How to Manage the Strategic Risks of New Product Development

Banks seeking new revenue streams are looking for new products and innovative ways to reach customers. These efforts must be tempered by the bank’s appetite for risk whether it is operational risk, credit risk, or reputation risk. During RMA’s most recent Credit Risk Management Audio Conference, two bank leaders discussed the due diligence that new products/services must undergo before they can be offered to the public.

CRO Nancy Foster, Park Sterling Bank, and Managing Director Kent Kirby, Portfolio Credit Risk, Commerce Bank discussed the risk management challenges posed by new products and services. They defined strategic risk as internal decisions and external factors that can threaten an institution’s ability to achieve its strategic objectives. Understanding the implications and the impact of the decisions the bank makes are critical.

The panelists discussed the importance of a sound enterprise risk framework and a formal risk governance program. The panelists also shared how their banks define strategic risk for purposes of the overall risk appetite statement. Foster described her organization’s qualitative strategic risk appetite factors as, most importantly, only pursuing those business opportunities that are consistent with the bank’s stated business strategies and that such opportunities are not commenced without the commensurate management and staffing required and without adequate capital levels.

Kirby outlined the major focal points that must be addressed when considering new products and services. Questions that should be asked include:

  • How does the product align with bank strategy?
  • Are the risks adequately identified?
  • What are the risks, what could go wrong, and what must be done right?
  • Can the risks be mitigated and, if so, how?
  • What is the financial justification of the product from an ROI standpoint?
  • Does the bank have the necessary infrastructure in place to implement and support the new product, or can it reasonably be built?

Both panelists agreed that banks can fall prey to easy misses when assessing strategic risks. These include not understanding the big picture and failing to identify all of the unknowns. Equally as important as having sufficient resources, is having the right people at the table with the right skill set. Banks need to either have the appropriate level of expertise in-house to properly evaluate a product or hire independent contractors.

Join us on Tuesday, March 14, 2017 for the next offering in the Credit Risk Management Audio Conference Series: Data Quality and Integrity.

Washington – The Week Ahead, September 25–29, 2017

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