Acting Comptroller Issues Statement on Key Risks Facing Federal Banking System

The Office of the Comptroller of the Currency, OCC, has published its semi-annual risk perspective which describes the current and expected operating environment of financial institutions in the U.S. and outlines the key risks faced by financial institutions in this context (with data provided for the analysis as of December 31, 2022). In brief, these are:
(1) operational risks: these risks remain elevated as banks are faced with a large number of cyber attacks, not least since the beginning of the Russian aggression towards Ukraine. Ransomware attacks are the most common types of cyber incidents and seem to prevail in light of the ongoing geopolitical tensions. Additionally, banks are facing a „complex“ operating environment due to all the sanction measures imposed by the U.S. Department of the Treasury (please also see compliance risk noted below) which leaves them highly vulnerable for violations. Furthermore, many banks are operating with old and outdated IT-systems, making it difficult to put in place efficient and modern cyber security measures.
(2) liquidity risks: as a result of the latest bank failures, financial institutions have increased their liquid asset portfolios, so the OCC, making them less vulnerable to client fund withdrawals. However, as recent experience has shown, due to increased social media connectivity and access to technology allowing real time deposit transfers at a heartbeat, bank runs can occur nearly instantaneously without any time to prepare. Therefore, institutions must continue to remain vigilant in this context. Furthermore, the increasing long-term interest rates are causing funding issues for banks as well, as they – too – have to pay high interest rates for lending activities. At the same time, the value of many assets in the banking books have depreciated which further contributed to liquidity concerns. As a consequence, the OCC strongly urges financial institutions to adequately perform their stress tests and to frequently review their contingency plans to ensure sufficient liquidity.
(3) compliance risks: these risks are clearly elevated particularly since the onset of the Russian aggression towards Ukraine and the subsequent sanction measures taken by the U.S. government and the Department of the Treasury. Furthermore, many institutions have outsourced numerous functions to third party service providers. Such arrangements naturally raise the risks of compliance as the outsourcing firm does not have direct control over the third party’s operations. On top, many banks are dealing with new technologies, products, and services such as the use of FinTech for purposes of monitoring operations which – at least at first – elevate compliance risks. In addition, banks are faced with enhanced supervisory efforts as regards the fair access of clients to consumer credit and the fair treatment of customers in the loan application process. Finally, due to rising levels of criminal activities in the banking sector (e.g. check fraud), institutions are faced with increased compliance issues to detect and mitigate fraudulent actvities, particularly in connection with money laundering and the financing of terrorism.
(4) credit risks: these risks remain(ed) moderate, in aggregate, so the OCC, even though there are beginning signs of credit-related stress in the commercial real estate market. Therefore, credit risks must be monitored closely particularly in view of rising interest rates and the ongoing Ukrainian conflict. In this context, the Office also notes that – despite the fact that „credit markets and loan portfolios [still] remain resilient, and problem loan levels remain manageable“ – the continuous high level of inflation and high interest rates are causing credit conditions to deteriorate.
For more detailed information, please consult the enclosed report.