Underlying credit and liquidity risks associated with the current point in the economic cycle should be on bankers’ radar screens, the OCC advised today in its Semiannual Risk Perspective report. While the economy notched robust economic figures in 2018, the agency warned that imbalances like inflation can emerge when the economy operates above its full potential. “Successive years of growth, incremental easing in underwriting, risk layering, and building credit concentrations result in accumulated risk in loan portfolios,” it said.
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. The report also observed that commercial real estate loans grew at 7.8% at community banks in 2018, compared to 1.4% industry-wide—although the number of OCC-supervised banks with CRE exposure over 300% of capital or construction and development loans of over 100% of capital declined.
While deposits have risen, the OCC cautioned that an uncertain rate environment and technological advances in moving funds “could result in markedly different depositor behavior than in previous economic cycles.” The OCC also noted that strategic risk—driven by the need for banks to invest in innovative technologies, transition from legacy systems and achieve greater efficiencies—is elevated. Consistent with previous reports, cyber threats result in elevated operational risk, and Bank Secrecy Act compliance risk remains high.