By Lisa Lambert
WASHINGTON (Reuters) - Many of the major risks U.S. banks face lay beyond their control, according to a review released by banking's top federal regulator on Friday that found the sector's financial performance remains strong.
The U.S. Office of the Comptroller of the Currency found that risks to banks lurk in competition from nonfinancial lenders and in the rapid evolution of money laundering and terrorism financing methods.
The OCC pointed to heavy reliance on third-party servicers and vendors as a place where banks could be vulnerable to a variety of threats, as they rely on outside firms to carry out critical activities or provide cyber security.
"Many banks have increasingly leveraged and become dependent on third-party service providers to support key operations within their banks. Over time, consolidation among service providers has resulted in large numbers of banks (becoming) reliant on a small number of service providers," according to the regulator.
It added that that can create "concentrated points of failure for certain lines of business or operational functions for a large segment of the banking industry."
Banks also could run the risk of falling afoul of multiple new or amended regulations in lending and real estate, because their vendors are not aware of regulatory changes, the OCC said. Banks may rely on outside firms or software to process loan applications, underwrite or close loans, which could open them to challenges in complying with the new regulations.
The OCC said loan growth in commercial real estate and looser underwriting standards are also top areas of risk.
The regulator is keeping its eye on a number of areas that could develop into systemic risks or may affect certain banks, as well: England's departure from the European Union known as Brexit, declines in commodity prices, auto loans and interest-rate changes.
The agency found that U.S. banks' revenue increased 3.6 percent in 2016 from 2015, mostly due to their net interest income - the difference between interest earned on assets and paid on liabilities - which had the largest gain since 2010. Meanwhile, residential mortgages began growing again last year, helping boost bigger banks.
(Reporting by Lisa Lambert; Editing by Jonathan Oatis and Tom Brown)