OCC Report Highlights Risks for Federal Banking System

Recently, in its Semiannual Risk Perspective for Spring 2020, the Office of the Comptroller of the Currency (OCC) reported the main issues surrounding the effects of the COVID-19 pandemic on the federal banking industry. The report presents information pertaining to bank performance, the operating environment, special topics in emerging risk, and trends in key risks.

Among the report’s key takeaways is that while banks were on strong footing prior to the pandemic, marked by “sound capital, liquidity, and strong asset quality,” the downturn experienced in the economy over the past several months can be expected to affect bank earnings, credit quality, operations, and capital.

“The broad themes facing the federal banking system are weak financial performance, elevated credit, and operational risks,” the report reads. “The onset of the pandemic created an uncertain credit environment testing the resiliency of both commercial and retail loan portfolios.”

The report also highlighted that financial performance will be heavily affected by higher credit losses, lower net interest income, and overhead expenses. Credit risk management practices will have to be adaptable and proactive to accommodate the current financial environment.

Compliance risk is heightened due to changed operations, such as employees working remotely and new programs to support consumers, such as the CARES Act and the Paycheck Protection Program, the OCC found. These conditions make it burdensome to manage high volumes of lending in a weakened economy.

Additionally, operational risk has been elevated as banks modify business processes to support both remote work and heightened technological capacities.

Bank profitability remains dependent on the depth and duration of the economic downturn that is difficult to predict,” the report reads. “Banks are taking appropriate action through increased credit provision expenses to prepare for potential increased credit stress.”