The Office of the Comptroller of the Currency ("OCC") examined risks facing national banks and federal savings associations in the Semiannual Risk Perspective for Fall 2016.

The report identified the following key risk themes: (i) high strategic risk in "consider[ing] business model changes" searching for generating rates of return "in a persistent low interest rate environment"; and (ii) "competitive pressures" driving "easing in underwriting standards."

The OCC explained that high compliance risk continues as banks:

  • manage money laundering risks subject to constrained resources in an increasingly complex risk environment;
  • implement changed policies and procedures to comply with amended consumer protection requirements; and
  • use third-party relationships to conduct: (i) consumer credit-related product development, implementation and fulfillment; and (ii) loan application or underwriting processes.

For the next 12 months, the OCC will prioritize: (i) "compliance with new regulatory requirements" — including those regulatory requirements related to "capital, liquidity, trading activities, residential mortgages and risk retention"; and (ii) "management processes" to implement new platforms and technologies required by "significant changes" to regulations.

The OCC stated (on page 21):

For some banks, the inability to meet challenges related to BSA/AML compliance has resulted in enforcement actions and increased reputation risk over the past several years. Penalties and remediation costs from such actions may affect financial condition and profitability, while the inability to take timely corrective action may continue to limit effective risk management outcomes. These effects, in turn, can limit a bank's ability to execute strategic plans, leverage technology, or undertake other innovations to expand product and service offerings.

Commentary / StevenLofchie

By saying that banks have a high level of "compliance risk," the regulators are, in effect, saying that the government regulations are, themselves, a material threat to the financial system. One interpretation derived from the report is that banks must get serious about following regulation. Another interpretation may be that regulatory enforcement and penalties have become so severe that the government itself has become a threat to financial stability. Either way, there is not much to boast about.

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