US OCC highlights key risks to federal banking system in latest report
The Office of the Comptroller of the Currency (OCC) has used its Semiannual Risk Perspective for Fall 2023 to warn banks of the “significant challenges” coming as a consequence of artificial intelligence’s (AI) seemingly unstoppable rise within financial services.
OCC releases Semiannual Risk Perspective for Fall 2023
The report labels AI’s interaction with banking specifically as “an emerging risk”, and emphasises that despite the benefits of widespread adoption, namely in reduced costs, improved services and increased efficiencies, banks could also face the adversity of compliance, credit, reputational and operational risks.
“It is important that banks manage AI use in a safe, sound, and fair manner, commensurate with the materiality and complexity of the particular risk of the activity or business process(es) supported by AI usage,” the report reads. “It is important for banks to identify, measure, monitor, and control risks arising from AI use as they would for the use of any other technology.”
Elsewhere, the OCC also discusses the current state of market, operational, credit and compliance risks being faced by the financial institutions it regulates, all of which it claims have risen.
It attributes the rise in credit risks to heightened interest rates, increased exposure in commercial real estate lending, prolonged inflation, declining corporate profitability and ultimately the potential for slower economic growth. The data, which was recorded on 30 June 2023, also suggests that borrower stress across asset classes is growing heavy.
With regard to operational risk, the report puts forward that the accelerating pursuit of digitalisation has left an increasing number of firms susceptible to fraud and errors, including fraud targeting peer-to-peer and other faster payment platforms.
Likewise, it says that compliance risk “remains elevated” as a result of trends attempting to equalise access to credit, typically though broader technology applications and partnerships with third parties.
Despite the turbulence posed by the onset of these risks, the report makes clear that the overall strength of the federal banking system “remains sound”, with banks expected to remain diligent and “adhere to prudent risk management practices across all risk areas”.
