OCC Highlights Key Risks for Federal Banking System

WASHINGTON—The Office of the Comptroller of the Currency (OCC) today reported the key issues facing the federal banking system and the effects of the COVID-19 pandemic on the federal banking industry in its Semiannual Risk Perspective for Spring 2020.

Banks entered the national health emergency related to COVID-19 in sound condition but face weak economic conditions resulting from the economic shutdown in response to the pandemic that will stress financial performance in 2020. The OCC reported weak financial performance, and increasing credit, operational, and compliance risks, among the key risk themes in the report.

Highlights from the report include:

• Financial performance will be affected by higher credit losses, overhead expenses, and lower net interest income.
• The onset of the national health emergency created an uncertain credit environment that will test the resiliency of commercial and retail loan portfolios. Credit risk management practices will need to be flexible and proactive to meet the challenges of the current environment.
• Operational risk is heightened as banks amended business processes and engaged third parties to support widespread remote work capabilities, increased technological capacity, and solutions to maintain operations under elevated operational volumes.
• Compliance risk is elevated because of a combination of altered operations, employees working remotely, and several new federal and state programs designed to support consumers such as the CARES Act, Paycheck Protection Program, and a variety of forbearance and deferred payment programs. Among other challenges, these conditions complicate the compliance responsibilities associated with managing high volumes and various programs of consumer and business lending in a weakened economy.

The report also highlights government relief programs as a special topic in emerging risks.

The report covers risks facing national banks and federal savings associations based on data as of December 31, 2019. The report presents information in four main areas: the operating environment, bank performance, special topics in emerging risk, and trends in key risks. It focuses on issues that pose threats to those financial institutions regulated by the OCC and is intended as a resource to the industry, examiners, and the public.

Related Link

• OCC Seminannual Risk Perspective Spring 2020