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The Office of the Comptroller of the Currency recently graded the 19 largest banks on five factors designed to gauge how well they are being run. The results are shocking.
December 13 -
HSBC's record-setting $1.92 billion penalty for a slew of anti-money laundering problems surprised many in the financial industry, who warned it could set a new precedent for targeting other institutions.
December 11 -
The Office of the Comptroller of the Currency published its first Semiannual Risk Review, a report offering a rare distillation of what it sees as the greatest safety and soundness threats facing banks, including weaker underwriting standards and new, potentially dangerous, products.
July 5
WASHINGTON — Banks are in danger of "taking excessive risk" in order to boost profits damaged by a slow economy, market volatility and new regulations, according to a report issued Thursday by the Office of the Comptroller of the Currency.
In the agency's second semiannual risk report, the agency detailed the threats facing banks, including dangerous new products, looser underwriting standards — and fears of the fiscal cliff, a set of tax hikes and budget cuts many fear will hurt the financial system.
"The uncertainty associated with the 'fiscal cliff' may already be diminishing confidence in financial markets, capital investment, and the real economy as firms defer hiring and investment decisions, and consumers retrench," the report said.
In a conference call with reporters, Marty Pfinsgraff, deputy comptroller for credit and market risk at the OCC, said the agency hoped lawmakers would resolve the fiscal cliff in the coming week. But with negotiations apparently stalled, that may be wishful thinking.
The agency said banks had improved since its
But the fiscal cliff was far from the agency's only concern, as it reiterated worries that banks have not focused enough on operational and reputational risk.
"Strategic risk is one of the things bank management is struggling with," said Darrin Benhart, deputy comptroller for credit and market risk at the OCC, on the call. "Our examiners … have conversations with banks at least quarterly and they're going to be talking about what are the new products" are being offered.
OCC officials said banks feel pressure to cut corners on compliance costs and halt the development of new products amid squeezed interest rates and fewer profits.
"From what we're seeing, the low growth economy and low interest rates are effecting what banks are spending in compliance as well as what they're spending in new business development," Pfinsgraff said.
That includes a lack of resources spent on anti-money-laundering and Bank Secrecy Act compliance, the OCC said. Though the laws are older, the risks are higher since there's more electronic banking fraud and evolving ways of money laundering.
The OCC said it will now include BSA/AML examination conclusions within the management component of a bank's Camels rating. It was previously included in the compliance portion of the Camels rating.
"In assessing a bank's BSA/AML compliance program, a presumption exists that serious deficiencies may adversely affect the bank's management component rating," the report said.
Regulators have already ramped up BSA/AML citations this year, including the $1.9 billion money laundering fine against HSBC.
"We've been very explicit that BSA will now be reflected in management and how management administers control in that area," Benhart said.
Underwriting standards were also of concern as banks have engaged in pricing wars and loosened standards to win over quality loans. The OCC said standards for leveraged loans have weakened during the past 18 months and yields on high-risk assets are at record lows.
Middle-market commercial and industrial lending also showed "signs of slipping" despite an overall stabilization in credit quality.
"We're going to be watching underwriting standards fairly closely to ensure banks stay at sound levels," Benhart said.
That includes new product lines or services that banks offer to find profitable assets, OCC officials said. Since the housing crisis, many community banks have jumped into commercial and industrial loans. But more recently, Pfinsgraff said banks are getting into the shale gas exploration in areas including Texas and the Midwest.
That's an "industry sector that's doing well and banks are going to support it, and that's good," he said. "But we want to make sure they do it appropriately."
Large and midsize banks have also been able to thwart some earnings pressure by boosting servicing revenues from the mortgage refinance boom.
But the OCC specifically targeted larger banks' operational risk as many are changing their business models, such as shifting roles in trading, securitization and consumer fee income in light of weak revenues. Continued foreclosure and mortgage processing problems also pose reputational risks.
Community banks were not left off the hook either.
The report cited a laundry list of concerns for smaller institutions, including lingering credit risk from the housing market, margin pressures and fears that some may chase yields by buying more complex investments or hold longer-term securities in the portfolio.
"Both actions increase exposure to shifts in interest rates and require heightened analysis to assess vulnerability to parallel and non-parallel shifts," the report said.
The OCC reiterated that all banks face an "emerging risk" as amortizations of home equity lines of credit mature. A majority of the HELOCs made in 2003 to 2007 will reach the end of their draw periods between 2014 and 2018.
How those loans were underwritten will have to be reassessed, which could cause some banks to face higher troubled debt restructuring costs and allowance for loan losses. Among the nine largest banks, there is more than $330 billion in outstanding HELOCs set to end in that four-year period.
"This transition from revolving to payout period will also require more comprehensive [allowance] analysis to ensure an appropriate reflection of risk of loss in these portfolios," the report stated.
