OCC cautions against growing credit risk in banking report

The overall strength of the federal banking system is sound but banks should remain diligent and confirm their risk management practices, the Office of the Comptroller of the Currency said today in its semiannual risk perspective report. The agency noted that the system as a whole faced increased volatility due to a liquidity crisis in the first quarter of 2023 following the failures of Silicon Valley Bank and Signature Bank. However, liquidity levels have been strengthened in response to the closures, it said.

The OCC said credit risk remains moderate but signs of stress are increasing, such as in certain segments of commercial real estate. Credit markets and loan portfolios remain resilient, and problem loan levels remain manageable, but the persistent drag from high inflation and rising interest rates is causing credit conditions to deteriorate, it added. Operational risk remains elevated with cybersecurity remaining a major concern. Compliance risk is also elevated as compliance systems are challenged to keep pace with changing services, products and delivery channel offerings.

Acting Comptroller of the Currency Michael Hsu urged banks to “be on the balls of their feet” with risk management. That includes re-evaluating exposures, especially asset and liability concentrations, across a range of scenarios; taking actions to preserve capital and maintain strong liquidity consistent with each bank’s risk profile; and maintaining discipline and strong risk management across all risk areas, “not just in response to headlines.” Hsu also told reporters during a press briefing that banking sector turmoil caused the agency to push back the timeline of finalizing its Community Reinvestment Act proposal, which was expected in coming months, Politico reported.