OCC Report Lists Key Risks For Review In Upcoming Examinations

by Manatt, Phelps & Phillips, LLP
Contact

Highlighting the operational, strategic, and compliance risks confronting financial institutions, the Office of the Comptroller of the Currency (OCC) published its “Semiannual Risk Perspective” report in late June based on 2013 year-end data. Banks examined by the FDIC or Federal Reserve should also consider the report a weather vane for their next examinations.

While the agency began its report on a positive note, describing the improved financial performance of federally chartered institutions in 2013 and a new record level of net income, it identified significant challenges and concerns in the current lending and operating environment. Competition for limited lending opportunities is resulting in loosening credit policies and underwriting standards and a search for revenue in new, often less familiar and higher risk products and services or outsourcing expense control solutions, sometimes without sufficient due diligence. The report also noted the cost and challenge to banks as “the volume and velocity of change in technology systems and business processes continue to increase.”

Cyberthreats and risks related to the Bank Secrecy Act and anti-money laundering compliance (BSA/AML) rank among on the agency’s list of key risk areas. Both the volume and sophistication of electronic banking fraud have increased, the OCC said, making it hard for banks to keep pace. Methods of money laundering continue to develop and change, requiring financial institutions to stay on their toes. “BSA programs at some banks have failed to evolve or incorporate appropriate controls into new products and services,” according to the report, suggesting that additional resources be devoted to the issue.

While most cyber attacks currently aim to disrupt business, the report expressed concern that attackers could change their approach and aim for “destruction and corruption.” Complicating the issue is the growth in “the number, nature, and complexity” of foreign and domestic third-party relationships, which leads to increased interconnectedness of systems and, in turn, greater cyber vulnerability.

Banks also face significant strategic risks, the OCC said, in looking for sustainable ways to generate target rates of return in the wake of the continued slow pace of the recovery from the financial crisis. Many banks are reevaluating their business models by expanding into new products while others are trying to cut costs and lower overhead. Smaller banks continue to lag behind larger banks in returns on equity and increasingly face competitive pressure from nonbank firms seeking to expand into traditional banking activities, the report acknowledged.

The OCC cautioned that examiners have begun to detect an “erosion in underwriting standards” due to the increased competition, citing the indirect auto lending market as problematic. Auto loans – typically obtained through a dealership – were a source of growth for banks, the report noted, but competition has led to tweaks in lending terms. “The results have yet to show large-scale deterioration at the portfolio level, but signs of increasing risk are evident,” the OCC said.

To read the OCC’s Semiannual Risk Perspective, click here.

Why it matters: Boards of Directors and senior bank management should not be surprised if their governance and risk management are questioned in upcoming examinations for shortcomings in credit underwriting or new strategic efforts as well as lapses in controls and compliance—particularly in BSA/AML or cyberfraud protection. The OCC emphasized the need for risk management by “balancing resource constraints, retention of key talent, and overall capability to monitor the breadth of change.” For cyberthreats and vulnerabilities, the agency referred financial institutions to statements from the Federal Financial Institutions Examination Council earlier this year cautioning banks about data security threats, adding that the “threats require heightened awareness and appropriate resources to identify and mitigate the evolving risks.”

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Manatt, Phelps & Phillips, LLP | Attorney Advertising

Written by:

Manatt, Phelps & Phillips, LLP
Contact
more
less

Manatt, Phelps & Phillips, LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.