Amid strong financial performance by banks during the longest U.S. economic expansion on record, the OCC flagged credit, operational and interest rate risks for bankers’ radar screens in its Semiannual Risk Perspective today. “Banks should prepare for a cyclical change while credit performance remains strong,” the agency advised, noting that “[c]redit risk has accumulated in many portfolios.” While noting that banks “have largely maintained a disciplined approach in their underwriting,” competing with nonbanks’ growing share in mortgages and commercial lending could pose risk as well.
The OCC also cautioned banks about interest rate risk driven by recent volatility in repo markets, as well as increasing challenges in asset/liability management from recent yield curve inversions. The agency also said it is “increasing regulatory oversight” of banks’ transition away from the London Interbank Offered Rate, which is no longer guaranteed to be available after 2021. “Examiners will evaluate whether banks have begun to assess their exposure to Libor in assets and liabilities to determine potential impacts and develop risk management strategies,” the agency said.
Operational risk remains elevated amid an increasingly complex environment of cybersecurity threats, third-party risk management and fraud. As it has done before, the agency singled out cybersecurity for special attention, calling on banks to focus on patch management, network configuration, access rights, phishing, compromised credentials and ATM exploits, among other threat vectors.
The risk outlook comes against the background of historically high capital levels, returns on equity above the pre-crisis highs for the first time and 25-year lows in past-due loans.