OCC: Interest Rates and Compliance Are Among Issues That Pose the Most Risk to Banks

investigation

The Office of the Comptroller of the Currency (OCC) listed interest rate, underwriting, strategic, compliance, and cybersecurity as the top supervisory concerns in the Semiannual Risk Perspective for Spring 2015 released Tuesday.

Based on data that covers risks to banks and federal savings associations through the end of 2014, the report, which focuses on issues that post threats to the safety and soundness of OCC-regulated institutions, noted an overall decline in revenues in profitability for all OCC-supervised institutions. The four main areas of data presented in the report are operating environment, bank condition, key risk issues, and regulatory actions.

The report found that the continued low interest rate environment continues to lay the foundation for the future vulnerability of OCC-regulated financial institutions. Many banks are re-evaluating business models and risk appetites in order to generate returns against the low interest rate backdrop, according to the OCC.

“Banks that extend asset maturities to pick up yield could face significant earnings pressure and capital erosion depending on the severity and timing of interest rate moves,” the report said.

According to the OCC, compliance risks remain high as banks are preparing to comply with new mortgage lending requirements, particularly those in the TILA-RESPA Integrated Disclosure (TRID) rule. The rule is scheduled to be implemented on August 1, but the Consumer Financial Protection Bureau (CFPB) has proposed the effective date to be pushed back to October 3 and is taking public comments on the proposal until July 7.

The report found that almost half of outstanding home equity lines of credit (HELOCs) will reach their end of draw period and reset between 2015 and 2017. For most HELOC borrowers, their monthly payments will change from interest-only to amortizing. According to the OCC, the switch from interest-only to amortizing may pose interest rate risk from concentrated resets and rising market rates. Also, many of the borrowers will suffer from payment shock due to additional monthly principal payments. In addition, conservative lending underwriting standards and lower property values may present obstacles to HELOC borrowers when trying to refinance.

The OCC said several of the risks presented, such as exposures to nonbank mortgage servicer companies, exposure to oil- and gas-related industries, and rising commercial real estate concentrations combined with loosening of underwriting standards, have the potential to develop into broader, systemic issues.

Click here to see the complete Semiannual Risk Perspective for Spring 2015.

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