In its Fall 2023 Semiannual Risk Perspective, the Office of the Comptroller of the Currency (OCC) emphasizes the importance of adaptive risk management strategies for financial institutions. The report covers key risk themes, highlighting the need for vigilance despite the overall robustness of the federal banking system.

The OCC report, based on data as of June 30, 2023, covers five main areas: the operating environment, bank performance, special topics in emerging risks, trends in key risks, and supervisory actions. It serves as a resource for the industry, examiners, and the public, providing insights into the risks facing national banks, federal savings associations, and federal branches and agencies.

Credit Risk is identified as a key theme, with factors contributing to the increase discussed first. These factors include higher interest rates, risk escalation in commercial real estate lending, prolonged inflation, declining corporate profitability, and the potential for slower economic growth. Signs of borrower stress across various asset classes necessitate heightened attention to credit risk management.

Market Risk is the subsequent focus, with an emphasis on the impact of rising deposit rates, broader market liquidity contraction, and increased reliance on wholesale funding on net interest margins. The report notes challenges in the first half of 2023, affecting net interest margins, and stabilization in the latter half, albeit with increased reliance on wholesale funding.

Operational Risk is highlighted as remaining elevated, particularly due to persistent cyber threats. Banks' efforts to digitize operations for innovative product and service delivery introduce risks of fraud and errors, especially in peer-to-peer and other faster payment platforms.

Compliance Risk is then discussed, with its heightened nature attributed to a focus on ensuring equal access to credit and fair treatment of consumers. The expanded use of innovative technologies and increased partnerships with third parties, including fintech firms, contribute to the complexity of compliance risk.

The report also explores the Emerging Risk of Artificial Intelligence (AI) in Banking. While acknowledging potential benefits such as cost reduction, improved efficiency, enhanced products and services, strengthened risk management, and expanded access to credit, the report underscores the challenges associated with AI adoption. These challenges include compliance risk, credit risk, reputation risk, and operational risk.

As the banking landscape evolves, the OCC's emphasis on maintaining vigilance, especially in the face of emerging risks like AI, underscores the importance of adaptive risk management strategies for financial institutions navigating an ever-changing environment.