance risk.
Trends in Interest Rate Risk
Rising interest rates generally benefit net interest margins at small banks but the potential risks were noted by the OCC and warrant monitoring. There is an expectation that Banks could experience adverse shifts in liability mix or increasing costs ultimately impacting earnings and increasing liquidity risk. Low interest rates have kept bank funding costs down. However, as market interest rates continue to rise, there is a risk that banks will face higher funding costs due to competitive pressures for deposits. Regulatory liquidity requirements for banks with total assets of $250 billion or more increase these competitive pressures. It is important for bank management to understand the sensitivity of their deposits and the potential effects on earnings and liquidity.
The OCC report offers a comprehensive overview of potential risks to financial institutions operating in the current economic environment. For more information on these and other issues such as evaluation of third party vendors, speak with the risk management consultants at Bank Strategic Solutions by calling (877) 560-4220 and find out what we can do for your bank.