Hsu: Banks should focus on counterparty credit, concentration risk amid economic uncertainty

As high inflation and economic uncertainties persist, Acting Comptroller of the Currency Michael Hsu today said that “now is the time for banks to take a fresh look at their exposures and take actions to adjust their risk positions—to ‘trim their sails,’ so to speak—ahead of potential uncertainty and volatility.”

“Just as the banking system stepped up and provided invaluable support to the economy as part of the pandemic response, the banking system can be a source of strength to communities, individuals, and businesses, if banks are disciplined in their risk management and fully prepared for the tide going out,” Hsu added during an industry event.

In particular, Hsu noted that banks should be carefully monitoring counterparty credit risk, and “pay special attention to where risk limits, margin practices escalation procedures, and client onboarding have been relaxed.” He also flagged concentration risk as another area that warrants scrutiny—in particular, he noted that firms with concentrations in non-depository financial institution lending and commercial real estate lending could be especially vulnerable in the event of a downturn.

Among other things, Hsu stressed the “importance of performing sensitivity analysis to quantify the impact of changing economic conditions on asset quality, earnings, and capital; and the need for an effective, accurate, and timely risk-rating system as a foundation for the institution’s credit risk review function to assess credit quality and, ultimately, to identify problem loans.”