On July 5, 2012, the Office of the Comptroller of the Currency (OCC) issued its Semiannual Risk Perspective for spring 2012, which concludes that the top risks facing national banks and savings associations are (1) the aftereffects of the recent housing-driven credit boom-bust cycle, (2) revenue challenges related to slow economic growth and market volatility, and (3) the potential that banks may take excessive risks in an effort to improve stability and profitability. The OCC press release discussing its report is available here.

In its discussion of the top risks facing national banks and savings associations, the OCC notes that the aftereffects of the housing market are still being felt by banks in multiple ways, including severely delinquent and in-process-of-foreclosure residential mortgages and vacancy rates. Banks also face growth challenges resulting from a slow economy and heightened financial market volatility resulting in moderate loan growth and historically low interest rates. The third challenge facing banks, that banks may take inappropriate risks in attempts to reach higher levels of profitability, is a function of the first two risks facing banks. As banks’ profit levels are depressed, they search for new ways to generate profit, including additional risk-taking.

By highlighting the resulting pressure to engage in risk-taking in order to increase profitability, the OCC sent a clear message to its supervised financial institutions that under no circumstances will banks be justified in taking on unsafe and unsound levels of risk. To avoid the temptation to take excessive risks, a bank board of directors must adopt and enforce policies that prohibit activities inconsistent with the board’s approved risk profile and tolerance.

Pepper Points

A bank should pursue an appropriately robust compliance regime as well as strategic planning processes that enable its senior management to recommend to its board how it should address the OCC-identified challenges and any other unique challenges it specifically faces, by:

  • refreshing and rebooting the bank board’s mission statement of the bank’s future; vital are assessments of the bank’s operating environment; strategic direction; and the staff responsible for implementing sound risk management systems, which perform their duties independently of the bank’s risk-taking activity
  • assessing the efficacy of existing processes and agreements with respect to asset management, safety and soundness, serving its community’s credit needs, consumer compliance, vendor relationships, information security and risk transfer
  • training often, and
  • documenting efforts.

Absent robust policies that keep a bank ahead of the curve, the OCC may issue a post-examination finding to the bank compelling the above-recommended self-examination and strategic planning processes through issuance of a public supervisory order.