Banks that use models for risk management should compare results of those models to results from other approaches, narrowing their reliance on single approaches, U.S. Comptroller of the Currency Thomas Curry said Wednesday.
The banking regulator warned that operational risk – the risk of loss due to failures of people, processes, systems and external events – is high and increasing, noting it’s “at the top of the list of safety and soundness issues for the institutions we supervise,” according to a copy of his speech, prepared for the Exchequer Club in Washington, D.C.
“Some of our most seasoned supervisors, people with 30 or more years of experience in some cases, tell me that this is the first time they have seen operational risk eclipse credit risk as a safety and soundness challenge,” he said.
While inadequate systems and controls were a primary reason for recent problems in mortgage servicing and foreclosure documentation, Curry said, flawed risk assessment and risk management systems can also create operational risk.
“For community institutions with credit concentrations, a flawed assessment of risk can lead to inadequate controls and insufficient risk management systems,” he said. “For the largest institutions, the challenges here can be exceedingly complex.”
Curry said supervisory guidance on model risk management from a year ago stresses the need for ongoing analysis to make sure models are likely to continue performing as expected. Yet banks and thrifts also face greater constraints on resources and pressure to economize on systems and processes, he said.
“All institutions, regardless of size, must resist the temptation to under-invest in the systems and controls they need to prevent greater risk and larger losses in the future,” he said.
For more information on how financial institutions are diversifying their portfolios through C&I lending, download the whitepaper, Shifting Credit Concentrations: 6 Ways to Prepare.