The Office of the Comptroller of the Currency (OCC) released its Semiannual Risk Perspective for Spring 2023, highlighting key issues facing the federal banking system.
Overall, the OCC reported that the strength of the federal banking system is sound, even through the tumultuous past few months. It closely monitored the condition of the banks it supervises throughout the market stress this spring when three banks went under and has engaged directly with its banks to ensure they are appropriately managing their risks.
“The Semiannual Risk Perspective (SARP) for Spring 2023 highlights key risks facing the federal banking system – risks that we expect bankers to be attentive to and prudently manage, and that reflect our priorities as supervisors of national banks and federal thrifts,” Acting Comptroller of the Currency Michael Hsu said. “Since March, the OCC has been closely monitoring the conditions of the institutions we supervise. The federal banking system is sound, and deposits are safe. Notably, national banks and federal savings associations (banks) have strengthened their liquidity to cover potential deposit withdrawals.”
The banking system faced increased volatility due to a liquidity crisis in the first quarter of 2023, but they have been focused on stabilizing liquidity and maintaining confidence in the banking system. The report said banks should remain diligent and maintain effective risk management practices over critical functions to continue to withstand current and future economic and financial challenges.
Among the highlights of the report, the OCC said liquidity levels have been strengthened in response to the failures of several banks and investment portfolio depreciation. Rising long-term rates caused significant depreciation in investment portfolios, focusing attention on banks’ liquidity risk profiles.
Further, it said credit risk remains moderate in aggregate, but signs of stress are increasing, for instance in certain segments of commercial real estate. Overall, credit markets and loan portfolios remain resilient, and problem loan levels remain manageable. However, the persistent drag from high inflation and rising interest rates is causing credit conditions to deteriorate.
The report also noted that operational risk is elevated as cyber threats persist, digitalization of banking products and services is expanding, and more banks use third parties. Also, compliance risk is elevated as compliance management systems are challenged to keep pace with changing products, services, and delivery channel offerings.
In addition, the report highlighted the OCC’s initiative on managing climate-related financial risks to the federal banking system and discussed the challenges posed by continued use of aging technologies and systems.
“Looking ahead, the OCC expects banks to “be on the balls of their feet” with regards to risk management, just as our examiners are,” Hsu said. “Most of the banks we supervise are doing these things. Maintaining such vigilance can be challenging, though. That is why it is critical for us all to continue to guard against complacency.”