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OCC: Banks ‘Sound,’ but Risks Abound

Many associate June with Juneteenth and Father’s Day. Some may circle the month on the calendar for lesser-known celebrations like National Doughnut Day or World Sauntering Day (by the way, happy National Onion Day to all who celebrate). 

For us, and we assume many of you, June is also hotly anticipated because that’s when the OCC now releases its Semiannual Risk Perspective (SARP). Soon, a panel of OCC leaders will speak directly to RMA’s members in a webcast on the SARP—you can register here. In the meantime, here’s our summary of the spring 2024 edition of this critical document: 

The U.S. economy outperformed expectations in 2023, buoyed by a strong labor market and robust consumer activity. While signs indicate a slowdown ahead, with a cooling job market, high interest rates, and persistent inflation potentially increasing consumer financial stress, the Blue Chip Consensus (an average of forecasts from leading business economists) predicts a “soft landing” for the economy, projecting real GDP growth to decelerate from 2.4% in 2024 to 1.7% in 2025. Despite these projections, the inverted yield curve and elevated rates emphasize the need for prudent interest rate risk management. 

Other key themes include: 

  • Credit Risk: Credit risk is rising, particularly in CRE, including office and multifamily properties. The higher-rate environment and structural shifts in the office sector are stressing these markets. The OCC suggests vigilance as loans, especially those with interest-only terms, are set to refinance in the next three years, potentially increasing risk. 
  • Market Risk: Net interest margins (NIMs) are under pressure due to strong deposit competition. Although funding costs and NIM pressures may be peaking, the future direction of rates and depositor behavior present significant risk management challenges. Banks are increasingly turning to wholesale funding, and investment portfolio depreciation remains a concern despite some improvement. 
  • Operational Risk: Cyber threats continue to evolve, targeting the financial sector with increasing complexity. The rise in digitalization and third-party service usage amplifies operational risks. Fraud, particularly in payment channels, underscores the need for robust fraud risk management strategies. 
  • Compliance Risk: The OCC says banks should maintain a compliance risk management framework that adapts to evolving risk profiles. Effective processes to prevent, identify, and report fraudulent activities are essential to protect both banks and consumers. 

“The condition of the federal banking system remains sound,” the OCC stated. “It is important for banks to continue identifying material risks and their interconnected impacts. Continuous risk management improvement remains appropriate as this allows banks to guard against complacency.”  

Many of the material risks the OCC references are discussed in the latest edition of RMA’s Risk Watch document—check it out. Register for the webcast and submit your questions for OCC leaders here.