On Tuesday, May 22nd, The Office of the Comptroller of the Currency (OCC)  published its Semiannual Risk Perspective for Spring 2019. Highlights include:

  • Credit quality is strong when measured by traditional performance metrics, but successive years of growth, incremental easing in underwriting, risk layering, and building credit concentrations result in accumulated risk in loan portfolios.
  • Operational risk is elevated as banks adapt to a changing and increasingly complex operating environment. Key drivers for operational risk include persistent cybersecurity threats as well as innovation in financial products and services, and increasing use of third parties to provide and support operations that are not effectively understood, implemented, and controlled.
  • Compliance risk related to Bank Secrecy Act/Anti-Money Laundering (BSA/AML) is high as banks remain challenged to effectively manage money laundering risks.
  • Interest rate risk and the related liquidity risk implications pose potential challenges to earnings given the uncertain rate environment, competitive pressures, changes in technology, and untested depositor behavior.

The report notes that compliance risk related to BSA/AML remains high, and while “overall trends have been positive, the BSA/AML-related deficiencies identified by the OCC stem from three primary causes: inadequate customer due diligence and enhanced due diligence, insufficient customer risk identification, and ineffective processes related to suspicious activity monitoring and reporting, including the timeliness and accuracy of Suspicious Activity Report filings. Talent acquisition and staff retention to manage BSA/AML compliance programs and associated operations present ongoing challenges, particularly at smaller regional and community banks.”

In the report, the OCC also advises that “Bank management should be aware of the potential fair lending risk with the use of AI or alternative data in their efforts to increase efficiencies and effectiveness of underwriting. It is important to understand and monitor underwriting and pricing models to identify potential disparate impact and other fair lending issues. New technology and systems for evaluating and determining creditworthiness, such as machine learning, may add complexity while limiting transparency. Bank management should be able to explain and defend underwriting and modeling decisions.”