OCC Issues Report on Risks Faced by National Banks and Federal Savings Associations (with Lofchie Comment)
The Office of the Comptroller of the Currency released a report providing an overview of various risks facing the banking industry.
The report, "Semiannual Risk Perspective for Spring 2015," contains an analysis of data in four key areas: the operating environment, bank conditions, key risk issues and regulatory actions. Highlights from the report include the following:
- for the banking industry to identify and mitigate their associated risks, evolving cyber threats and information technology vulnerabilities require heightened awareness and appropriate controls;
- competition for limited lending opportunities is intensifying and has resulted in looser underwriting standards and layered risk, particularly in indirect auto lending, asset-based lending, commercial real estate lending, and commercial and industrial loans;
- banks continue to reevaluate their business models and the potential risk of their appetites for generating returns against the backdrop of low interest rates; and
- a prolonged low-interest-rate environment continues to lay the foundation for future vulnerability.
Lofchie Comment: One risk is that by maintaining very low interest rates, the government encourages asset bubbles and other high-risk investment strategies. In addition, high-capital requirements, combined with liquidity and other investment restrictions, discourage regulated institutions from acting as buyers in case of a sell-off. In that scenario, central clearinghouses exacerbate systemic risk - not because the clearinghouses fail, but because they demand higher margin for open positions, which sucks out of a system ever more liquidity. In other words, overly aggressive regulation intended to eliminate risk becomes the source of risk.