Confidential report from the Office of the Comptroller of the Currency reveals that major US banks failed due to operational risks

In confidential assessments, the Office of the Comptroller of the Currency said 11 of the 22 large banks it oversees have “inadequate” or “weak” management of so-called operational risks, said the people, who asked not to be identified because the information isn’t public.

That helped about a third of the banks earn a rating of three or worse on a five-point scale for their overall management, the people said. The scores are the latest sign that U.S. regulators are concerned about the level of risk at the nation’s biggest banks following a string of bankruptcies last year.

Operational risk is one of the categories that regulators use to assess the overall risk of the banks they supervise. Individual ratings for each bank are closely monitored, but regulators sometimes use aggregate data on bank scores to highlight areas of concern in discussions with other bodies and the industry.

At the Comptroller of the Currency, the operational risk assessment feeds into a report card known as the CAMELS ratings, which rates companies on a scale of one to five for each element—capital adequacy, asset quality, management, earnings, liquidity, and sensitivity to market risk. These scores create an overall rating that identifies the degree of scrutiny or resilience a company faces, including the activities it can engage in and the amount of capital it must hold.

The Office of the Comptroller of the Currency did not comment specifically on the unannounced findings. In a statement, the regulator said that Acting Comptroller Michael Hsu “has consistently discussed the need for banks to guard against complacency and actively manage their risks in order to build and maintain confidence in the federal banking system.”

Operational risk is supposed to cover a range of potential threats to banks that go beyond bad loans or market volatility that causes losses. It can include anything from employee errors and legal problems to natural disasters and technological glitches. Banks must present to regulators plans to manage such risks, and they must hold capital against such threats, a requirement that has long been debated because it is harder to measure than credit or market risk.

The tough scores are part of a broader regulatory scrutiny in the wake of record bank failures last year, after which regulators have vowed to do more to identify and fix problems. The vast portfolio of banks under the OCC’s watch ranges from regional lenders with at least $50 billion in assets to megabanks with trillions of dollars in assets.

While none of the banks that had just failed were under the supervision of the Office of the Comptroller of the Currency, Hsu said in congressional testimony in May 2023, he had reviewed his agency’s operations and emphasized the need for “robust and timely supervisory action.”

an agency Calls Operational risk is the “broadest component” of its supervisory framework, acting as a kind of overarching principle as the technology on which banks rely evolves. a report Last month, the Office of the Comptroller of the Currency said this aspect was “elevated” as the industry responds to “an increasingly sophisticated and complex operating environment.”

Last year, the Office of the Comptroller of the Currency, the Federal Reserve, and the Federal Deposit Insurance Corporation. released The US Federal Communications Commission has issued guidance to banks on how to mitigate risks from third-party vendors. The agency said that “the use of third-party vendors, particularly those using new technologies, may pose elevated risks” and instructed companies on how to monitor such activities.

Earlier this year, agencies stepped up their efforts, issuing warnings about the use of foreign AI tools.

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