OCC Report Discusses Risks Facing National Banks and Federal Savings Associations

Summary

Interest rate, underwriting, strategic, compliance, and cybersecurity top the Office of the Comptroller of the Currency's (OCC) supervisory concerns in its Semiannual Risk Perspective for Spring 2015, released today.

The report, which covers risks facing national banks and federal savings associations based on data through the end of 2014, also noted declining revenues and profitability overall in OCC-supervised institutions.

Highlights from the report include:

• Evolving cyber threats and information technology vulnerabilities require heightened awareness and appropriate controls to identify and mitigate the associated risks.
• Compliance risks remain high, as banks work to comply with new mortgage lending requirements and manage Bank Secrecy Act/Anti-Money Laundering risks.
• Competition for limited lending opportunities is intensifying and resulting in loosening underwriting standards and layering of risk, particularly in indirect auto lending, asset-based lending, commercial real estate (CRE) lending, and commercial and industrial loans.
• Many banks continue to re-evaluate their business models and risk appetites to generate returns against the backdrop of low interest rates.
• The prolonged low interest rate environment continues to lay the foundation for future vulnerability. Banks that extend asset maturities to pick up yield could face significant earnings pressure and capital erosion depending on the severity and timing of interest rate moves.
• Several risks have the potential to develop into broader, systemic issues. These risks include exposures to oil- and gas-related industries, rising CRE concentrations coupled with easing of underwriting standards, and exposures to nonbank mortgage servicer companies.
• Almost half of outstanding home equity lines of credit balances will transition from draw period to repayment between 2015 through 2017. For most borrowers, monthly payments will change from interest-only to amortizing, which may pose interest rate risk from concentrated resets and rising market rates, payment shock from additional principal payments, and refinancing difficulties because of lower property values and conservative lending underwriting standards.

The report presents data in four main areas: the operating environment, bank condition, key risk issues, and regulatory actions. It focuses on issues that pose threats to the safety and soundness of those financial institutions regulated by the OCC. It is intended as a resource to the industry, examiners, and the public.