Banks are jumping out on the risk curve, as they seek to boost profits in an environment of low interest rates and heated competition, according to the Office of the Comptroller of the Currency (OCC), which regulates banks.

Part of the problem rests in lending, according to the OCC's semiannual risk report.

"Competition for limited lending opportunities is intensifying, resulting in loosening underwriting standards, particularly in indirect auto and leveraged lending," the report says.

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"Easing in underwriting and increased risk layering is also occurring in commercial loans."

The OCC notes it will increase its attention on underwriting standards and encourage banks to diligently assess their credit risk appetite.

Interest rates are at historic lows across the yield curve, pushing banks to take more risk in their lending and more risk in their investments.

"The prolonged low interest rate environment continues to lay the foundation for future vulnerability," the report says.

"Banks that extend asset maturities to pick up yield, especially if relying on the stability of non-maturity deposit funding in a rising-rate environment, could face significant earnings pressure and potential capital erosion depending on the severity and timing of interest rate moves."

However, overall the OCC says the financial performance of federally chartered institutions improved in 2013.

Experts say banks are still in an early phase of figuring out how to control their risk. "Our abilities to measure market risk are akin to where medicine was in the 1700s," Damian Handzy, CEO of Investor Analytics, which provides risk-management systems, tells The Wall Street Journal.

"Everyone is honestly trying to get better at this, but we're still in the laboratory. The old systems do not address systemic risk at all. Traditional banking tools are just not designed for that."

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