OCC outlines risk plan as Northeastern loan growth doubles

Multifamily, commercial and automotive loans are driving loan growth among banks in the Northeast, but increasing risk will draw fresh attention from regulators to ensure recent and future growth is sound, the Office of the Comptroller of the Currency said recently.

The OCC on Oct. 28 released a report detailing substantially improving conditions among OCC-regulated banks in its Northeastern District, defined as Connecticut, Delaware, the District of Columbia, eastern Kentucky, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, North Carolina, Pennsylvania, Rhode Island, South Carolina, Vermont, Virginia and West Virginia. 

While the target audience of the OCC release is somewhat narrow in scope (banks regulated by the OCC in the Northeastern District), other banks may benefit from reflecting upon their own processes and results to ensure they are sound in areas which may soon receive additional attention.

The OCC noted a full doubling of loan growth among banks and federal savings associations in the district over the past year. This metric surged from 2 percent as of June 30, 2013, to 4.4 percent as measured on June 30 of this year. This is slightly below pre-financial crisis levels, but denotes a sizable step toward recovery. The tri-state area (New York, New Jersey and Connecticut) saw the highest growth in the district, an impressive 7 percent.

Kristin Kiefer, district acting deputy comptroller for the OCC, said, “Loan growth for OCC-supervised banks and FSAs in the district centers upon multifamily, commercial and automotive loans. Additionally, we see banks and FSAs expanding their product lines available to bank customers, which, if done in a safe and sound manner also helps to drive loan growth.”

In addition (and likely somewhat related) to loan growth, the OCC reported that 85 percent of the banks and FSAs in the district had a composite rating of 1 or 2 as of June 2014 (a composite rating is a combined assessment based upon each component of CAMELS: Capital adequacy, Asset quality, Management capability, Earnings quantity/quality, Liquidity adequacy and Sensitivity to market risk. It measures 1-5, with 1 being the best score an institution can receive and 5 the worst). The district has seen very favorable conditions; asset quality has increased and both problem assets and net loan losses have decreased. As a result, these institutions’ allowance for loan and lease losses (ALLL) have also been in decline over the study period.

The OCC spoke favorably about conditions for growth, but also cautioned institutions about “strategic vulnerabilities” that may accompany the continued growth. As such, the OCC proclaimed its intent to mitigate the growing risk, and outlined the areas they will be focusing on in the environment of increasing risk. 

Strategic Risk:

The OCC said 12 percent of banks in the district are deemed as having “high strategic risk,” and another 43 percent were identified as having “increasing strategic risk.” As a regulatory body, the OCC said it will focus on the following to address the increasing risk:

• Execution of bank strategic plans and management of strategic risk

• Effectiveness of profit plans and growth projections

• Board risk parameters, adequacy of staffing, succession planning and audit

Asset and Liability Management:

Asset and liability risk management was deemed a concern as continued low interest rates and pressure on traditional earnings sources cause many banks to increase long-term asset holdings. As a result, the OCC will focus on:

• Identification, measurement, monitoring and control of interest risk rate

• Reasonable interest rate risk limits

• Ongoing validation and updating of key assumptions used in modeling

• Liquidity risk management and adequacy of contingency funding plans.

Credit Risk:

The OCC states that the low interest rate environment, modest loan demand and lower revenue from fees is forcing banks to adapt and come up with new business models and increasing risk tolerances. The OCC plans to implement the following:

• Risk management for new and high growth loan products

• Changes in underwriting

Operational Risk:

Lastly, the OCC mentioned an increase in operational risk, and its intent to focus on:

• Significant growth areas, new products, new or expanded services and changes in strategic direction

• Vendor and third-party management processes

• Security measures to deter and detect cyber-attacks

• Traditional control processes (such as audit, loan review, internal controls and due diligence)

Many of the issues which the OCC will be focusing on ring true for all banks regardless of regulator and region. As portfolios grow and banks enter new risk scenarios, it would be prudent to reflect upon the key areas outlined above to mitigate the various manifestations of risk and to ensure that recent and future growth will be sound.