Banking Risk the Office of Essay

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Earning flatness does not suggest that banks are taking on undue risk. Certainly a category such as realized securities gains or losses should have made a dramatic change if there was increased risk (volatility) in the banking system. Provisioning expenses were reduced at all banks, which can either be seen as risky behavior or a reflection of higher quality credit portfolios. The reduction in expenses is cited in the report as one of the risks, as banks seek better efficiency but take on more risk to achieve it. Another potentially risky revenue stream comes from trading. Trading income increased but the report notes that the European economic issues have reduced the risk appetite of many banks, again refuting the idea that banks are taking on excess risk in search of higher profits.

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The one big example at J.P. Morgan of excess risk-taking (Henry & Viswanatha, 2012) does not appear to be indicative of an industry-wide trend.

Conclusion

While the OCC report lists a number of different ways in which banks are engaging in riskier behavior to bolster profits, the data in the report does not offer much supporting evidence. Bank profits are increasing due to lower costs, not higher earnings. It is a reach to suggest that increased efficiency is a major risk factor in the banking system. If anything, the evidence in the report suggests banks have better credit quality, and are not earning more money on risky activities. Unfortunately, the OCC report does not make its own case in this instance.

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