Garnet Capital Advisors Blog

In early January, the Office of the Comptroller of the Currency (OCC) released its Semiannual Risk Perspective. The report, dated Fall 2016, contains data through the second half of 2016 concerning the primary issues facing the nation's banking system, with particular focus on the safety and soundness of banks and their compliance with laws and regulations.

Strategic risk stems partly from the extended period of low interest rates.

Increased Governance of Sales Practices

While Comptroller of the Currency Thomas Curry noted that many of the multiple fronts covered in the report were similar to those in the last Semiannual Risk Perspective, the OCC added "governance over sales practices" to its list of strategic risks in light of revelations last year that Wells Fargo employees had sold products to its clients without their permission and committed other irregularities in its sales procedures.

Curry noted that in the wake of Wells Fargo, the OCC "initiated a broader review to assess whether similar practices and weaknesses are occurring in other large and midsize banks. Work on the review continues."

Irregular sales practices at Wells Fargo indicate a need for more governance.

Strategic Risk High

Curry emphasized that the OCC is highly concerned with strategic risk for banks across the board.

Strategic risk arises from multiple fronts. The first is the extended period of low interest rates banks have faced for the last several years. In response, many banks have had difficulty maintaining and increasing revenue. They have moved into innovative products and services partly to maintain their margins.

The conditions stemming from the low interest rate environment have also caused an increasing number of banks to either change or consider changing their business models. Mergers and acquisitions are strategies considered partly because of the low interest rate environment.

The second front, though, is the competitive landscape. Traditional lenders have faced multiple entrants into the field, including financial technology (fintech) companies and out-of-market banks.

Fintech firms are in some cases partnering with more traditional financial firms, such as insurance companies, in an attempt to move into markets for financial products in which banks also compete.

Growing consumer and business demand for innovation have also contributed to the competitive landscape.

As a result of both low interest rates and rising competition, banks have also moved to loans of lesser quality in an effort to increase loan originations. The OCC noted that commercial loans, commercial real estate loans, and auto loans are all areas in which risk is rising. Risk layering, increasing exceptions to loan policies, climbing loan-to-value ratios and decreased covenant protection all contribute.

Increased Compliance Risk

Curry also noted that "compliance must receive the same focus as safety and soundness for a bank to succeed."

Compliance risk continues to be high. The Bank Secrecy Act and Anti-Money Laundering (BSA/AML) act are mandated and stringent regulations are needed to have appropriate security controls at all banks.

A Seasoned Loan Advisor Can Help

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