OCC warns of high corporate debt levels, commercial real estate risks

Increased corporate debt, cybersecurity threats and the risk of chasing returns in a low interest rate environment could undermine banks’ efforts to boost profits as the pandemic progresses, the auditor’s office said on Monday.

In a semi-annual report on the risks in the national banking system, the OCC found that banks made a strong recovery from the pandemic in the first half of the year due to improved credit conditions.

But some banks could be risking too quickly with poorer quality loans, looser underwriting, and inadequate due diligence on products and services, an OCC official said on a conference call with reporters.

“Excessive risk eventually becomes like cooked frog syndrome. If it’s too late, it’s too late to do anything about it, ”the officer said.

Acting auditor Michael Hsu urged banks to be careful about risk when looking for revenue opportunities.

“Strategic measures taken by banks to offset profits, the impact of low yields and the narrowing of the interest margin remain a risk,” said Hsu.

Acting auditor Michael Hsu urged banks to be careful about risk when looking for revenue opportunities. “Strategic measures taken by banks to offset profits, the impact of low yields and the tightening of the interest margin remain a risk,” he said.

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Now, almost every conversation OCC auditors have with a bank involves a discussion of cybersecurity risk, OCC officials said. Ransomware attacks have become more sophisticated and malicious actors have become bolder, it said.

On the other hand, credit risk has weakened due to the government’s stimulus. At the beginning of the pandemic, OCC auditors thought banks would suffer massive losses that never actually occurred.

But high liquidity is both a blessing and a curse for banks, OCC officials said. The banks were able to gradually resolve loan defaults over the past year, but this momentum has lost momentum.

“Banks will have to rely on traditional business practices, net interest margins and income, and other ways to generate income from the bank,” said an OCC official. Banks find it “really hard to park that money to get a margin at all. So you have to provide deposits somewhere [and] Credit growth is pretty flat. “

Against this background, the OCC encourages banks to protect themselves from the so-called “risk of complacency”. Banks are advised to remain vigilant and avoid undue risk.

“The OCC encourages banks to guard against complacency in order to ensure financial resilience without compromising effective risk management systems that support sound business models and strategic and operational plans,” the report said.

Another cause for concern is corporate debt burdens, which were already high in 2019 and skyrocketed during the pandemic.

Corporate debt has continued to rise this year. The OCC fears that companies are accessing cheap debt to pay dividends and buy back stocks rather than investing in areas of the economy that would lead to long-term productivity.

The presence of large debt in the broader economy coupled with a larger proportion of the debt of high-risk borrowers increases the risk of default in the event of an economic downturn or interest rate hike, the OCC said in the report.

“When you’re having a downturn where profits may not be as good for some of these companies, this can be a real challenge for them,” said an OCC official. “Because of the breadth and depth of this debt, it can even pose a systemic risk to the economy.”

The OCC is also closely monitoring the commercial real estate sector as companies start getting their employees back into work. It is unclear whether business and consumer habits have changed permanently and what a post-pandemic environment will look like specifically for office buildings and shopping malls.

Hsu also said the OCC continues to work on developing climate risk prudential principles for large banks. The agency recently submitted an application for scientific and policy-oriented research on climate risk in banking and finance due to the increasing frequency and severity of extreme weather events.

“We are getting more and more specific,” said Hsu. “There’s just a lot of information going back and forth now about where these practices and issues are that affect our policies.”