OCC Warns of Risk from Rising Corporate Debt

Exposure to rising corporate debt — including bonds and loans — was among several key risk themes identified by the OCC in its semiannual risk report released today. With nonfinancial corporate debt at a 30-year high, the OCC urged banks to keep a close eye on whether current lending practices reflect accepted risk tolerances, warning that a downturn in the corporate debt market “may affect supervised institutions more profoundly than in previous periods.”

While the OCC continues to see strong bank performance and overall sound asset quality, it is continuing to closely monitor rising credit risk, citing several successive years of incremental easing of underwriting standards, risk layering and concentration growth, the report noted.

Consistent with the previous semiannual risk report, the OCC flagged operational risk as an area of additional concern, particularly related to cybersecurity, the implementation of the Current Expected Credit Loss standard and the concentration of critical functions among a few large third-party service providers. The agency also warned of rising compliance risk related to new technologies banks are employing to counter money-laundering threats and interest rate risk in a rising rate environment.