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 ArticleFED Publishes Financial Stability Report in November 2019
EBA published an erratum for the technical package on phase 2 of the reporting framework 3.0.
MAS amended Notice 643A that addresses requirements for banks to prepare statements of exposures and credit facilities to related concerns or parties.
ECB has published, in the Official Journal of the European Union, the Guideline 2021/565 on the euro short-term rate (€STR) and this guideline amends the previous ECB Guideline 2019/1265.
EBA launched a consultation on the draft regulatory technical standards on the list of countries with an advanced economy for calculating the equity risk under the alternative standardized approach (FRTB-SA).
PRA is proposing, via CP7/21, the approach to implementing new requirements related to the specification of the nature, severity, and duration of an economic downturn in the internal ratings-based (IRB) approach to credit risk.
The UK government launched the Recovery Loan Scheme (RLS) as part of its continued COVID-19 support for UK businesses, as announced by HM Treasury on March 03, 2021.
FSB published a letter, from its Chair Randal K. Quarles, to the G20 Finance Ministers and Central Bank Governors, ahead of their virtual meeting on April 07, 2021.
OSFI issued a letter to the deposit-taking institutions issuing covered bonds and announced the unwinding of the temporary increase to the covered bond limit for deposit-taking institutions, effective immediately.
To support recovery from the COVID-19 crisis, EU has published two regulations to amend the securitization framework, as set out in the Securitization Regulation (2017/2402) and the Capital Requirements Regulation or CRR (575/2013).
HM Treasury announced that G7 Finance Ministers and Central Bank Governors met ahead of COP 26, the 2021 UN Climate Change Conference, and agreed on green agenda.