The Office of the Comptroller of the Currency (OCC) has recently presented its Semiannual Risk Perspective for Fall 2023, delving into the critical challenges facing the federal banking system. The report identifies credit, market, operational, and compliance risks as the predominant themes shaping the banking landscape.
Unpacking Key Risk Themes: Credit, Market, Operational, and Compliance Risks
The OCC report underlines the escalating credit risk attributed to higher interest rates, increasing vulnerability in commercial real estate lending, prolonged inflation, declining corporate profitability, and potential economic growth deceleration. Simultaneously, compliance risk remains elevated due to a heightened focus on ensuring equal access to credit, fair treatment of consumers, innovative technology adoption, and expanded partnerships with third parties.
AI’s Emerging Role and Risks in Banking
Despite the potential benefits of widespread AI adoption in banking, the OCC identifies it as an emerging risk.
The report underscores the challenges associated with AI, spanning compliance risk, credit risk, reputation risk, and operational risk. While AI holds promise for efficiency and innovation, careful management is essential to mitigate its inherent risks.
Guidance on ‘Buy Now, Pay Later’ Lending
In addition to risk identification, the OCC has issued guidance on ‘Buy Now, Pay Later’ (BNPL) lending, a sector gaining prominence. The guidance emphasizes risk management in BNPL loans, payable in four or fewer installments without finance charges.
The OCC’s acting comptroller, Michael Hsu, also highlighted the importance of responsible practices in the BNPL market, particularly as the holiday shopping season unfolds. The guidance directs banks to uphold clear underwriting, repayment terms, pricing, and safeguards, ensuring transparency in marketing materials and disclosures.
Third-Party Risk Management: A Core Consideration
Donna Murphy, the OCC’s acting deputy comptroller for the Office of Financial Technology, stressed the “essential” nature of third-party risk management. This emphasis comes in the backdrop of increasing collaborations between banks and fintech companies. Murphy’s statement before the House Subcommittee on Digital Assets, Financial Technology, and Inclusion reiterates the potential benefits of third-party partnerships but underscores the necessity for robust risk management to protect consumers and maintain overall bank safety and soundness.
AI and Machine Learning Landscape in Banking
Addressing the House Subcommittee, Murphy also discussed the growing integration of AI and machine learning in the banking sector. While acknowledging the significant potential benefits, Murphy highlighted the OCC’s continued focus on managing and controlling the risks associated with AI use in banking. Potential risks include poorly designed mathematical models, faulty data, changes in model assumptions, inadequate validation, testing, and limited human oversight.
Looking Forward
As banks navigate the dynamic landscape of evolving risks, compliance challenges, and technological integrations, finding a balance between innovation and risk management becomes imperative. The OCC’s comprehensive report and guidance aim to equip banks with the insights needed to navigate these complexities successfully.
The Office of the Comptroller of the Currency (OCC) has recently presented its Semiannual Risk Perspective for Fall 2023, delving into the critical challenges facing the federal banking system. The report identifies credit, market, operational, and compliance risks as the predominant themes shaping the banking landscape.
Unpacking Key Risk Themes: Credit, Market, Operational, and Compliance Risks
The OCC report underlines the escalating credit risk attributed to higher interest rates, increasing vulnerability in commercial real estate lending, prolonged inflation, declining corporate profitability, and potential economic growth deceleration. Simultaneously, compliance risk remains elevated due to a heightened focus on ensuring equal access to credit, fair treatment of consumers, innovative technology adoption, and expanded partnerships with third parties.
AI’s Emerging Role and Risks in Banking
Despite the potential benefits of widespread AI adoption in banking, the OCC identifies it as an emerging risk.
The report underscores the challenges associated with AI, spanning compliance risk, credit risk, reputation risk, and operational risk. While AI holds promise for efficiency and innovation, careful management is essential to mitigate its inherent risks.
Guidance on ‘Buy Now, Pay Later’ Lending
In addition to risk identification, the OCC has issued guidance on ‘Buy Now, Pay Later’ (BNPL) lending, a sector gaining prominence. The guidance emphasizes risk management in BNPL loans, payable in four or fewer installments without finance charges.
The OCC’s acting comptroller, Michael Hsu, also highlighted the importance of responsible practices in the BNPL market, particularly as the holiday shopping season unfolds. The guidance directs banks to uphold clear underwriting, repayment terms, pricing, and safeguards, ensuring transparency in marketing materials and disclosures.
Third-Party Risk Management: A Core Consideration
Donna Murphy, the OCC’s acting deputy comptroller for the Office of Financial Technology, stressed the “essential” nature of third-party risk management. This emphasis comes in the backdrop of increasing collaborations between banks and fintech companies. Murphy’s statement before the House Subcommittee on Digital Assets, Financial Technology, and Inclusion reiterates the potential benefits of third-party partnerships but underscores the necessity for robust risk management to protect consumers and maintain overall bank safety and soundness.
AI and Machine Learning Landscape in Banking
Addressing the House Subcommittee, Murphy also discussed the growing integration of AI and machine learning in the banking sector. While acknowledging the significant potential benefits, Murphy highlighted the OCC’s continued focus on managing and controlling the risks associated with AI use in banking. Potential risks include poorly designed mathematical models, faulty data, changes in model assumptions, inadequate validation, testing, and limited human oversight.
Looking Forward
As banks navigate the dynamic landscape of evolving risks, compliance challenges, and technological integrations, finding a balance between innovation and risk management becomes imperative. The OCC’s comprehensive report and guidance aim to equip banks with the insights needed to navigate these complexities successfully.
