How to Stay Balanced as Risk Managers in Today's Benign Environment

The following is the next installment in RMA’s Credit Risk Council 2017 Industry Insights: Perspectives from the Front Line.

As this credit cycle continues, maintaining perspective and holding the line have become increasingly difficult for risk managers. Remaining vigilant while dealing with increasing benevolence is one of the toughest, yet most important, aspects of the job.

Agreeing to small, or subtle, policy changes today may cause remorse tomorrow. Unfortunately, there is no crystal ball and, though discipline and consistency are the goals, risk managers may fall victim in some form or another.

There is also the pressure to grow the business even though it may seem prudent to pull back and sit on the sidelines. Banks need to have the discipline and foresight to temper that growth and take a longer-term view. But how can banks strike the right balance?

The following suggestions can help risk managers navigate this challenging period:

  • Encourage more socialization of tough, or on-the-edge, requests even if the request is within one's discretionary authority; if in doubt, elevate. This takes the pressure off the individual adjudicator.
  • Review your underwriting standards. Perhaps tighten them even if the result is simply to send a message or, better yet, identify cracks before it's too late.
  • Examine your exception reporting and ensure it's providing the right type of information with sufficient granularity and accuracy. Doing so allows for effective monitoring for pockets of risk or troublesome trends such as risk layering; i.e., multiple exceptions in one credit.
  • Reaffirm business strategies and risk appetites with the heads of businesses to ensure the organization is looking at its business objectives and goals in a consistent way. Moving off strategy, i.e., strategy-drift, to achieve growth goals is a sure sign of trouble that will no doubt introduce new risks. Not staying within the bank's strategy can be as fatal as not staying within the bank's risk appetite.
  • Besides staying measured on individual hold levels and granting exceptions where warranted, hold the business to aggregate group exposure limits; i.e., aggregate all hold level excesses that exceed single name policy limits and have them managed to an overall cap. This places the discipline back on the business to manage and ensures overall hold levels are maintained.
  • Ensure that the right talent is in key roles. Empower those who have the fortitude and experience to hold the line and can be relied on when the pressure to do business becomes difficult. Then ensure they are provided strong support.
  • Encourage greater communication between risk, the underwriters, and the front line to work through the issues before they become real problems or, worse, are irreversible. Open and transparent communication solves problems and creates stronger partnerships.
  • Get workout teams working sooner and more closely with the line at the earliest sign of deterioration to identify emerging problems and take a preventive approach. This visibility can be one of the best early warning indicators. 

Please look for the next Industry Insight on Tuesday, September 19, Data Governance.

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