The strength of the federal banking system remains sound, the Office of the Comptroller of the Currency reported today in its semiannual risk perspective report. The report covers risks facing national banks, federal savings associations, and federal branches and agencies based on data as of Dec. 31 last year.
Consumer sentiment, geopolitical risk, sustained higher interest rates and downward movement in some macroeconomic indicators have increased economic uncertainty, the OCC said, while the adoption of new technologies, products and services can offer benefits to banks and customers.
The OCC highlighted credit, market, operational and compliance risks, as the key risk themes in the report. Commercial credit risk is increasing, driven by growing geopolitical risk, sustained higher interest rates, growing caution among businesses and their customers, and other macroeconomic uncertainty, OCC said. Pockets of risk remain for some commercial real estate property types and vary by geographic market and product type, the report noted, while refinance risk remains high for loans underwritten during a period of lower interest rates.
Retail credit risk remains stable despite economic uncertainty. OCC reported that most consumer borrower segments continue to withstand elevated prices, interest rates and growing debt levels, supported, in part, by growth in wages exceeding aggregate inflation since 2019. Wage growth is decelerating, however, and economic uncertainty is driving adverse changes in consumer sentiment, according to the report.
Net interest margins in OCC-supervised institutions improved in the latter half of 2024 as effective federal funds rate cuts enabled banks to lower funding costs, according to the report. The OCC said “robust interest rate risk scenario analysis” and sensitivity testing are “critical” due to uncertainty surrounding inflation and future EFFR movement. Asset-based liquidity was stable in 2024, but unrealized investment portfolio losses remain a focus, the report said. Deposits were also stable, but deposit competition “warrants continued monitoring.”
Operational risk is elevated and banks “continue to seek opportunities to gain efficiencies and respond to an evolving and increasingly complex operating environment” OCC said, noting that failure to upgrade systems and digitize may result in loss of market share to competitors offering faster and cheaper payment alternatives.
In the area of fraud, criminals continue to exploit traditional payment methods. OCC said, adding that fraud schemes commonly target checks, wire transfers, peer-to-peer payment platforms and insiders. Evolving cyber threats “by sophisticated malicious actors” continue to target banks and key service providers, which makes “operational resilience” more important, according to the report. Recent disruptions across many sectors, including the financial sector, highlight the importance of sound third-party risk management, the report advised.
Compliance risk continues to be elevated due in part to Bank Secrecy Act/anti-money laundering and consumer compliance risks associated with elevated fraud levels, account access concerns, and evolving business models.
