OCC Flags Rising Interest Rates as Key Bank Risk

Uncertainty around how bank deposits will reach to a rising interest rate environment was among several key risk themes identified by the OCC in its Semiannual Risk Perspective report released today. The agency noted that banks have acquired historically high levels of non-maturity deposits during the low interest rate environment that has persisted over the past decade, and that competitive pressures could further drive up costs of deposits as interest rates increase.

While the OCC acknowledged that the health of the financial system remains strong — citing sound asset quality, capital reaching near-historic highs and improving earnings as positive indicators — credit risk remains a top concern. The report noted that banks and nonbanks have continued the recent trend of easing underwriting standards as they compete for quality loans, and that concentrations –particularly in commercial real estate portfolios — continue to grow.

Consistent with the previous semiannual risk report, the OCC also remains concerned about operational risks, particularly as banks transition to more technology-oriented systems and processes and as the cyber threat landscape continues to evolve. The OCC highlighted the importance of having effective cyber controls in place and a strong vendor risk management framework to ensure banks conduct due diligence when engaging with third-party service providers.

Compliance risk also continued to be a key supervisory priority. The OCC encouraged banks adopting new technologies to focus on ensuring that their Bank Secrecy Act compliance programs are up to date, noting that examiners have continued to identify a number of BSA program deficiencies among OCC-supervised institutions. Other compliance challenges include the Financial Crimes Enforcement Network’s new beneficial ownership rule, changes to the Military Lending Act, the TILA-RESPA integrated disclosures and the Home Mortgage Disclosure Act, the OCC said.