OCC: Operational, Strategic Risk Elevated; Banks Remain Resilient

In its Semiannual Risk Perspective Report, the OCC yesterday flagged operational risk and strategic risk as being elevated, with banks continuing to face increasingly sophisticated cyberattacks and take strategic risks in order to improve earnings in the current economic environment. The OCC noted that “banks are showing resilience in the current environment, with satisfactory credit quality and strong earnings, but weak loan demand and low net interest margins continue to weigh on performance.”

In addition, the OCC noted that compliance risk also remains heightened as COVID-19 relief programs wind down. “The conclusion of these programs creates increased compliance responsibilities, high transaction volumes, and new types of fraud, as banks continue to respond to a changing operating environment,” the OCC said. Meanwhile, credit risk remains “moderate,” and “loan portfolios have been resilient and widespread credit deterioration has not materialized from the [COVID-19] crisis due to appropriate risk management by banks,” the report said.

Turning to community banks in particular, the OCC found that some firms have “assumed increased credit and interest rate risk consistent with their operating strategies,” and emphasized the need for these institutions to “ensure financial resilience, without compromising sound business models and strategic plans, to avoid excessive risk taking, and to maintain adequate controls when managing investment and lending programs and third-party relationships.”

Additional challenges facing community banks include strategic risk—particularly with regard to effective strategic planning, talent acquisition and retention and succession planning.

The OCC also outlined its plans to address climate-related risks that affect the banking sector. As part of this initiative, the agency said that in 2022, it will finalize the previously announced climate risk management framework for large banks and will “develop more detailed expectations by risk area.”

The agency intends to publish for comment climate risk management principles for large banks that will build on the principles issued by the Basel Committee’s Task Force on Climate-Related Financial Risks. “The principles are intended to help direct the focus of institutions on the foundational questions to determine the materiality of climate risk and establishing a risk management framework. The principles will also provide a basis for development of more complex, mature, climate risk management expectations.”

In addition, the OCC said it would review large firms’ progress toward establishing climate risk management capabilities and conduct additional industry outreach, and that it would provide another update on the climate risk initiative in the Spring 2022 Semiannual Risk Perspective report.