OCC published the Semiannual Risk Perspective for Fall 2019. The report covers risks facing national banks and federal savings associations based on data as of June 30, 2019. In this issue, operational, credit, and interest rate risks are among the key themes for the federal banking system. The report also highlights cyber-security and technology management as a special topic in emerging risks.
The report focuses on issues that pose threats to the financial institutions regulated by OCC. It report covers information on operating environment of banks, bank performance, special topics in emerging risks, trends in key risks, and supervisory actions to address issues. According to the report, financial performance of banks is sound, partly because of a favorable credit environment and the longest economic expansion in U.S. history. Asset quality is strong and stable while leverage and risk-based capital ratios are at record levels, providing strong loss-absorption capacity. The following are the key highlights from the report:
- Operational risk is elevated, as banks adapt to a changing and increasingly complex operating environment. Key drivers elevating operational risk include the need to adapt and evolve current technology systems for ongoing cyber-security threats.
- Credit risk accumulated in many portfolios. Banks should prepare for a cyclical change while credit performance remains strong. Preparation includes maintaining robust credit control functions, particularly credit review, problem-loan identification, and workout, collections and collateral management.
- Recent volatility in market rates led to increasing levels of interest rate risk. The complexity of asset-liability management is exacerbated by the recent yield curve inversions.
- The London Interbank Offered Rate (LIBOR) will likely cease to be an active index by the end of 2021. Accordingly, OCC is increasing regulatory oversight of this area to evaluate bank awareness and preparedness.
- Banks face strategic risks from non-depository financial institutions, use of innovative and evolving technology, and progressive data analysis capabilities.
The report highlights that cyber-security continues to be a key concern as breaches and operational outages occur across all industries, including the financial sector. Banks generally have appropriate controls for operational stability and protection of bank and customer data. Banks strengthened risk management processes and controls to address concerns. As a result, cyber-security-related issues have decreased and have remained relatively stable over recent quarters, reflecting increasing maturity of banks’ cyber-security programs. However, cyber-security remains a significant risk area for banks, with opportunities for further improvement.
In the special feature on cyber-security, OCC emphasizes that the cyber-security program of a bank should be part of an overall operational resilience framework. In addition to a well-documented and comprehensive incident response program, banks should consider partnering with the Financial Services Information Sharing and Analysis Center to share threat information and self-reporting incidents through the Federal Bureau of Investigation’s Internet Crime Complaint Center. Also, banks may be required to file Suspicious Activity Reports (SAR) with the Financial Crimes Enforcement Network for certain cyber events resulting in fraud. As institutions increasingly rely on third parties to help reduce costs and enhance technological capabilities, they should have processes to ensure that cyber-security controls are appropriate for the outsourced operations.
Keywords: Americas, US, Banking, Operational Risk, Credit Risk, Interest Rate Risk, LIBOR, Semiannual Risk Perspective, Cyber Risk, OCC
Previous ArticleHKMA Proposes Changes to Module on Supervision of Concentration Risk
HKMA announced that enhancements will be made to the Special 100% Loan Guarantee of the SME Financing Guarantee Scheme (SFGS) and the application period will be extended to December 31, 2021.
EBA launched consultations on the regulatory and implementing technical standards on cooperation and information exchange between competent authorities involved in prudential supervision of investment firms.
BoE has set out a three-phased plan to transform data collection from the UK financial sector over the next decade.
BIS recently made a couple of announcements with respect to the planned and ongoing work in the area of financial technology.
ESRB updated the list of national macro-prudential measures applied by each member state in the European Economic Area.
BoE has set out results of a survey on the impact of COVID-19 events on the use of machine learning and data science.
In response to a request from the European Council and Parliament, ECB published an opinion on the proposed regulation on markets in crypto-assets.
APRA announced the updated aggregate amounts for the 2021 Committed Liquidity Facility (CLF) established between the Reserve Bank of Australia (RBA) and certain locally incorporated authorized deposit-taking institutions that are subject to the Liquidity Coverage Ratio (LCR).
ECB published supervisory Memorandums of Understanding (MoUs) with UK as well as other European and non-European authorities.
EIOPA identified business model sustainability and adequate product design as the two EU-wide strategic supervisory priorities.