While credit conditions in the US appear sound, there are some that are raising flags about the growing risks embedded in the current US bank operating environment. US regulator, Thomas Curry, the Comptroller of the Currency, recently gave a speech at the OCC Semiannual Risk Perspectives Event, dated January 5th 2017. In this speech, he confirmed that while overall capital, liquidity and leverage conditions were acceptable, the worst loans can sometimes be made in the best of operating environments when competition is heating up. In effect, he says that risk appetite and underwriting discipline can wane in such markets.
Curry confirms sales practices, exposed at Wells Fargo, is something that the regulator is examining across the industry. The other flags he raises today includes the following areas for US BHCs, savings institutions, and community banks to be sensitive to in today's market:
- Strategic risks - new competitive threats and business model changes
- Credit risks - easing in C&I and retail lending standards, including LTVs and RE
- Operational risks - cyber risks remain of paramount importance here
- Compliance risks - fair treatment of consumers and other clients.
Curry also identifies loan loss provisions as a key area, with inadequacy in reserving practice given the recent rapid loan growth (C&I loans grew over 10% last year according to Curry), greater concentrations of credit risk and single obligors, higher tolerance for underwriting levels, and higher risk appetite. (For more on Curry's concerns, see the OCC website at https://www.occ.gov/news-issuances/speeches/2017/pub-speech-2017-4.pdf)
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