OCC Reports Elevated Banking Risk in First Half of 2023

In its Semiannual Risk Perspective, the OCC reported increased credit, market, operational, and compliance risks during the first half of 2023.

According to the Report, the U.S. economy "proved more resilient than anticipated in the first half of 2023" with recessionary pressures easing. However, there are elevated levels of risk to the banking sector in key areas.

The OCC found increases in credit risk due to "higher interest rates, increasing risk in commercial real estate lending, prolonged inflation, declining corporate profitability, and potential for slower economic growth." The OCC noted that "performance indicators are beginning to show signs of borrower stress across asset classes."

The OCC found elevated levels of market risk due to "rising deposit rates, broader market liquidity contraction, and increased reliance on wholesale funding," which, the OCC said, "started to impact net interest margins (NIM) through the first half of 2023." The OCC added that "increases in interest rates are negatively impacting investment portfolio values."

The OCC found increases in operational risk noting the prevalence of cyber threats and increases in digitalization efforts which may heighten "risk of fraud and error, including fraud targeting peer-to-peer (P2P) and other faster payment platforms."

The OCC also found increases in compliance risk due to, among others, "the expanded use of innovative technologies for product and service delivery", expanded partnerships with third party financial technology firms; and increases in Bank Secrecy Act/ AML risk. The OCC emphasized "the necessity for continued vigilance and adherence to sound risk management practices when assessing the impacts of emerging integrated AI technologies in the banking sector." The OCC noted positive AI developments driven by an elevated focus on equal credit access and fair consumer treatment.