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Banks still prone to risks

By Marcie Geffner · Bankrate.com
Monday, July 8, 2013
Posted: 6 pm ET

U.S. banks and federal savings institutions continue to face major risks, some of which could be pushed to excess as these companies try to improve profitability, overcome revenue challenges in a slow economy and respond to a surge in sophisticated cyberthreats.

That's according to a semiannual report from the Office of the Comptroller of the Currency, a federal banking agency.

Here are the highlights.

  • Banks' strategic risk remains high and continues to increase as they re-evaluate their strategies and business models to boost profit in a slow economic growth with low interest rates and new regulatory requirements.
  • Low rates can make banks more vulnerable as they try to chase higher yields. Banks could experience significant earnings pressure, even to the point of capital erosion, when interest rates increase.
  • Demand for loans, particularly commercial loans, has improved, but increased competition for limited commercial and industrial lending opportunities is weakening some underwriting standards. Further meaningful gains in loan volume depend on sustained economic growth, especially in housing and consumer spending.
  • Cyberthreats continue to become more sophisticated and require heightened awareness and appropriate resources to identify and mitigate the associated risks.
  • Risks related to money laundering and electronic bank fraud have increased for banks that have failed to evolve or incorporate appropriate controls into new products and services.
  • New products and services may present unfamiliar risks for which some banks may lack the requisite expertise, management information systems and appropriate risk controls.

"Low interest rates, narrow loan demand and lower fee income continue to hinder stronger revenue gains, while lower loan-loss provisions have largely supported profits," the report stated. "Monetary policymakers have indicated their intention to keep interest rates at or near historical lows over the near-term, which will continue to put pressure on net interest margins. Margins also are under pressure as banks compete aggressively by cutting rates because of limited lending opportunities, and as they reinvest proceeds from maturing higher-yield assets at lower yields."

The report said the financial performance of federally chartered banking institutions improved in 2012, and the economic outlook for 2013 is positive. Still, banks continues to face "headwinds" that include concern about sovereign debt levels and banking system problems in Europe, and uncertainty about fiscal and monetary policies in key countries such as the U.S. and Japan. Anxiety over slow revenue and profit growth also remains high.

Are you worried about cyberthreats to the banking system?

Follow me on Twitter: @marciegeff.

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