On December 7, 2023, the OCC released the Fall 2023 edition of its publication Semiannual Risk Perspective. According to the report, economic growth remained solid in the first half of 2023 despite higher interest rates and profitability for the federal banking system also improved even as banks continued to navigate a higher interest rate environment, uncertain economic climate, and fallout from the failure of three regional banks in the spring.
The report also highlights the following regarding credit, market, operational, and compliance risks:
Credit risk is increasing due to higher interest rates, increasing risk in commercial real estate lending, prolonged inflation, declining corporate profitability, and potential for slower economic growth. Key performance indicators are beginning to show signs of borrower stress across asset classes.
Rising deposit rates, broader market liquidity contraction, and increased reliance on wholesale funding started to impact net interest margins through the first half of 2023. Competition for deposits and higher interest rates are raising deposit rates. Deposit and liquid asset trends stabilized in the latter half of 2023, but these levels were supported by increased reliance on wholesale funding. Increases in interest rates are negatively impacting investment portfolio values.
Operational risk is elevated. Cyber threats continue. Banks continue to leverage new technology to further digitalization efforts, offering innovative products and services to meet customer demands. Increasing digitalization efforts can also heighten risk of fraud and error, including fraud targeting peer-to-peer and other faster payment platforms.
Compliance risk remains elevated. This is due to the heightened focus on ensuring equal access to credit and fair treatment of consumers, the expanded use of innovative technologies for product and service delivery, and expanded partnerships with third parties, such as financial technology firms, and increases in Bank Secrecy Act/Anti-Money Laundering risk.
In addition, the report highlighted artificial intelligence (AI) in banking as an emerging risk.
The full publication can be found here.