OCC Highlights Key Risks Facing Banking System

The Office of the Comptroller of Currency has released their semiannual report highlighting key risk areas affecting the federal banking system. The report presents data in five main areas: the operating environment; bank condition; key risk issues; the range of practice in interest rate risk modeling; and regulatory actions. It focuses on issues that pose threats to the safety and soundness of those financial institutions regulated by the OCC and is intended as a resource to the industry, examiners, and the public, reflecting data as of June 30, 2014. 

Specifically regarding community and midsize banks, the report identifies key risks facing community and midsize banks including:

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  • High strategic risk as banks adapt their business models to respond to sluggish economic growth, low interest rates, and intense competitive pressures.
  • Properly planning for management succession and retention of key staff.
  • Erosion of underwriting standards in various loan products.
  • Expansion into loan products that require specialized risk management processes and skills, such as participations in syndicated leveraged loans.
  • Increasing exposure to IRR at banks with concentrations in long-term assets (including mortgagebacked securities [MBS] and loans) and uncertainties about the behavior of NMDs once interest rates increase.
  • Appropriate oversight of third parties vendors.
  • Increasing volume and sophistication of cyberthreats.
  • Increasing BSA/AML risk because of higher-risk services and customer relationships
  • Ensuring effective compliance management systems and staffing

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The outlook for community and midsize banks includes

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  • Moderate to strong loan growth, stabilizing NIM, and stronger capital ratios.
  • Suppressed mortgage-banking revenue and lower gain-on-sale margins
  • A continued search for higher-yielding assets and profitable strategic business niches.
  • Expansion into new products and services
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