OCC Report Identifies Key Risks Facing Federal Banking System

  • Source: occ.gov

Takeaway:

Banks can expect that the issues identified in this report will be top of mind as they interact with their regulators and should take a moment to review their programs related to these risks and consider where enhancements may be needed. In addition, banks should look beyond the programmatic elements and consider tactical solutions to mitigate financial risk on their financial statements.

Treliant’s team of experts, including former bankers and regulators, can assist financial institutions in reviewing their risk management programs and analyzing their risk positions to develop mitigation and contingency plans.

Highlights:

On December 7, 2023, the Office of the Comptroller of the Currency (OCC) released its Semi-Annual Risk Perspectives for Fall 2023.  The OCC highlighted four key themes of which the banking sector should take note:

  1. Credit Risk – While the US economy remained more resilient than anticipated, the impact of rising interest rates and continued commercial real estate vacancies have begun to have an impact on default rates and valuation of certain asset classes. Consumer credit remained strong but there are risks to consumer credit, including slower job growth and reduced household savings rates. In addition, credit spreads have continued to tighten and there may be greater volatility in certain asset classes due to inflation dynamics, higher rates for longer and continued CRE concerns that may persist in the bond markets.
  2. Liquidity Risk -The higher rate environment and slower deposit growth has increased the competition for traditional deposits and required banks to turn to higher cost deposits. Uninsured deposits were down as an overall percentage of liabilities; while cumulative five-quarter deposit beta reached 43%, which surpasses the cumulative beta at comparable stages of the three prior tightening cycles. However, pressure on bank liquidity may be assisted by the reduction of credit needs being seen in the system overall, particularly in the C&I segment.
  3. Operational Risk – Financial institutions have seen a continued increase in cyber attacks and the current geopolitical tensions are likely to increase the need to monitor and attempt to thwart these threats. These issues are increasing the pressure on bank infrastructure and staff ability to respond to these issues.
  4. Compliance Risk – Supervisors have increased their review of bank fair lending and community reinvestment act programs. The increased attention to these programs has increased bank compliance department requirements. In addition, given the geopolitical tensions, increased adoption of fintech relationships, and expansion of digital products and services, has increased the BSA/AML risk. Based on a review of suspicious activity reports data, fraud continues to be on the rise across the banking sector.

The OCC had special mention for the continued bank-fintech relationships and the importance of third party risk management considerations; the increased use of artificial intelligence by banks and the need for banks to identify, monitor, and manage the related use of this technology; and the release of final interagency principles for climate-related financial risk management for large financial institutions and the need for banks to enhance their understanding of the impacts of climate change and ways to mitigate climate-related financial risk.

What Does This Mean for Financial Institutions?

With the noted regulatory, market, and geopolitical challenges, institutions are advised to take the following proactive steps:

  • Assess and mitigate asset quality related exposures including credit concentrations, default management practices, and credit models.
  • Continue efforts to diversify liquidity sources and explore potential M&A opportunities that can boost liquidity and offset risk exposures.
  • Continue to invest in strengthening enterprise risk frameworks and governance including internal control environments, cyber risk management, complaint management, Board and management risk governance and change management processes.
  • Prepare now for the work that will be required to comply with applicable pending and finalized regulatory changes and the anticipated impacts they will have (capital rules, 1033, CRA and overdraft are expected to be significant in investment and impact).
  • Understand the new guidelines and precedence for third-party risk management and ensure you have and are executing against a plan to strengthen and mature.
  • Establish enterprise policies and practices for AI innovation and how it will be explored, tested and adopted.
  • Ensure your fair lending, CRA, consumer protection and AML leaders and organizations are supported and enabled to make necessary advancements in program maturity, skillsets and tools to keep pace with the evolving industry risks and regulatory expectations.

Author

Joe Sergienko

Joe Sergienko, a Client Relationship Executive, is responsible for driving business development and client relationship management at Treliant. He has over 20 years of financial services experience in corporate and consulting roles, with expertise in areas including risk management, capital planning, regulatory compliance, data governance, process improvement, capital and liquidity…