OCC Report Identifies Key Risks Facing Federal Banking System

Regulatory Developments

OCC Report Identifies Key Risks Facing Federal Banking System
On December 7, the OCC’s National Risk Committee released its semiannual risk perspective report (the Report), commenting on the condition of the federal banking system and identifying key risks. The data in the Report is largely as of June 30, 2023 and is meant to address issues and risk that pose threats to all financial institutions regulated by the OCC. 

The Report identified key risk themes: (1) credit risk is increasing due to higher interest rates, and borrower stress across asset classes is starting to become apparent; (2) the effects of rising deposit and interest rates are negatively impacting investment portfolio values; (3) operational risks are rising, largely related to cyber threats and fraud, innovative products and services offerings, and increasing digitalization efforts; and (4) compliance risks remain high. Further, the Report identified artificial intelligence (AI) risk as an emerging risk, noting that increased adoption of AI presents challenges for compliance risk, credit risk, reputational risk and operation risk.  

FDIC Board of Directors Released Semiannual Update on Restoration Plan
On December 7, the FDIC released its second semiannual update of 2023 on the DIF restoration plan. The FDIC is required under the Federal Deposit Insurance Act to adopt a restoration plan when the DIF’s reserve ratio—the ratio of the fund balance relative to insured deposits—falls below 1.35 percent.

The FDIC noted that increased loss provisions, resulting from the 2023 bank failures, coupled with strong insured deposit growth, resulted in a reserve ratio of 1.10% as of June 30, 2023, down from 1.25% as of December 31, 2022. Currently, despite the decline, the FDIC projects that the reserve ratio is likely to reach the statutory minimum of 1.35% by the statutory deadline of September 30, 2028.

“Even with the period of stress earlier this year, the banking industry continues to be resilient. However, downside risks—including the effects of inflation, rising market interest rates, and geopolitical uncertainty—could present challenges and could have longer-term effects on the condition and performance of the economy and the banking industry, which could exacerbate the risk of losses to the DIF.”

‒ Martin J. Gruenberg, Chairman, FDIC 

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FINRA Kicks Off the Holiday Season With a Proposal to Permit the Use of Some Projections and Targeted Returns
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To learn more about this proposal, view a recent client alert.

Upcoming Goodwin Event – San Francisco Fintech Forum: Investment Trends and Regulatory Updates (February 7)
Goodwin’s Fintech group will host a premier gathering of fintech companies, financial institutions, and investors at our San Francisco office on Wednesday, February 7, to discuss the latest fintech trends facing the industry. For more information, including the program agenda, click here.

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