Comptroller Otting Provides Congressional Testimony on OCC Priorities

On June 13 and 14, 2018, Comptroller of the Currency Joseph Otting discussed his priorities for the agency and the banking industry more broadly during testimony before the House Financial Services Committee and the Senate Committee on Banking, Housing, and Urban Affairs. His prepared testimony for both Committees highlighted OCC efforts:

  • To modernize the regulatory approach to CRA in order to promote investment where it is needed most

  • To encourage banks to meet customers’ needs for short-term, small-dollar credit

  • To promote more efficient compliance with BSA/AML regulations that protect the banking system from use for illegal purposes

  • To simplify regulatory capital and the Volcker Rule

  • To ensure efficiency in agency operations

Comptroller Otting cited the recent passage of the Economic Growth, Regulatory Relief, and Consumer Protection Act as having a meaningful impact on OCC-regulated institutions. Mr. Otting said the OCC will work closely with fellow financial regulators to ensure that all the reforms contained in this legislation are implemented quickly.

Comptroller Otting discussed the OCC’s perception of risks currently facing the banking industry, and made reference to the OCC’s latest Semiannual Risk Perspective, published on May 24, 2018. Mr. Otting warned that, while overall credit quality remains strong, bankers must remain vigilant regarding the potential effects of competition and undue complacency on new loan quality and credit risk management. He said OCC examiners have noted evidence of eased underwriting, increased commercial real estate concentration limits, and a higher level of concerns related to policy exceptions.

Rising interest rates pose a number of potential risks for some banks, according to Mr. Otting. Bank investment portfolios with concentrations of long-duration and low, fixed-rate assets could erode in value as rates rise, particularly if rates rise more abruptly than anticipated. Deposit costs will also increase due to competitive pressures, and he advised that banks should be modeling these potential risks as part of sound balance sheet management. Credit risk will also likely increase due to increases in debt service costs.

Mr. Otting said operational risk remains elevated as banks adapt business models to the evolving banking environment, transform operating processes, and respond to increasing cybersecurity threats. He said cybersecurity threats show no signs of abating. He noted that some of these threats target large quantities of personally identifiable information and proprietary intellectual property. Comptroller Otting warned that banks need to manage risks associated with using third parties through appropriate due diligence and risk oversight to ensure controls protecting the confidentiality, integrity, and availability of systems and data are maintained. Further, he said that as technology moves consumers and the banking industry toward greater interconnectedness and reliance on online transactions, outages and breaches will generate greater disruption in how lives and businesses are conducted. Banks, retailers, nonbank service providers, and regulators must be vigilant in working together to protect the banking system and improve its resiliency, he advised.

Compliance risk remains elevated as banks manage risk in an increasingly complex environment and work to comply with evolving regulations, Mr. Otting stated. He particularly noted the evolving challenges of BSA compliance and observed that, while new regulatory requirements may enhance the transparency and confidence of financial transactions, they place significant burden on banks. He also highlighted recent changes to HMDA and MLA requirements and implementation of TRID as presenting strains on bank compliance management systems and change management processes.

In discussing OCC priorities, Mr. Otting said he sees an opportunity to modernize the CRA regulatory framework in order to expand the types of activities eligible for CRA consideration to include more small business lending and community development activities. He said the banking agencies are discussing an ANPR to solicit comments on how best to accomplish this. He said he believes improvements can be made to:  (1) expand and provide clarity regarding the types of activities that receive CRA consideration; (2) revise the concept of assessment areas; and (3) increase the transparency of how CRA performance is measured.

Mr. Otting cited the current demand by consumers for short-term, small-dollar credit, and said they need safe, affordable choices for these products. He admitted that, while banks may not be able to serve all of this market, they can reach a significant portion of it and bring additional options and more competition to this marketplace while delivering safe, fair, and less expensive credit products. He said the OCC is encouraging banks to offer responsible short-term, small-dollar installment loans to help meet these credit needs.

In noting the increased burdens posed by BSA/AML compliance, Mr. Otting said the banking agencies recently met to discuss ideas on how to improve the approach to implementing these laws and regulations and presented certain recommendations to the U.S. Treasury Department and FinCEN. These recommendations include:

  • Allowing regulators to schedule and scope BSA/AML examinations on a risk basis and identifying ways to conduct related examinations more efficiently

  • Considering changes to the threshold requiring mandatory reporting of SARs and currency transaction reports and simplifying forms and requirements

  • Working with law enforcement to provide feedback to banks regarding the actual use of SARs and other filings

  • Exploring the use of technologies to reduce reporting burden

Comptroller Otting’s complete written House testimony can be found here. His Senate testimony contains similar comments. 

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