NEWS AFFAIRS 7 : WHERE EVERY STORY HAS IT'S AFFAIR!
WASHINGTON, D.C. – A confidential report from the Office of the Comptroller of the Currency (OCC) has found that half of the major banks it supervises have a weak grasp of potential risks, ranging from cyber attacks to employee mistakes. This revelation highlights significant concerns about the overall risk management practices of some of the nation’s largest financial institutions.
Inadequate Risk Management
According to sources familiar with the matter, the OCC’s confidential assessments revealed that 11 out of the 22 large banks it supervises have been rated as having “insufficient” or “weak” management of operational risk. This has led to about one-third of these banks receiving a score of three or worse on a five-point scale for their overall management.
Understanding Operational Risk
Operational risk encompasses a wide range of potential threats beyond traditional financial risks such as bad loans or market volatility. It includes risks from employee errors, legal issues, natural disasters, and technological failures. Banks are required to have plans in place to manage these risks and to hold capital against them. However, measuring these risks can be more challenging compared to credit or market risks.
Regulatory Response and CAMELS Ratings
The OCC uses operational-risk assessments as part of its broader evaluation framework, known as CAMELS ratings. This system grades banks on a scale from one to five across six components: capital adequacy, asset quality, management, earnings, liquidity, and sensitivity to market risk. These ratings influence the level of regulatory scrutiny a bank faces and the types of activities it can engage in.
Acting Comptroller Michael Hsu has emphasized the need for banks to actively manage their risks to maintain trust in the federal banking system. While the OCC has not commented specifically on the nonpublic findings, Hsu’s public statements underscore the agency’s focus on preventing complacency among banks.
Heightened Regulatory Scrutiny
The harsh grades are part of increased regulatory scrutiny following a series of significant bank failures last year. In response, regulators have vowed to take more proactive measures to identify and address potential problems within the banking sector. The OCC oversees a range of banks, from regional lenders with assets of at least $50 billion to megabanks with trillions in assets.
In May 2023, Hsu testified before Congress, highlighting the need for “timely and forceful supervisory action” despite none of the failed banks being under OCC supervision. This reinforces the agency’s commitment to stringent oversight in the wake of previous banking crises.
Industry Challenges and Guidance
The evolving and complex operating environment of the banking industry has elevated the importance of managing operational risks. The OCC has called operational risk the “broadest component” of its supervisory framework, capturing a wide array of potential threats as technology and other factors continue to develop.
Last year, the OCC, along with the Federal Reserve and the Federal Deposit Insurance Corp. (FDIC), issued guidance for banks on mitigating risks associated with third-party vendors. They highlighted that the use of third parties, especially those employing new technologies, can present elevated risks and provided instructions on monitoring such activities.
The confidential findings from the OCC underscore significant concerns about the risk management practices of some of the country’s largest banks. With increased regulatory scrutiny and the ever-evolving landscape of operational risks, banks must prioritize robust risk management strategies to safeguard against potential threats. As the banking industry adapts to these challenges, the role of regulatory oversight remains crucial in maintaining the stability and trust of the financial system.
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