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OCC Report Preaches Diligence in Elevated Risk Environment

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‘Banks should remain diligent and confirm the effectiveness of their risk management practices.’

In its first Semi-Annual Risk Perspective since this spring’s bank failures, the OCC declared the financial system sound but warned of elevated operational and compliance risk in addition to deteriorating credit conditions. “Banks have increased their cash holdings and borrowing capacity to cover potential depositor withdrawals,” the OCC said. Still, “usage of the Federal Reserve lending facilities indicates that there is still a need for liquidity.” Overall, “[b]anks should remain diligent and confirm the effectiveness of their risk management practices.”

Operational risk. In last week’s much-anticipated report, the OCC noted “persistent” cyber threats. “Threat actors are increasingly targeting bank service providers or exploiting vulnerabilities of third-party software,” which demands “heightened threat and vulnerability monitoring processes,” the report said. And digital banking, while an important source of opportunities, “can contribute to a complex operating environment along with increasing compliance, reputational, strategic, and other risks.”

Compliance risk. “Compliance risk management systems are challenged to keep pace with changing products, services, and delivery channel offerings,” the report said. Other reasons compliance risks are elevated: the heightened focus on fair lending and “a noted increase in financial crimes, especially check fraud, and Bank Secrecy Act/anti-money laundering (BSA/AML) risks in traditional banking products and services.”

Credit risk. Although credit risk is considered moderate, “persistent headwinds threaten asset quality and loan performance.”

Looming large:

  • The effect of inflation, higher wages, and rising interest rates on the operating expenses of business borrowers.
  • Remote work-fueled office building vacancies, especially in urban submarkets.

Uncomfortable echoes. Other recent reports have added to the narrative of a deteriorating credit environment. Goldman Sachs, per MarketWatch, said leveraged loans are having “a worse start to the year for defaults than in 2008 as the global financial crisis was unfolding.” And a Kelley Blue Book article, citing the New York Fed, said “more Americans under 30 are behind on their car payments than at any point since the Great Recession of 2008.”

The main culprits: rising interest rates and zooming prices propelled by inflation and the pandemic’s supply chain shortages. The average monthly payment for a new car in April was $766, which was actually down from $792 in December.

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