The pinnacle of the Workplace of the Comptroller of the Forex (OCC) Michael Hsu has warned banks to watch counterparty and focus dangers as world uncertainty mounts.
The US banking system has remained sturdy whilst pandemic restrictions proceed in some areas, on high of spiralling inflation, provide chain points, and the struggle in Ukraine.
Nonetheless, at a current business occasion, Hsu warned that banks ought to nonetheless be cautious as monetary property and different market indicators have been sending “decidedly blended indicators”.
He referred to as for banks to investigate their dangers now, adjusting their publicity accordingly to keep away from the sector concurrently needing to go “risk-off”, which might threaten the banking sector as a supply of power.
He suggested banks to particularly deal with counterparty concentrations, cautioning that the default of a single counterparty might trigger “giant, sudden losses and, in some instances, to broader contagion”.
He additionally suggested banks to think about their sector concentrations, warning banks can “undergo appreciable losses” when markets flip.
Loans to non-depository monetary establishments and industrial actual property have been of specific concern, Hsu mentioned, as each sectors had skilled fast progress in 2021.
Hsu was talking on the Bloomberg Threat & Regulation Week 2022 convention.
Final month, the acting comptroller similarly warned on risks facing financial institutions, urging them to take larger warning.
On the American Bankers Affiliation’s Threat 2022 convention, Hsu mentioned that monetary establishments mustn’t deal with tail dangers as siloed, citing geopolitical threat, cyber threat, inflation and rate of interest threat, and recession threat.
“Not solely have the likelihoods for every tail threat elevated, however it doesn’t take a lot creativeness to see how completely different tail threat occasions could also be linked and will materialize concurrently,” he mentioned.
