The head of the Office of the Comptroller of the Currency (OCC) Michael Hsu has warned banks to monitor counterparty and concentration risks as global uncertainty mounts.
The US banking system has remained strong even as pandemic restrictions continue in some areas, on top of spiralling inflation, supply chain issues, and the war in Ukraine.
However, at a recent industry event, Hsu warned that banks should still be wary as financial assets and other market indicators have been sending “decidedly mixed signals”.
He called for banks to analyze their risks now, adjusting their exposure accordingly to avoid the sector simultaneously needing to go “risk-off”, which could threaten the banking sector as a source of strength.
He advised banks to especially focus on counterparty concentrations, cautioning that the default of a single counterparty could cause “large, unexpected losses and, in some cases, to broader contagion”.
He also advised banks to consider their sector concentrations, warning banks can “suffer considerable losses” when markets turn.
Loans to non-depository financial institutions and commercial real estate were of particular concern, Hsu said, as both sectors had experienced rapid growth in 2021.
Hsu was speaking at the Bloomberg Risk & Regulation Week 2022 conference.
Last month, the acting comptroller similarly warned on risks facing financial institutions, urging them to take greater caution.
At the American Bankers Association’s Risk 2022 conference, Hsu said that financial institutions should not treat tail risks as siloed, citing geopolitical risk, cyber risk, inflation and interest rate risk, and recession risk.
“Not only have the likelihoods for each tail risk increased, but it does not take much imagination to see how different tail risk events may be linked and could materialize simultaneously,” he said.