- The OCC Releases Semi-Annual Risk Perspective
- June 28, 2013 | Author: Craig N. Landrum
- Law Firm: Jones Walker LLP - Jackson Office
On Tuesday, June 18, 2013, the Office of the Comptroller of the Currency ("OCC") released its semi-annual risk perspective addressing key issues facing banks based on the condition of the federal banking system and emerging threats to the system's safety and soundness. The report presents data in the operating environment; the condition and performance of the banking system; funding, liquidity, and interest rate risks; and regulatory actions.
For community and mid-size banks, strategic risk remains a primary regulatory concern due to slow economic growth, historically low interest rates, intensified competitive pressures, and uncertainty about regulatory changes and costs. As banks seek to increase income through new products and services, expansion of business lines or aggressive cost reductions, the OCC sees increased vulnerability. Any expansion into new products will require specialized risk management processes and skills and such analysis must be documented for Board approval and for the regulators.
Another area of concern is a trend in investment portfolio management to purchase more mortgage back securities to increase rates, thereby increasing exposure to rising interest rates. The unusually low rate climate will require more complex analytics to access interest rate risk vulnerabilities.
As banks seek to improve credit quality and profitability from new lending opportunities and products, compliance and operational risks require effective risk management functions, particularly information security as community and mid-sized banks are now experiencing threats from cyber-criminals.
Finally, expanding reliance on technology and changing regulatory requirements increases operational risk, especially from sophisticated cyber-threats. The cost in revenues needed to manage the risks of cyber-attacks continues to increase as the attacks broaden and intensify. Further, by adopting new technologies, banks are adopting new and less market tested applications or increasing the use of outsourcing to reduce operating costs. Risk management and effective oversight will be a major point in the upcoming examination. As an example the Bank Secrecy Act ("BSA") and money laundering ("AML") risks are increasing as systems fail to evolve or incorporate appropriate controls for new products and services and to counter threats from changing methods of money laundering and increasing sophistication of electronic banking fraud. Banks must devote sufficient resources to BSA/AML risk management.
Examiners are expected to focus on the adequacy of strategic and capital planning processes in light of the assumed risks and planned initiatives to insure the appropriate risk management processes are in place, especially where there are new or modified products or outsourcing of activities.
In short, even though economic indicators show a positive economic outlook for the remainder of 2013 with improving loan growth and the decline in problem assets, banks face significant strategic risks due to continued income pressures.