The Office of Comptroller of the Currency's (OCC) National Risk Committee (NRC) pronounced the financial position
of federally chartered institutions "improved" last year in its Semiannual Risk Perspective issued
on Wednesday. The federal banking system
set a new record level of net income that was only $5 billion or 5 percent
higher than the previous pre-financial crisis record set in 2006 and it took
seven years and $1.5 trillion or a 20 percent growth in assets to achieve
it. This, the report said, highlights
the slow pace of the recovery.
data in five main areas: the operating environment; the condition and
performance of the banking system; key risk issues; elevated risk metrics; and
regulatory actions. It focuses
on issues that pose threats to
the safety and soundness of banks rather
than opportunities that banks may encounter at the same time. The report reflects
data as of December 31, 2013.
While conditions overall showed
improvement in the second half of 2013, the OCC reports that credit risk is
building in supervised national banks and federal savings associations
following a period of improving credit quality and problem loan clean-up. Competitive
pressures, and strategic and operational risks top the list of supervisory
concerns. Essentially, the OCC is saying banks' efforts to make a profit in light of increased regulatory costs and low-volatility market conditions are risky.
Return on assets and on equity remain below their
pre-recession peaks. The federal system
as a whole returned almost 10 percent on equity but small institutions are
lagging behind large ones. Revenue was
down as lower net interest income more than offset slightly higher noninterest
income and sluggish loan growth and low interest rates weigh on net interest
margins. Improvements in earnings are
still coming more from lower noninterest and provisions expenses rather than
real growth. In addition, banks continue to face competitive pressure from nonbank firms seeking to
expand into traditional banking
Intensifying competition for lending
opportunities is causing banks to loosen underwriting standards especially in
commercial loans, indirect auto, and leveraged lending. Risk layering is also a concern in commercial
loans. While not widespread, some
examiners have noted multiple policy and underwriting exceptions on individual
credit decisions which OCC and Federal Reserve Board surveys of lending
practices have confirmed.
increase in long term interest
rates in 2013 underscores the need to understand and quantify banks' vulnerability to
rising interest rates. Some
banks have reached for yields
to boost interest income
with decreasing regard
for interest rate or credit risk.
For example, banks that extend asset maturities to
increase yield could face significant earnings
pressure, especially if relying
on the stability of
non-maturity deposit funding in a rising rate environment,
economic growth is pushing banks to reevaluate business models, capital
deployment, and risk appetites and some are on taking on additional risks by
expanding into new, less familiar, or higher risk products. OCC says its examiners will focus on strategic
business and new product planning to monitor risk management processes.
Some banks are
lowering overhead expenses,
often by reductions in
control functions, exiting less profitable
businesses, closing offices, and
outsourcing critical control functions to third parties,
in some instances without appropriate levels of due diligence.
Cyber-threats continue to evolve,
requiring heightened awareness and appropriate resources to identify and
mitigate the associated risks.
Financial asset prices have
experienced very low volatility for an extended period. As a result, measures
of price risk, such as value-at-risk, are at very low levels. The reduced
willingness of dealers to hold securities in inventory, due to capital and
other concerns such as a change in monetary policy, could contribute to greater
price swings going forward and increased price risk.
Secrecy Act (BSA) and
anti-money laundering (AML) risks remain serious concerns as
money-laundering methods evolve and the volume and sophistication of electronic
bank fraud increases. These risks have grown
among community banks during the last few years because of increases in the
number of higher-risk, cash intensive customers and internationally oriented
transactions. BSA programs at some banks
have failed to evolve or to incorporate appropriate controls into new products
The report makes only a few brief mentions of the
residential loan sector, citing shrinking refinancing activity as a risk factor
for smaller banks and that charge-offs of residential loans has decreased while
delinquencies among HELOCs has increased.
The one section devoted to residential mortgages notes that the decline
in new foreclosure activity has helped to offset slowing mortgage origination
activity. Foreclosure starts for both
prime and subprime loans fell indicating that the market is stabilizing but
also attributed in part to the improving economy and aggressive foreclosure
Mortgage originations started out the year strong but
rising interest rates caused activity to falter starting in May. With improvements in job creation, income
growth, and household formation lagging, demand for mortgages remains low.