Despite retaining strong earnings and credit quality during turbulent economic conditions, banks continue to face performance threats from weak loan demand and low net interest margins.
According to the Office of the Comptroller of the Currency’s (OCC) Semi-annual Risk Perspective Report, operational and strategic risk in the banking sector are elevated as banks increasingly come face-to-face with sophisticated cyberattack threats, while loan demand and net interest margins remain low.
Compliance risk is also high, according to the OCC, as Covid-19 relief continues to wind down.
“The conclusion of these programs creates increased compliance responsibilities, high transaction volumes, and new types of fraud, as banks continue to respond to a changing operating environment,” the OCC said.
Credit risk remains moderate however, according to the report, as credit deterioration was largely contained during the crisis due to risk management measures taken by banks.
Such measures have been particularly adopted by community banks. The regulator found that some firms have “assumed increased credit and interest rate risk consistent with their operating strategies”.
The OCC also emphasized the need for these institutions to “ensure financial resilience, without compromising sound business models and strategic plans, to avoid excessive risk taking, and to maintain adequate controls when managing investment and lending programs and third-party relationships”.
The report also addressed climate risk in the sector and highlighted the OCC’s intention to publish climate risk management principles for large banks, built upon the principles issued by the Basel Committee’s Task Force on Climate-Related Financial Risks.
“The principles are intended to help direct the focus of institutions on the foundational questions to determine the materiality of climate risk and establishing a risk management framework,” said the report.
Last month, a Federal Reserve report echoed the office’s findings. In its latest supervision and regulation report, the Fed found loan demand and net interest margins continued to drive a decline in banks’ overall net interest income.