Earlier this month (12/3/18), the OCC released their semi-annual risk perspective for the fall of 2018. The report covers risks facing national banks and federal savings associations based on data as of June 30, 2018. The report presents information in five main areas: the operating environment, bank performance, special topics in emerging risk, trends in key risks, and supervisory actions. It focuses on issues that pose threats to those financial institutions regulated by the OCC and is intended as a resource to the industry, examiners, and the public. The report also includes several compliance and BSA-focused perspectives on trending challenges facing OCC-regulated banks.
Highlights from the report include:
Credit quality remains strong, but the OCC is monitoring the origination quality of new loans, the potential for increased lender complacency within credit risk identification and management, and the potential embedded risks from successive years of eased underwriting.
Operational risk is elevated as banks respond to an evolving and increasingly complex operating environment.
Compliance risk is elevated as banks manage money laundering risks and comply with amended consumer protection requirements.
Rising interest rates and increased competition for deposits may result in changes in funding mix or costs.
While the report is focused on general banking risks, it does outline a few risks associated specifically to compliance - BSA and consumer compliance. The report first spends some time discussing BSA/AML risks. Specifically, the OCC points out a concern where financial institutions are not adjusting or realigning BSA/AML and OFAC risk assessments to reflect changes in risk profiles resulting from factors such as growth, new products and services, substantial changes in customer volume or types (particularly in high-risk areas), and significant increases in transaction volume. The OCC points out that the majority of identified BSA/AML-related deficiencies identified stem from issues related to customer due diligence/enhanced due diligence, customer risk identification, and processes related to suspicious activity monitoring and reporting.
In addition to the BSA concerns, the OCC report discusses some risk concerns related to consumer compliance. First, the OCC explains that fair lending risk may increase as banks attempt to increase efficiency and effectiveness of underwriting through the use of artificial intelligence or alternative data. Secondly, the OCC points out that regulatory changes may necessitate modifications to existing operations, policies, procedures, and systems. These changes may result in significant compliance and reputational risk if not implemented correctly and with appropriate change management processes. The OCC states that they have linked many risk assessment concerns to weaknesses in change management processes, such as bank processes that fail to include a compliance function when decisions are being made about changes in products or services.
Interestingly, the OCC concludes their discussion on compliance risk by explaining that attracting and retaining competent staff necessary to manage compliance risks remain a challenge at some banks. As a result, some banks are using third-party service providers to supplement and support existing compliance operations. The OCC cautions that such practices should be accompanied by initial and ongoing due diligence and appropriate oversight as the absence of or gaps in due diligence, oversight, and controls may result in elevated risk levels and increase the potential for violations.
The full fall 2018 semiannual risk perspective can be found here.