Acting OCC Comptroller Expects Banks to Improve Credit Risk Management Practices

Acting OCC Comptroller Michael J. Hsu said that he expects banks to improve credit risk management practices under the new "current expected credit losses" ("CECL") standard.

In remarks at the RMA Risk Management Virtual Conference, Mr. Hsu said the CECL standard provides banks with more flexibility and judgment on expected losses earlier in the life cycle of assets, even when credit metrics may not currently be showing signs of deterioration. Mr. Hsu said that banks should (i) monitor borrower financial positions and behaviors as they relate to inflation, (ii) focus on concentrated portfolios and vulnerable borrowers and (iii) continue stress testing and sensitivity analysis.

Further, Mr. Hsu argued that a bank's commitment to diversity, equity and inclusion can strengthen its risk management. He said that diverse leadership can help preemptively address blind spots before they develop into worse issues, citing growing evidence that companies that address blind spots through diversity are more successful. He added that banks must also foster a culture that encourages diverse thought and is truly inclusive in order to fully benefit from its potential.