From a supervisory perspective, risk is the potential that events will have an adverse effect on a bank’s current or projected financial condition6 and resilience. 7 The OCC has defined eight categories of risk for bank supervision purposes: credit, interest rate, liquidity, price, operational, compliance, strategic, and reputation. These categories are not mutually exclusive. Any product or service may expose a bank to multiple risks. Risks also may be interdependent and may be positively or negatively correlated. Examiners should be aware of this interdependence and assess the effect in a consistent and inclusive manner. Examiners also should be alert to concentrations that can significantly elevate risk. Concentrations can accumulate within and across products, business lines, geographic areas, countries, and legal entities.
Regulation Z prohibits a card issuer from opening a credit card account for a consumer under an open-end (not home-secured) consumer credit plan, or increasing any credit limit applicable to such account unless the card issuer considers the consumer’s ability to make the required minimum periodic payments under the terms of the account, based on the consumer’s income or assets and current obligations.
In addition to credit risk posed by individual borrowers, credit risk exists in the overall credit card portfolio. Relaxed underwriting standards, aggressive solicitation programs, inadequate account management, and a general deterioration of economic conditions can increase credit risk. Changes in product mix and the degree to which the portfolio has concentrations, geographic or otherwise, can also affect a portfolio’s risk profile. Banks control credit risk through coordinated strategic and marketing plans. Banks should have comprehensive policies and procedures that include strong front-end controls over underwriting standards, well-defined account management processes, strong back-end controls for effective collection programs, and robust monitoring and reporting management information systems. Examiners assess operational risk by evaluating the adequacy of systems and controls governing credit card application processing, account management, and collections.
