community-banks-strategic-riskwritten by Blair Groves

In January the Office of the Comptroller of the Currency’s (OCC) National Risk Committee (NRC) published their Semiannual Risk Perspective. Within this document they designated “strategic risk” as high for the current operating environment of the U.S. banking system.

Given this, the report urges banks to be vigilant in case the economy weakens, or markets suddenly tighten.

Banks in Good Health
The report, which is based on data as of June 30, 2017, paints a positive picture of the financial health of U.S. banks. Capital and liquidity have improved significantly since the financial crisis and are near historic highs. Return on equity, net income, net interest income, and net interest margins all improved during the first half of 2017 compared to a year earlier.

And while bank loan growth slowed overall during the period measured, it remained stable for smaller banks, which the NRC defines as banks with total assets of less than $1 billion.

Based on this data, the report concludes that the banking sector remains “relatively stable” with strong asset quality and satisfactory underwriting policies and procedures. However, the number of loans with eased underwriting is growing due to increased competition. This heightens the risk of credit quality problems if and when economic conditions deteriorate, notes the report.

Ongoing Concerns Persist
The NRC voices ongoing concerns about strategic risk due to a number of factors which include pressure to boost lending, enhance efficiencies, embrace new technologies, and innovate products and services.

In particular, the credit environment continues to be influenced by aggressive competition (especially from non-bank lenders), heightened asset valuations, slowing loan growth, and tighter spreads. “These factors are driving incremental easing in underwriting practices and increasing concentrations in select loan portfolios,” states the report.

It specifically voices concerns about potential lender complacency due to the long economic recovery and expansion. “In this environment, lenders need to focus on maintaining sound credit standards within risk tolerances and understanding the potential credit risks that may be exposed under less-benign economic conditions,” the report states.

Operational and Compliance Risk
Banks also continue to face operational risk due to the increasing cybersecurity threats and the growing use of third-party service providers for some critical operations. Compliance risk remains elevated due to increasing money laundering threats, challenges in complying with Bank Secrecy Act (BSA) requirements, and complexity in consumer compliance regulations.

In addition to the credit, operational, and compliance risks noted previously, the NRC monitors a variety of other risks that it believes bankers should be aware of, including the following:

The NRC publishes the Semiannual Risk Perspective twice each year, using data gathered midyear and at year end. You can download the complete report by visiting https://www.occ.treas.gov and typing “Semiannual Risk Perspective” in the search box.

Please contact us for more information about strategic risk 417-881-0145.