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OCC: Banks Healthy, but Credit Risk Levels…Not So Much

several-banksThe housing market is six years into the current recovery, and while banks are generally in good health, worrisome signs of credit risk are still prevalent among these institutions.

The Office of the Comptroller of the Currency (OCC) 2015 Annual Report, which is required by Congress to report "a summary of the state and condition" of the national banking system and any recommendations for "any amendment to the laws relative to banking," found that banks are performing well, but maintaining the influx of growth is becoming challenging.

The report showed that banks were generally profitable in 2015 and experienced "steady loan growth and relatively few problem assets." System-wide profitability reached 10.0 percent in 2015, up from 9.9 percent in 2014, but still well below pre-crisis levels. Both net interest income and noninterest income increased during the first half of 2015 among banks, while net income rose $3 billion year-over-year.

"The improving economy stimulated loan growth in the federal banking system in 2015," the OCC report stated. "The result is a stronger federal banking system than existed before the crisis."

Thomas J. Curry, Comptroller of the Currency, noted that some banks are targeting less creditworthy consumers and easing their lending standards to keep up with growing competition .

"If these loans deteriorate, and if banks do not have the appropriate risk management processes and structures in place to measure, monitor, and control the increased credit risk, banks could be forced to curtail lending even to creditworthy customers, adversely affecting the broader economy," the report said.

Banks should consider the meaning of success, both in the short and long term, by rewarding behaviors that contribute to the institution’s long-term safety and soundness and not just those that add to its bottom line in the near term.

Curry noted that there are two kinds of competition among banks:

  1. Negative competition is the type that can lead to lowering standards and adopting shortcuts in risk management and controls.
  2. Positive competition, on the other hand, fosters innovation in product quality, customer service, and managerial efficiency.

"Banks that engage in responsible innovation are likely to remain relevant to their customers and secure in their role in the payments and credit systems," he said.

Curry added, "It’s important that banks continue to think outside the box. It’s just as important that their regulators think outside the box as well. In the run-up to the financial crisis, complex products were introduced faster than state and federal regulators could absorb and comprehend them. With hindsight, it’s clear that banks didn’t fully understand the risks some of these products entailed. But then again, neither did their regulators, and that is our responsibility."

Click here to view the full report.

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