OCC Urges Midwest Banks to Stay Wary of Risk-Taking

The Office of the Comptroller of the Currency is urging community banks in the Midwest to pay close attention to risk, even though economic conditions in the region are improving.

Capital levels and financial results for banks in the OCC's central district are recovering, largely because of healthier credit quality. Still, bankers still face pressure from low interest rates, compressed net interest margins and competition.

There is an overall "improving trend" in the region, Bert Otto, the OCC's deputy comptroller for the central district, said Thursday during a press briefing. "However … we are not out of the woods yet."

"Strategic vulnerability is our top risk in the central district," John Meade, the agency's risk committee chairman and district risk officer, said during the call. He added that good strategic risk management involves three elements: considering downside scenarios, responsiveness to industry changes and effective implementation.

Banks looking for growth could venture into new markets, offer new products and services or pursue mergers and acquisitions, but they should expect regulators to keep a close watch on those endeavors, Meade said. Institutions may also be willing to take on more risk by loosening credit standards or changing the terms or pricing on loans, he said.

"We are emphasizing with our banks the need to understand materials risks assumed," Meade said. "We are challenging our banks to ensure appropriate systems are up and functioning prior to getting into something new."

The OCC is focusing on areas such as credit-related risk, compliance and reputational issues. It is also monitoring banks' dealings with commercial real estate and foreclosed properties. First and second mortgages represent another area that examiners will "watch closely," Meade said.

Delinquencies remain high at nearly a third of institutions, and credit risk management systems and processes remain "under pressure due to the tepid recovery," Meade said. Examiners continue to notice issues with problem loan management, concentrations and underwriting, and they are observing "some aggressive loan pricing and structure" including relaxed repayment or collateral requirements, he said.

The OCC is also categorizing compliance and reputational risks as "high or moderate" at nearly 60% of the institutions it examines, Meade said. The agency is focusing on anti-money laundering and Bank Secrecy Act compliance, fair-lending statutes, overdraft protection and mortgage foreclosure practices.