WASHINGTON — The Office of the Comptroller of the Currency told a somewhat familiar story Friday about the industry's risk environment: the quality of strategic decision-making is ever important while credit underwriting and concentrations of commercial real estate loans remain concerns.

"Strategic risk continues to be concentrated in midsize and community banks searching for revenue and market niches," the agency said in its semiannual risk report. "The increased pressure for revenue, challenging external economic drivers, and the changing regulatory environment continue to increase strategic risk."

The OCC said key risk issues were "relatively unchanged" from the fall report, although the agency noted elevated concerns about banks' compliance risk management and recharacterized its assessment of auto lending risk, saying that auto lending was now "an issue warranting continued monitoring." The agency also reiterated concerns about cyber and money-laundering risks.

Keith Noreika
“Our job is to find that balance for supervision that effectively ensures safety and soundness and compliance, but does not stifle opportunities ... or foster an environment so risk-averse that banks fail to meet the credit needs of their customers,” said acting Comptroller of the Currency Keith Noreika. Bloomberg News

"Increased auto-lending risk from several years of strong growth and eased underwriting standards is now materializing in the lagging delinquency and loss severity indicators," the agency said. "These lagging indicators are likely to continue to increase as loans with more aggressive underwriting mature."

The risk report was also Keith Noreika's first as acting comptroller. Somewhat in contrast with his recent testimony on Capitol Hill, in which he expressed concerns about the regulatory burdens facing banks, Noreika in a call with reporters Friday presented a relatively normal regulator's view on risks facing the industry.

“Our job is to find that balance for supervision that effectively ensures safety and soundness and compliance, but does not stifle opportunities ... or foster an environment so risk-averse that banks fail to meet the credit needs of their customers,” he said.

The report noted certain compliance risks, particularly in how banks implement new mortgage disclosure requirements under the Truth in Lending Act and Real Estate Settlement Procedures Act.

“Compliance, governance and operational risks remain leading risk issues for large banks, while strategic, credit and compliance risks remain leading issues for midsize and community banks,” Noreika said.

The report also cited the need for awareness among banks about risks tied to third-party service providers, as well as the interest rate risk associated with the low interest rate environment, among others.

"Heavy reliance on third-party service providers for critical activities and the increasing changes driven by new products offered by emerging fintech companies create increased risk relating to third-party risk management," the report said.

Noreika said strategic risk was "elevated as banks make decisions to expand into new products and services, consider new delivery channels or otherwise search for sustainable ways to generate returns in a persistent, low interest rate environment."

“Net interest margins remain under pressure despite recent increases in the Fed funds rate,” he said.

The report found that CRE loan growth has “resulted in increasing credit concentrations.”

"Results from recent supervisory activities raise concern over the quality of CRE risk management, particularly as it relates to managing concentration risk," the report said.

Today, 388 banks have at least a quarter of their capital parked in CRE loans and have experienced a three-year growth rate of 50% or more in their CRE loan portfolio, the OCC found.

"Growth in some banks has been accompanied by weaker underwriting standards and examiner-identified weaknesses in concentration risk management practices," the report said. "With the continuation of favorable market fundamentals, the OCC expects additional CRE loan growth in 2017."

The report also noted that cybersecurity remains a major concern, particularly with banks relying more and more on third-party partners.

“Sophisticated cybersecurity threats continue to pose high inherent risks to an interconnected financial services marketplace,” the OCC found. "Boards and management play a critical role in establishing a sound culture and implementing effective resiliency practices."

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Lalita Clozel

Lalita Clozel covers fintech regulation, anti-money-laundering, cybersecurity and the Federal Deposit Insurance Corp. in American Banker's Washington bureau.