The Federal Reserve may be tapering its monthly asset purchases – and economic data may be showing some signs of improvement – but the Office of the Comptroller of the Currency is telling national banks and federal savings institutions to be careful of excessive risk heading into the new year.
It seems examiners at the agency are worried that 2014 is starting to look a lot like 2007 when you consider lingering risks and the type of gambling that happens when financial institutions are looking for quick returns and new business.
It seems with the new year comes new worries.
Why?
Certain lending products that are considered exotic – or worrisome to regulators who lived through the downturn – continue to pop up, the OCC claims in a report covering key risks facing banks in 2014.
One of those risks for banks is the fact that intense competition for lending opportunities in a low-interest rate environment prompted certain institutions in 2013 to return to what the OCC calls "unfamiliar loan products" in a market where recent increases in long-term interest rates is creating some vulnerability.
The OCC is seeing looser underwriting and believes increasing "long-term interest rates underscores the vulnerability for banks that reach for yield" since they end up dealing with earnings pressure to the point of possible capital erosion when rates continue to edge up, the OCC said.
And that’s not their only concern.
Cyber threats are on the rise, and only growing in sophistication and frequency, the OCC noted.
In light of this, the OCC says its bank examiners plan to focus on the firm’s strategic business and new product planning and overall risk management.
And changes at the Federal Reserve, with Chairman Ben Bernanke announcing the beginning of tapering as early as January, only highlight the need for additional scrutiny in this shifting environment, examiners seem to suggest.
"Price volatility has been very low for a long time," the OCC said. "Light securities dealer inventories suggest limited risk appetite for market making, raising the possibility of more significant market volatility and price risk as quantitative easing policies change."
