On June 18, 2013, the Office of the Comptroller of the Currency (OCC) released its Semiannual Risk Perspective highlighting current risks for national banks and federal savings associations. The report, available here, offers executive officers of all financial institutions a road-map in preparing for the latest round of forthcoming bank examinations and provides critical guidance in staying on top of trends and uncertainties that pose risks to their franchises.
The OCC identifies strategic risk as a primary concern for banks. In a difficult economic environment, banks are seeking to improve their overall performance through new products and services, expansion of business lines and cost reductions. Accordingly, the OCC will closely examine the adequacy of a bank’s strategic and capital planning processes relating to new initiatives to ensure that appropriate risk management processes are in place. This will include a comprehensive review of internal controls and procedures, as well as the overall adequacy of internal oversight over new products, services and activities. Regulators will be able to positively evaluate banks which are able to demonstrate that their overall enterprise risk management function is sufficient to manage strategic risk, even with the increased pace of new regulatory requirements.
Challenges in growing revenue mean that banks may undertake problematic lending activities to boost their overall yield. The OCC will closely review commercial credit underwriting practices to ensure that banks structure the terms of new and renewed credits (particularly in the C&I portfolio) in a manner which does not compromise prudent lending standards. In addition, the OCC will focus on the interest rate risk measurement process to ensure that banks are adequately testing for portfolio risk.
Cyber-threats pose an increased risk to banks. The OCC notes that banks must have adequate resources in place to identify and mitigate the risks associated with such threats. Further, the OCC expresses concern that the Bank Secrecy Act and Anti-Money Laundering procedures at institutions are failing to evolve in a manner sufficient to keep up with a changing climate of new products and services and external threats. If coupled with a lack of sufficient internal resources to address BSA/AML issues, banks are potentially subject to significant criticism and adverse findings in examinations, as well as more robust enforcement actions.
As revenue pressure continues to increase, technology continues to evolve, and threats to the integrity of proprietary information substantially grow, executives are encouraged to closely review this important guidance as they prepare their institutions for the regulatory and institutional challenges ahead.
