Community banks are doing well but still face numerous risks, according to the Semiannual Risk Perspective Report released Monday by the Office of the Comptroller of the Currency’s National Risk Committee.
The report flagged operational and strategic risks as being elevated, “with banks continuing to face increasingly sophisticated cyberattacks.” The OCC has noticed an increase in ransomware attacks in financial services, “leveraging phishing emails targeting employees and compromised credentials to gain access to networks through remote access channels. Once access is gained, the attackers conduct ransomware and other extortion campaigns.”
Compliance risk also remains elevated as Covid-19 relief programs unwind, according to the OCC. “The conclusion of these programs creates increased compliance responsibilities, high transaction volumes, and new types of fraud, as banks continue to respond to a changing operating environment,” the report stated. Community banks have “assumed increased credit and interest rate risk consistent with their operating strategies,” according to the OCC. The report stressed the need for smaller banks “to avoid excessive risk taking, and to maintain adequate controls when managing investment and lending programs and third-party relationships.” Other challenges community banks face, according to the OCC, include strategic risk — especially effective strategic planning, acquiring talent, and retention and succession planning.
Those findings come as the U.S. economy continues improving: Real GDP surpassed its pre-pandemic peak in the second quarter of 2021, but workforce shortages continue. Job openings have grown to record levels, especially in the leisure and hospitality sectors. Financial conditions remained favorable this year, as monetary and fiscal stimulus measures continued supporting financial markets. However, market participants expect that support to be gradually reduced over the next few quarters and anticipate short-term interest rates will remain next year.
To the OCC, banks are showing perseverance “in the current environment, with satisfactory credit quality and strong earnings, but weak loan demand and low net interest margins continue to weigh on performance.” Community banks have been inundated with deposits during the pandemic while FDIC-insured institutions made $69.5 billion in net income during the third quarter, a nearly 36 percent increase from the previous year, due to a $20 billion decline in provision expenses. Two-thirds of all banks reported annual improvements in quarterly net income, and the share of profitable institutions year-over-year slightly increased to nearly 96 percent.