A “maturing economic cycle may cause consumer headwinds,” and increased credit and operations risks for banks, the OCC recently said. The OCC recently released a report concluding that while the overall condition of the federal banking system remains sound a maturing economic cycle may cause consumer difficulties. Banks need to continue identifying material risks and their interconnected impacts. Continuous risk management improvement remains key.
The OCC highlighted credit, market, operational, and compliance risks as the critical consideration in its report. First, credit risk is rising. Commercial real estate sectors are experiencing stress due to a higher rate of environmental and structural changes. Office and multifamily loans, particularly those with interest-only terms, set to refinance over the next three years pose additional risk. Inflation and elevated interest rates may increase consumer financial stress in some households and weigh on overall consumption growth.
From a market risk perspective, net interest margins are under pressure due to intense deposit competition. The future direction, timing, and extent of rate movements and uncharted depositor behavior present risk management challenges. Operational risk is also elevated. Cyber threats continue to target the financial services industry and their critical service providers with ransomware and other attacks. Increasing digitalization, new and innovative product and service adoption, and third-party use increase bank operating environment complexity, creating opportunities and risks. Continued check and wire transfer fraud and increased payment fraud incidents underscore fraud risk management’s importance.
Banks operate in a constantly shifting environment because of changing customer needs and preferences related to products, services, and delivery channels. Risks are compounded if products and services, including changes, are not delivered or implemented fairly and equitably. It remains essential for banks to maintain a compliance risk management framework that is commensurate with their risk profiles and capable of growing and evolving as their risk profiles change. Fraud continues to be a significant risk for banks. Effective processes to prevent, identify, and promptly file suspicious activity reports on fraudulent activity remain essential to protect both banks and consumers.
The report highlights the necessity of firmwide resilience efforts due to interconnected risks. Events could simultaneously affect multiple risk categories. Banks must establish an appropriate risk culture that identifies potential hazards, particularly before times of stress. Prudent planning from a firmwide perspective can enhance a bank’s ability to maintain operations, remain financially sound, and service customers in times of stress. If you need any assistance planning for these risks, Compliance Alliance has an Economic Headwinds Toolkit designed to tackle all of these aforementioned risks. It provides tools and articles on:
- Asset-Liability Management;
- Allowances for Credit Losses/CECL & Credit Risk/Concentration Risk;
- Investment Risk;
- Capital Requirements;
- Asset Management;
- Fraud Mitigation;
- Physical Security; and
- Internal Controls
The Compliance Alliance team will continue to update the Economic Headwinds Toolkit to meet your needs as circumstances evolve. If you have any specific questions, please feel free to reach out to the Compliance Hub Hotline.