On June 18, the OCC published its Semiannual Risk Perspective for Spring 2024, a report assessing the health and risks of the federal banking system focusing on threats to the safety and soundness of banks and their compliance with applicable laws and regulations. In its release about the report, the OCC stated that the banking system remains sound, but recognized potential consumer difficulties due to a slowing labor market, high interest rates, and “sticky” inflation. The report encouraged financial institutions to improve continuously risk management processes, stating that it was “crucial that banks establish an appropriate risk culture that identifies potential risk, particularly before times of stress.” The information in the report was based on data up to December 31, 2023, and included a special topic, operating environment, bank performance, and trends in key risks.

According to the report, key risk themes included:

1. Credit Risk: There was an increase in credit risk, particularly in the commercial real estate sector. The office sector and some multifamily properties were under stress from higher interest rates and structural changes. Loans in these sectors, especially interest-only loans due for refinancing in the next three years, pose a heightened risk.
2. Market Risk: Banks were experiencing pressure on net interest margins due to deposit competition, which “may be nearing a peak.” There were challenges in risk management from potential future interest rate changes and unpredictable depositor behavior. The use of wholesale funding was growing, though more slowly, and banks face elevated unrealized losses in their investment portfolios, despite improvements.
3. Operational Risk: The operational risk was high due to the evolving nature of the banking environment and cyber threats, including ransomware, were a continued threat. Digitalization and the adoption of new products and services, along with third-party engagement, increased complexities and risks. Fraud incidents and the importance of fraud risk management were also emphasized.
4. Compliance Risk: Banks must navigate a dynamic environment with evolving customer preferences, and compliance risk management frameworks need to be adequate and adaptable to changes in banks' risk profiles. Fraud remained a significant risk, with check and wire fraud, and peer-to-peer transaction scams becoming more common. The OCC will continue to evaluate banks' CRA performance.

The report emphasized that these risks can be interrelated, noting that a “stress event could manifest through operational and/or financial events and have institution-specific or sector-wide impacts,” and that “[e]ach stress event may vary (e.g., operational, liquidity, credit, compliance, and other) and resiliency implications need to be proactively considered.”