OCC Report Examines Key Risks for Federal Banking System

The report, which is based on data as of December 31, 2018, presents information in five main areas: the operating environment, bank performance, special topics in emerging risks, trends in key risks, and supervisory actions. It focuses on issues that pose threats to the financial institutions regulated by OCC and is intended as a resource to the industry, examiners, and the public. The report highlights that financial performance of banks making up the federal banking system strengthened in 2018. The financial services sector also continues to experience rapid growth in fintech and regtech. The following are the key highlights from the report: 

• Credit quality remains strong. However, as per OCC, banks should have appropriate risk management practices in place in case of a potential cyclical downturn. OCC keeps reminding bankers and examiners to assess the quality and timeliness of credit risk identification, risk mitigation, and loan-loss reserve methodology.
• Operational risk is elevated as banks adapt to a changing and increasingly complex operating environment. Key drivers for operational risk include persistent cyber-security threats, innovation in financial products and services, and increasing use of third parties to provide and support operations that are not effectively understood, implemented, and controlled.
• Compliance risk related to Bank Secrecy Act/anti-money laundering (BSA/AML) remains high.
• Interest rate risk and the related liquidity risk implications pose potential challenges to earnings, given the uncertain rate environment, competitive pressures, changes in technology that have made it easier for customers to move funds, and untested depositor behavior after an extended low-rate environment. 

The special topics section in the report examines the impact of financial innovation in the elevation of strategic risk for banks. Rapid technological changes in the industry are forcing banks to reevaluate their business strategies. OCC has observed substantial variance in adoption of innovation—by technology type and by bank size—in the federal banking system. Some banks are combining resources through consortia and making other collaborative arrangements to share the cost of developing and acquiring new technologies. Others have increasingly relied on third-party service providers or fintech relationships to enable more efficient and effective operations and deliver innovative products. Still others continue to take a wait-and-see approach, though a slow-adopter strategy adds risk because the speed of change, combined with the lengthy process to evaluate and implement newer technology solutions, can result in loss of customers or market share before the bank can respond. The challenge of adapting to the current environment may prove difficult for banks lacking the financial resources to invest in technology. Yet some smaller banks looking to innovative solutions may find their business models more nimble and adaptable to collaboration with a nonbank firm to strengthen bank operations and customer acquisition.

Related Links

• Press Release
• Report (PDF)

Keywords: Americas, US, Banking, Semiannual Risk Perspective, Credit Risk, Operational Risk, Compliance Risk, Interest Rate Risk, Fintech, Regtech, OCC