OCC: Pandemic, Low Rates Shape Risk Environment for Banks

The response to the coronavirus pandemic continues to shape the risk environment for banks, according to the OCC’s Semiannual Risk Perspective released today. Key risks the OCC highlighted were credit risk as the ongoing economic downturn affects debt service capability, strategic risk from a long-term low-rate environment, cyber risk as many banks continue operating in a primary or partial work-from-home environment and compliance risk as banks implement new programs to support the recovery.

The report highlighted credit risk in both commercial and consumer portfolios. While “banks need to work with borrowers while making timely recognition of risk—emphasis on timely,” said Acting Comptroller Brian Brooks during a press briefing today, he added that “we need real-time and accurate information about loans that are going south, loans that are at risk, loans that should be classified. We will not be punishing banks for loans that were prudently underwritten at the front end, but we will look very carefully at banks that fail to recognize the risk in those loans at this present moment in the pandemic response.”

The OCC also flagged the transition away from the London Interbank Offered Rate, noting that in 2021, “the OCC will increase its oversight, particularly for banks with significant Libor exposure or less-developed transition processes.” The agency also noted an increase in ransomware attacks using phishing emails and risks stemming from an increasingly technologically complex operating environment.

The OCC acknowledged that banks were well-positioned at the outset of the pandemic with “historically high capital ratios and ample liquidity.” The number of banks with a CAMELS rating of 3, 4 or 5 did not change materially, nor did the number of outstanding Matters Requiring Attention.