WASHINGTON Banks increasingly face risks from every direction as loan underwriting weakens, institutions are more exposed to interest rate shifts and threats from money laundering and cyber thieves are an ever-present danger, the Office of the Comptroller of the Currency said Wednesday.
The OCC's report, which provides a semiannual update on risk trends in the industry, presented a pretty sobering picture. Not only do credit and operational risks present concerns, but the industry's general difficulty in increasing revenue is not helping.
"The limited ability to increase revenue and operating profit while not taking excessive risk remains a key challenge," the report said. "Many banks are seeking to boost the pace of loan growth, increasing the temptation to weaken underwriting standards or pricing."
The report said interest rate risk is still a threat. Banks are often investing in assets with longer dated maturities, not only for themselves, but also for clients when acting as fiduciaries.
"We continue to monitor interest rate risk within the banks that we supervise and our concern is that the prolonged low rate environment is setting up a situation where interest rate risk could become more critical when interest rates do rise," Kevin Walsh, deputy comptroller for market risk, told reporters during a telephone briefing on the report. He added, "It is important to remind the system to be vigilant."
The report also highlighted that modeling the behavior of savings, checking and money market accounts can be difficult to predict in a fluctuating interest rate environment.
"The [interest rate risk] data show a wide range of practice for [nonmaturity deposit] assumptions," the report said. "Accordingly, it is important that banks not rely on external proxies and instead use assumptions that reflect the bank's unique profile in order to identify risk properly."
Echoing an earlier survey on credit underwriting the agency released Tuesday, the risk report said institutions continue to loosen standards, including for syndicated leveraged loans, auto loans, asset-based loans, commercial real estate loans and commercial and industrial loans.
The agency also noted that some institutions are venturing into product areas where they do not have the appropriate expertise and may be inherently riskier than more established business models.
"Banks' boards of directors and senior managers should ensure that strategic planning and product approval processes appropriately consider expertise, management information systems, and risk controls for the banks' business lines and activities," the report said.
Meanwhile, as banks leverage cloud computing technology and mobile banking in the services they offer, they face heightened cyber and money-laundering threats. "Banks' operational environments face increasing challenges from the combination of evolving cyber threats and newly identified information technology vulnerabilities," the report said.
Darrin Benhart, deputy comptroller for supervision risk management, said the agency is "attempting to raise awareness across the board" about concerns dealing with cybersecurity and potential anti-money-laundering deficiencies. The OCC is particularly focused on getting community and mid-sized banks "up to speed on cyber issues," Benhart said.
The report said obstacles to setting up effective AML programs "remain prevalent given changing methods of money laundering and growth in the volume and sophistication of electronic banking fraud." Smaller community banks are taking on higher-risk customer relationships even if they lack appropriate Bank Secrecy Act risk management infrastructure or adequate risk controls.
"A lack of resources and expertise devoted to BSA/AML in some banks often compounds these issues," the OCC said.
There were some positive indicators. Benhart noted that, for banks the OCC supervises, return on equity is improving, net interest margin compression is slowing and loans are showing continued growth.
Still, he said the agency is attuned to the frequency of banks exploring new business models
"We continue to see business model execution risk as an item we are keeping an eye on as our banks continue to look for new ways to generate revenue," Benhart said.