“The specific mention of the LIBOR cessation and the risks associated with transitioning to new benchmark rates are expected to be a focus of the OCC in 2020.”

On December 9th, 2019, the Office of Comptroller of the Currency (OCC) issued its Semiannual Risk Perspective for Fall 2019, and reported that operational, credit and interest rate risks are among the key themes that pose a threat to the safety and soundness of national banks and federal savings associations.1 The expected cessation of the London Interbank Offered Rate (LIBOR) in 2021 is specifically mentioned as a concern, and the OCC will increase regulatory oversight of this area to evaluate bank preparedness.2 The report also highlights cybersecurity and technology management as a special topic in emerging risks.3 In the report the OCC commented that while “bank financial performance is sound” it advised that financial institutions should be prepared for cyclical change while performance is healthy.4

What this means

The OCC report highlights five areas of specific concern:5

1. Operational Risk

The report regards operational risk as being elevated as banks adapt to an increasingly complex environment. They cited cybersecurity as a key concern as breaches and operational outages occur across the industry, and banks should adapt and evolve current technology systems for ongoing cybersecurity threats.

2. Credit Risk

While credit quality remains strong, risk has accumulated in many portfolios, and banks should prepare for any cyclical change. The report emphasizes that this preparation should include maintaining robust credit control functions such as credit review, problem loan identification and collateral management.

3. Market Volatility

Recent volatility in market rates has led to increasing levels of interest rate risk, and as asset and liability management becomes more complex, the report encourages banks to focus on appropriate risk management governance.

4. LIBOR Transition

The report specifically focuses on the expected cessation of LIBOR in 2021 and is increasing regulatory oversight of this area to evaluate bank awareness and preparedness. It suggests that the LIBOR transition may increase operational, compliance and reputational risks associated with moving clients to a new rate, or new offering products and services that are benchmarked to a new alternative rate. Assessment of these risks should include analysis of customer impact, repapering contracts, updating system applications, revising and testing models, and having the appropriate fallback language and disclosures to clients.

5. Strategic Risk

The report suggests that banks face strategic risks from non-depository financial institutions (NDFI), together with the use of innovative and evolving technology and increased capabilities in data analysis. NDFI’s continue to grow and are strong competitors to bank lending and payment models. Banks should invest in research and development to incorporate artificial intelligence (AI) and machine learning capabilities.

Across all these identified risks, the report highlights cybersecurity and technology management as special emerging risks across the industry.

Conclusion

While the OCC report confirms that bank performance is sound, partly because of a favorable credit environment, and a healthy U.S. economy, they emphasize that risks are evident. The key themes highlighted in the report, of operational, credit and interest rate risk are to be monitored closely and the OCC is to implement actions to address concerns.6 The specific mention of the LIBOR cessation and the risks associated with transitioning to new benchmark rates are expected to be a focus of the OCC in 2020.7 Examiners are to evaluate whether banks have begun to assess their exposure to LIBOR in assets and liabilities, and to identify potential impacts and develop risk management strategies.8

Visit our LIBOR offering page to learn how our solutions can help you transition from LIBOR with confidence. 

References:

  1. “OCC Highlights Key Risks for Federal Banking System,” Office of the Comptroller of the Currency. Access at: https://www.occ.treas.gov/publications-and-resources/publications/semiannual-risk-perspective/files/semiannual-risk-perspective-fall-2019.html.
  2. Ibid
  3. Ibid
  4. “OCC highlights key risks affecting the federal banking system in semiannual risk report,” Buckley LLP, December 13, 2019. https://buckleyfirm.com/blog/2019-12-13/occ-highlights-key-risks-affecting-federal-banking-system-semiannual-risk-report.
  5. Semiannual Risk Perspective,” Office of the Comptroller of the Currency, Fall 2019. Access at: https://www.occ.treas.gov/publications-and-resources/publications/semiannual-risk-perspective/files/pub-semiannual-risk-perspective-fall-2019.pdf.
  6. “OCC Highlights Key Risks for Federal Banking System,” Office of the Comptroller of the Currency, Fall 2019. Access at: https://www.occ.treas.gov/publications-and-resources/publications/semiannual-risk-perspective/files/semiannual-risk-perspective-fall-2019.html.
  7. Ibid
  8. Ibid

Newsletter Author: Venetia Woo, Mairi Bryan
Newsletter Contact Person: Venetia Woo

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