Banks Move to Higher Risk Amid Low Rates, OCC Says

The largest national banks have led their industry toward increased holdings of securities that expose them to “inappropriate risk” as interest rates linger at unusually low levels, according to a report from the U.S. Office of the Comptroller of the Currency.

Investment portfolios at national banks rose from 13 to 20 percent in the three years since the 2008 financial crisis, centering on growing investments in mortgage instruments, the OCC said in a report on banking-industry risks released today. The regulator of national banks said the chase for profit may lead to “inappropriate levels of risk.”

“As net interest income has declined, non-interest income faces ongoing pressures from legislative, regulatory, and market changes that have depressed fee income, servicing and securitization income, and may restrain future trading revenue,” the report said. “These pressures are most intense at the largest banks, though smaller banks also feel the effects.”

Pursuing new products in less familiar markets will also increase risk as banks look for ways to ease revenue declines in core business lines, the report said.

Small banks have also increased their investments to make up for “tepid” loan demand and significantly lengthened the maturities in their portfolio, leaving them vulnerable to future rate spikes, according to the industry risk analysis, which is the first in what the OCC said will be twice-yearly reports.

To contact the reporter on this story: Jesse Hamilton in Washington at jhamilton33@bloomberg.net

To contact the editor responsible for this story: Maura Reynolds at mreynolds34@bloomberg.net