Banking Risk: Do Banks Take Excessive Risk for Profit?
This paper examines the Office of the Comptroller of the Currency's (OCC) Semiannual Risk Perspective (2012) and its argument that financial institutions may be taking disproportionate risks to improve profitability. The paper reviews specific risk categories identified by the OCC — including underwriting standard pressure, new product risk, third-party system reliance, and exposure to interest rate shocks — then evaluates whether the report's own data supports those concerns. The analysis finds that bank profit growth has been driven primarily by lower costs rather than higher earnings from risky activities, and concludes that the OCC's report does not strongly substantiate its own warnings about industry-wide excessive risk-taking.
- Introduction: OCC concerns about banks pursuing excessive risk
- OCC Risk Concerns: Underwriting, new products, efficiency, and rate risks
- Evidence from Earnings Data: Earnings data challenges OCC's risk narrative
- Conclusion: OCC report fails to support its own warnings
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What makes this paper effective
- The paper takes a critical stance toward its primary source, evaluating whether the OCC report's own data supports its stated concerns — a strong analytical move that goes beyond summary.
- It organizes risk categories clearly before pivoting to a counterargument, giving the essay a logical two-part structure: claim, then evidence assessment.
- The conclusion is direct and well-supported, pointing to a specific gap between the OCC's warnings and the earnings data presented in the same report.
Key academic technique demonstrated
This paper demonstrates source interrogation — using a primary source's own data to test and ultimately challenge that source's conclusions. Rather than accepting the OCC's risk warnings at face value, the writer turns to the report's earnings figures to assess whether the evidence matches the rhetoric, modeling critical reading of policy documents.
Structure breakdown
The paper opens with a framing introduction, moves into a survey of OCC-identified risk categories (underwriting pressure, new product risk, efficiency-driven third-party exposure, and macroeconomic vulnerability), then pivots to an evidence-based counterargument drawing on the same report's earnings data. The conclusion synthesizes the tension between the OCC's stated concerns and its own supporting evidence.
Introduction
The Office of the Comptroller of the Currency (OCC) has argued that there is a possibility that financial institutions are taking disproportionate risks to improve their profitability. This paper discusses these different risks and presents evidence surrounding the idea that banks are taking on excessive risk in the quest for improved profitability.
OCC Risk Concerns
The OCC's Semiannual Risk Perspective (2012) highlights several areas of concern with respect to these risks. Underwriting standards are under pressure as banks compete for higher-earning assets to improve profitability. Higher yields come from riskier investments, and the OCC believes banks are pursuing riskier investments in order to earn yield. Persistent low interest rates — below inflation levels — compel banks to increase risk in order to earn positive real returns.
New product risk occurs when banks seek out new or unfamiliar markets in order to offset declines in revenues from core lines of business. In part, these declines relate to the current interest rate environment, but they can also relate to ongoing weakness in the mortgage sector. Banks are forced to seek out new opportunities outside of mortgages to fuel growth.
The OCC also argues that banks are seeking to increase efficiency, and that this effort has at times led to the use of third-party products or distribution systems to capture economies of scale. Unfortunately, third-party products and systems are riskier than in-house alternatives. The OCC is concerned that banks are working too hard to squeeze out efficiencies in their systems.
These risks are especially critical given the present environment, characterized by ongoing weakness in economic growth and vulnerability to shocks. The report specifically mentions the threat of rate shocks stemming from the low interest rate environment. There are also risks associated with changes in the regulatory environment, which the report describes as "unprecedented" in volume and scope.
Conclusion
While the OCC report lists a number of different ways in which banks are engaging in riskier behavior to bolster profits, the data within the report does not offer much supporting evidence. Bank profits are increasing due to lower costs, not higher earnings. It is a stretch 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 through risky activities. Unfortunately, the OCC report does not make its own case in this instance.
Works Cited
Henry, D. & Viswanatha, A. (2012). U.S. investigates whether JP Morgan traders hid losses. Reuters. Retrieved November 29, 2012 from http://www.reuters.com/article/2012/07/13/us-jpmorgan-earnings-idUSBRE86C0G420120713
OCC. (2012). Semiannual risk perspective. U.S. Department of the Treasury. Retrieved November 29, 2012 from
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