Key Highlights from the OCC’s Risk Alert on Dec 12th 2021
All information quoted here is from the OCC Risk Alert
The Office of the Comptroller of the Currency (OCC) charters, regulates, and supervises
national banks and federal savings associations and licenses, regulates, and supervises
the federal branches and agencies of foreign banking organizations.
The OCC supervises these banks to ensure they operate in a safe and sound manner, provide fair access to
financial services, treat customers fairly, and comply with applicable laws and regulations.
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.
The OCC’s Semiannual Risk Perspective addresses key issues facing banks, focusing on those that pose threats to the safety and soundness of banks and their compliance with applicable laws and regulations.
This fall 2021 report presents data in five main areas:
- The operating environment, bank performance, special topics in emerging risks, trends in key risks, and supervisory actions. The report reflects data as of June 30, 2021, unless otherwise indicated.
KEY RISK THEMES
Operational risk remains elevated as cyber attacks evolve, become more sophisticated, and cause damage
to more industries. The OCC has observed an increase in ransomware attacks in financial services. These attacks continue to leverage phishing emails targeting employees and compromised credentials to gain access to networks through remote access channels. Once access is gained, the attackers conduct ransomware and other extortion campaigns.
Credit risk remains moderate. Loan portfolios have been resilient and widespread credit deterioration has not materialized from the crisis due to appropriate risk management by banks, improvements in economic activity, and the remaining effects of pandemic-related government actions and relief programs. However, the duration of the pandemic, its impact on demand for credit, and the effects of nonbank competition may put pressure on some banks’ willingness and ability to maintain credit discipline as the economy recovers and loan growth opportunities return.
Compliance risk remains heightened, as banks’ efforts to serve customers in the end stages of assistance programs create challenges for change management, as well as for product and service risk management practices. Assistance programs include the Coronavirus Aid, Relief, and Economic Security (CARES) Act’s Paycheck Protection Program (PPP) and federal, state, and bank-initiated forbearance and deferred payment programs. The conclusion of these programs creates increased compliance responsibilities, high transaction volumes, and new types of fraud, as banks continue to respond to a changing operating environment.
Strategic risk associated with banks’ management of NIM compression and efforts to improve earnings is
elevated. Stimulus measures, low-yield investment options, and reduced lending opportunities fueled deposit inflows that resulted in additional highly liquid assets and lower margins as banks struggled to find yield. Banks may attempt to further improve earnings through measures including increasing credit risk (in both loans and investments), extending loan duration, and cost cutting.
The OCC encourages banks to guard against complacency to ensure financial resilience without compromising effective risk management systems that support sound business models and strategic and operating plans. When done properly, growth can provide significant benefits to consumers, communities, investors, and the economy.
Banks should remain vigilant when considering growth, new profit opportunities to avoid excessive risk taking, and should maintain adequate controls when managing investment and lending programs.