The Office of the Comptroller of the Currency ("OCC") reported on risks facing national banks and federal savings associations, presenting information in five areas: the operating environment, bank performance, topics in emerging risk, trends in key risks and supervisory actions. The report focuses on particular issues that may pose threats to the financial institutions regulated by the OCC.
Based on data as of June 30, 2018, the OCC found that:
- the financial performance of banks comprising the federal banking system improved in the first half of 2018 relative to 2017;
- system-wide return on equity increased to more than 12 percent (surpassing 10 percent for the first time since 2008);
- net interest income increased eight percent (reaching its highest level in six years);
- the bank operating environment presented several challenges that increase risks for banks (e.g., strong competitive pressure from banks and nonbanks, growth in nonfinancial corporate debt, eased loan underwriting standards);
- credit quality remains strong when evaluated by traditional performance metrics;
- credit risk is increasing due to accumulated risk in loan portfolios from years of easing in underwriting, risk layering, concentrations and rising potential impact from external factors;
- operational risk is elevated as banks respond to a changing operating environment;
- cybersecurity remains a "key operational risk";
- increasing interest rates and increased competition for deposits may lead to changes in the funding mix or costs;
- compliance risks remain elevated; and
- interest rate risk poses challenges in light of the current rising rate environment, among other things.
In addition, the report underscores risks posed by the growth in nonfinancial corporate debt and, in particular, the leveraged lending market, which has seen "near-record issuance through the first half of 2018." OCC states that the average ratio of debt to earnings before interest, tax, depreciation and amortization (EBITDA) for corporate loans is at a "record high." The OCC said it "remains focused on transactions with increasing leverage, weaker capital structures, and looser credit agreements." The OCC also observed an increase in the number of community and midsize banks acquiring participations in leveraged loans.
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