The Office of the Comptroller of the Currency called out cryptocurrency in its semiannual report that identifies risks to U.S. banks.
The crypto market has gone through two headline grabbing crashes recently, events that acting Comptroller Michael Hsu said has reinforced the agency’s cautious approach to digital assets. Last month, an algorithmic stablecoin called TerraUSD caused markets to tumble after collapsing in value, and Celsius Network earlier this month froze withdrawals following a major market downturn.
“They confirm some of our prior thoughts that there are some vulnerabilities and risks in that space that do warrant a cautious and careful approach,” Hsu told reporters.
Despite this, the agency’s analysis of the topic remained largely similar to its last risk report, released six months ago.
The OCC said that it “continues to engage on an interagency basis to analyze various crypto-asset use cases,” according to the agency’s Semiannual Risk Perspective released on Thursday. It is also looking to “provide further clarity on legal permissibility, as well as safety and soundness and compliance considerations related to crypto-assets.”
Talks between banking agencies on crypto guidance, however, have been paused. The Federal Deposit Insurance Corp. has stopped work on its forthcoming guidance for banks that hold crypto assets for their clients, according to a report by Politico Pro.
During a call to discuss the risk report, an OCC staff member said the agency continues to have ongoing conversations with a wide variety of other agencies. There’s no current timeline for the OCC to issue any crypto-related guidance, the staff member said.
The risk report also gave an update on the OCC’s efforts to include climate risk in its supervisory framework.
“Current information-gathering indicates that these banks are in the early stages of building out their frameworks,” the report found. “OCC large bank examination teams will integrate the examination of climate-related financial risk into supervision strategies and continue to engage with bank management to better understand the challenges banks face in this effort, including identifying and collecting appropriate data and developing scenario analysis capabilities and techniques.”
While the climate risk section is largely focused on large banks, the report does note that “midsize and community banks are starting to consider the implications of climate-related financial risks based on products, geographies or other potential concentrations.”
The OCC also cautioned banks that rising interest rates could bite into profits. As deposits rose during the COVID-19 pandemic, some banks sought to offset the dilutive impact on their net interest margin by increasing credit risk or the duration of investment portfolios. As a result, there was an acceleration of long-term assets on banks’ balance sheets.
“Banks should understand and maintain diligence on how a rising rate environment could impact their risk profiles in light of inflationary concerns and an expected rising rate environment,” the report found. “Rising interest rates have significantly decreased and nearly erased unrealized gains in bank investment portfolios. Banks that increased investment portfolio duration to offset NIM compression are likely to continue experiencing declining portfolio valuations as rates and yields rise.”
