OCC’s Hsu Warns Against ‘Complacency’ as Recovery Revs Up

With projected economic growth expected to create a positive environment for bank performance in the remainder of 2021 and 2022, according to the OCC’s newly released Semiannual Risk Perspective, newly appointed Acting Comptroller Michael Hsu today said “it’s critical that bankers and their regulators guard against complacency.”

“Banks do deserve credit for having weathered the pandemic fairly well, in terms of capital and liquidity levels, continuing to work with borrowers and lending [and]maintaining operations while everyone was working from home,” Hsu said, adding that “there is a risk of a bit of overconfidence from that . . . as we enter a growth phase.”

Key risk themes highlighted by the OCC included credit, interest rate, operational and compliance risk. In particular, the decline in interest rates and the Federal Reserve’s long-term low-rate policy put downward pressure on net interest margins, pushing banks to respond through reducing costs and extending durations. Should yields rise, “credit quality trajectory is critical to supporting earnings that could be realized from the steepening curve,” the report said.

While “credit risk never really materialized the way we thought it would last spring and through the fall,” according to a senior OCC official during a press briefing, the OCC noted that commercial credit risk remains elevated, especially in commercial real estate. Operational risks remain elevated, with ransomware attacks increasing in every sector, and the OCC noted that third-party risk management continues to be an area of “heightened supervisory focus.”

The transition away from Libor remains a priority area for supervision. “OCC banks are making very strong progress on Libor cessation and replacement,” said an OCC official, who added that “we want banks to select a replacement rate or rates that fit their business, their customer base and their risk profile, provided that replacement rate is IOSCO-compliant” and approved through an appropriate internal process.

The Semiannual Risk Perspective raised the issue of climate change for the first time, an OCC official said. “Banks may face risk relative to climate change through physical conditions or transitions in the economy,” the report noted. “Accordingly, in common with other supervisors, the OCC is developing its knowledge of the risks in this area by engaging with relevant stakeholders.” Hsu—who joined the OCC from the Fed earlier in May—told media that has asked OCC staff to explore joining the Fed as a member of the Network for Greening the Financial System, a global group of bank supervisors and central banks focused on climate risk management.