Financial Services Supervising Agencies Focus on Credit Risk Management

The Office of the Comptroller of the Currency (OCC) and the National Credit Union Administration (NCUA) have released their supervisory priorities for 2025. These priorities are established to address the highest risk to the financial system for the upcoming fiscal year, with a strong emphasis on credit risk.

Credit risk: A principal concern

Loan growth moderated during 2024, but there was a notable increase in delinquencies and charge-offs across several loan segments, including consumer automobile loans, credit cards, and commercial real estate (CRE). Despite modest loan growth in 2024, the financial industry experienced robust expansion between 2021 and 2023.

Credit card delinquencies have stabilized since mid-2024 but remain significantly higher than at the end of 2023. For credit unions, both credit card delinquencies and net charge-offs have surpassed the peak levels reached during the global financial crisis.

Delinquency rates for automobile loans rose to unprecedented levels for credit unions. The delinquency rate for CRE loans has reached its highest point since 2014, particularly driven by loans secured by offices in major urban areas.

Additionally, the multifamily sector is experiencing stress, with signs of softening across various markets and property types.

Risk-based regulatory approach

In response to the increased credit risk profile within the financial system, both regulatory agencies are taking a risk-based approach to supervision. This approach prioritizes evaluating financial institutions' risk appetites and the adequacy of their credit risk review and concentration risk management practices.

Emphasis is being placed on the appropriateness of underwriting assumptions and standards, the effectiveness of ongoing risk identification and problem loan management, evaluating stress testing exercises, and the adequacy of the allowance for credit losses (ACL).

Focus on allowance for credit losses (ACL)

The OCC has specifically identified the ACL as a supervisory priority for 2025. Examiners are tasked with determining whether the dollar volume of reserves is appropriate, considering the current economic environment and reasonable, supportable forecasts for future economic changes.

Assumptions and qualitative adjustments will undergo scrutiny to verify the ACL is well-supported and includes governance activities commensurate with the size, complexity, and risk profile of the institution.

How CLA can help with credit risk management for financial services

The priorities set forth by the OCC and NCUA underscore the importance of proactive and robust risk management practices in maintaining the stability of the financial system. Financial institutions are encouraged to align their strategies and operations with these supervisory expectations to navigate the evolving risk landscape effectively. Reach out to get started on reducing risk.