OCC Report Flags Key Risks Impacting Banking System

In its Semiannual Risk Perspective for Fall 2023, the Office of the Comptroller of the Currency (OCC) outlined key challenges and emerging threats facing the banking system. While emphasizing the overall robustness of the federal banking system, the OCC urged banks to remain vigilant, uphold prudent risk management practices, and avoid complacency in the face of potential economic challenges.

Key Risk Themes Identified:

Credit Risk:

1. Factors Contributing to Increase: The OCC highlighted several factors elevating credit risk, including higher interest rates, escalating risk in commercial real estate lending, prolonged inflation, declining corporate profitability, and the potential for slower economic growth.
2. Signs of Borrower Stress: Key performance indicators are showing early signs of borrower stress across various asset classes, necessitating heightened attention to credit risk management.

Market Risk:

1. Impact of Rising Deposit Rates: The report emphasized the impact of rising deposit rates, broader market liquidity contraction, and increased reliance on wholesale funding on net interest margins.
2. Challenges and Stabilization: Banks faced challenges in the first half of 2023, with deposit rate competition and higher interest rates affecting net interest margins. The latter half saw stabilization, but reliance on wholesale funding increased.

Operational Risk:

1. Heightened Cyber Threats: Operational risk remains elevated, with persistent cyber threats posing a significant concern. Banks' ongoing efforts to digitize operations for innovative product and service delivery also introduce risks of fraud and errors, especially in peer-to-peer and other faster payment platforms.

Compliance Risk:

1. Focus on Equal Access and Fair Treatment: Compliance risk is heightened due to a focus on ensuring equal access to credit and fair treatment of consumers. The expanded use of innovative technologies and increased partnerships with third parties, including fintech firms, contribute to the complexity of compliance risk.

Emerging Risk: Artificial Intelligence (AI) in Banking:

1. Potential Benefits: The OCC acknowledged the potential benefits of widespread adoption of AI in banking, including cost reduction, improved efficiency, enhanced products and services, strengthened risk management, and expanded access to credit.
2. Challenges: However, the report underscored the challenges associated with AI adoption, including compliance risk, credit risk, reputation risk, and operational risk.

The OCC report, based on data as of June 30, 2023, covers five main areas: the operating environment, bank performance, special topics in emerging risks, trends in key risks, and supervisory actions. It serves as a resource for the industry, examiners, and the public, offering insights into the risks facing national banks, federal savings associations, and federal branches and agencies.

As the banking landscape continues to evolve, the OCC's emphasis on maintaining vigilance, especially in the face of emerging risks like AI, underscores the importance of adaptive risk management strategies for financial institutions navigating an ever-changing environment.

The GRC Report is the first word in governance, risk, and compliance news. As your trusted source for comprehensive coverage, the GRC Report keeps you informed and equipped to navigate the evolving landscape of governance, risk, and compliance. And remember, the GRC Report isn't just a news source; it's a community of professionals who share your passion for GRC excellence. Don't miss out on our insightful articles and breaking news – join the conversation and empower your GRC journey.