Monitoring credit risk management, interest rate risk and banks’ ability to stress test loans affected by low oil prices are among the priorities for supervisors at the Office of the Comptroller of the Currency (OCC) these days, according to the agency’s recent mid-year status report on its operating plan.
The OCC said its supervisory focus for the second half of the federal fiscal year (ending Oct. 1) would focus on seven areas, although it noted strategies for individual banks will vary based on the institution’s size, complexity and risk profile.
Credit risk has been a frequent topic of commentary by the OCC in recent years as loan underwriting standards ease and competition among lenders has increased:
• In its December 2015 Semiannual Risk Perspective, the OCC highlighted easing underwriting standards as being among the key risks for financial institutions, and it outlined plans to review and evaluate underwriting practices. For both large and small banks, credit was the chief area of supervisory concern communicated to directors and managers in the form of Matters Requiring Attention, or MRAs.
• The OCC’s Shared National Credits Program Review in November, which examined the largest and most complex credits shared by multiple financial institutions, noted weakness in underwriting standards in 28 percent of the sampled loans – a higher percentage than in recent years. It cited leveraged oil and gas commitments as a primary driver and named the following as frequently cited weaknesses: minimal or no loan covenants, liberal repayment terms, repayment dependent on refinancing and inadequate collateral valuations.
• Earlier this year, the OCC issued its 21st annual Survey of Credit Underwriting Practices report, which called out increasing credit risk and continued easing in underwriting standards. Examiners this year have been focusing on evaluating new loan originations, new product portfolios and loan portfolios with increasing volumes, the OCC said in its mid-year status report.
For the remainder of the current fiscal year, the OCC outlined that its evaluation of credit risk management will focus on:
• Concentration risk management
• Credit underwriting practices
• Loan growth strategies
• Quality of loan policies
• Allowance for loan and lease losses methodology and
• Stress testing.
Also related to stress testing, the OCC supervisors and examiners will be assessing the effect of continued low oil prices and banks’ practices for stress testing affected loans through the rest of the current fiscal year, according to the status report. The OCC in December noted banks face potential exposure to oil- and gas-related industries through direct exposure to exploration and production credit as well as through exposure to service, office and hotel sectors tied to energy.
Supervisors are also expected to focus on how financial institutions are measuring interest rate risk in order to ensure managers understand, monitor and control risk related to changes in interest rates, the OCC said. “Staff will focus on banks’ ability to accurately identify and quantify interest rate risk with emphasis on funding pressure that may arise with deposits,” the report said.
Compliance, strategic planning, corporate governance and banks’ ability to address information security risks and cybersecurity threats are the remaining areas of supervisory focus for the second half of the year, the OCC said.
Sageworks has numerous resources for banks looking to enhance commercial credit analysis and make stress testing analysis a priority. See webinars, whitepapers and articles on our Resources for Bankers page.