OCC Reports on Key Risks in Federal Banking System

Summary

The OCC reported that the strength of the federal banking system remains sound. The OCC expects banks to remain diligent and adhere to prudent risk management practices across all risk areas. Continuous assessments of and improvements to risk management practices support banks' efforts to guard against complacency and to build and enhance resiliency against potential future economic and operational challenges.

The OCC highlighted credit, operational, compliance, and market risks, as the key risk themes in the report. Highlights from the report include:

• Commercial credit risk remains moderate and shows signs of stabilizing as risks are better identified, monitored, and controlled. Commercial credit risk drivers indicate the presence of pockets of risk specific to a lender's region and lending market. The commercial real estate (CRE) office sector remains stressed. Risks in multifamily CRE lending remain elevated, particularly in the luxury segment.
• Overall retail credit risk is stable. Delinquency and loss rates on residential real estate-secured loans held by banks remain historically low but are increasing. Delinquencies in other retail asset classes, namely credit cards and auto loans, reflect an increasing trend. However, banks' retail credit loan performance is consistent with many industry forecasts reflecting delinquency and seasonal loss patterns normalizing from atypical historically low levels.
• Operational risk is elevated. Banks continue to respond to an evolving and increasingly complex operating environment. Evolving cyber threats by sophisticated malicious actors target the financial services industry and their key service providers. Recent significant disruptions across many sectors, including the financial sector, highlight the importance of sound third-party risk management and operational resilience.
• From a compliance risk perspective, banks continue to operate in a dynamic banking environment as customers' needs and preferences related to products, services, and delivery channels evolve. It remains important for banks to maintain appropriate risk-based compliance risk management frameworks capable of growing and transforming as their risk profiles change. Banks should perform timely investigations of fraud and unauthorized transaction disputes and resolve them in accordance with applicable laws. Data governance gaps as well as customer or transaction exclusions in Bank Secrecy Act and anti-money laundering (BSA/AML) transaction monitoring may result in increased noncompliance with requirements to report potentially suspicious activity.
• Community Reinvestment Act (CRA) related risks remain stable as the OCC continues to assess banks' CRA performance under the 1995/2021 regulatory framework.
• Regarding market risk, banks net interest margin (NIM) performance has varied across bank asset sizes. Bank funding costs trended higher throughout 2024 but at a slower pace compared with 2023. Funding cost trends have had mixed impacts on NIMs due to trends in earning asset yields. Deposit volumes, deposit mix, and wholesale funding usage have started to stabilize while banks build asset liquidity.

The special topic focuses on the increasing trend in external fraud activity targeting consumers and the federal banking system. The frequency of both traditional and novel, more sophisticated fraud activities targeting customers and banks continues to increase. Banks should maintain sound fraud risk management practices through prudent controls and appropriate fraud monitoring capabilities to identify, investigate, mitigate, and report fraudulent activity. Banks can also support their customers by providing educational information about trending fraud activities and ways to protect themselves.