2019 Annual Risk Management Conference Sponsor Perspective: SRA Sizes Up the Banking Industry at the RMA Annual Risk Management Conference

This event brings bank practitioners, bank industry academics, regulatory examiners, and bank industry service providers together to share knowledge, best practices, awareness, and to raise skill levels. This translates into a stronger industry supported by stronger individual members possessing the most current and relevant facts and viewpoints. In addition to brick and mortar subjects, RMA is committed to unequivocally advocating the nobility and ethical worthiness of the banking industry. According to the Edelman scale of trustworthiness, banking is trusted slightly more than media and government. Of course, as individuals we cannot control an industry or any other macro element. However, we can control micro elements by engaging in ethical business practices. Society centered ethical practices executed by individual members will lead the industry to a position of public trust. When you are responsible for making dreams become realities, making times of crisis bearable and healable, and securing people’s futures, you have an ethical and moral responsibility not only to understand these things but to live them. 

KEYNOTE PRESENTATION: Risk Optimization and The Five Lane Highway

Risk Optimization. We heard in the keynote that risk optimization is equally as important as risk mitigation. Banks often view risk management as a burden, a check box, as a benefit only in mitigating risk. But the business of banks is risk. The question is how much risk? Are we taking too little risk or too much? As risk managers our job is to optimize risk. It is paramount to construct a complete risk profile through aggregation and analysis of key data indicators to locate risk optimization opportunities. Pursuit of exposure is where we want to go. Risk minded professionals must advise their banks on where they have the capacity to take more risk. 

The Five Lane Highway. Optimize your key data indicators. Assign each bank activity to a lane on the five-lane highway. Red is not bad, it is aggressive. Green is not safe it is an opportunity. Yellow and orange are moderately safe. Risk professionals drive the discussions and report to executives and the board, where each of the bank’s activities are on the five-lane highway. The foundation of the five-lane approach is your organization’s risk appetite statement. 

The job of risk professionals is to establish and build trust. Trusting relationships are lasting and profitable relationships. Risk people put clients at the center of their workflow and decision making processes. Ask yourself. If your bank and your risk practitioner practices were filmed and put on YouTube, would you be proud? Trust is defined by an equation, credibility + reliability + intimacy. Are you and your institution credible? Are you and your institution reliable? Your bank must establish and maintain a risk ecosystem that involves every nook and cranny of the bank. In the past a Human Resources code of conduct was enough. Today your institution must have a valued, credible risk management culture that is supported and resourced from the top down. This culture carries the organization. It is only as strong as its worst individuals’ behavior.

Resilience and Regeneration. A representative from the Department of Homeland Security who discussed cyber/operational resilience at the conference summed up resilience: It is simply your institution’s ability to continue operating at a base capacity if there is an unforeseen, sudden occurrence that seriously wounds your organization. You can recover quickly if you are resilient. 


The theme of the conference was “Prepare for Tomorrow.” In alignment with this theme, many of the individual presentations and audience-wide engagements concentrated on present day economic conditions. Conditions and the inevitability that future conditions at some point will not be as rosy as they are today. Now is the time to assess not only your current business practices, portfolios, and loan books but also your bank’s practices covering the length of the current expansion, roughly ten years. 

Are you ready for a cycle change?
Are you prepared to take a punch? Are you positioned for the inevitable recovery? Are you positioned to serve your customers in hard times as well as today’s good times? Are you ready for a recession while being simultaneously positioned for growth? These represent the themes of multiple presentations that I attended at the event. These are the questions, simple as they sound, that banks must be asking themselves. After asking the questions and determining what exists and what needs to exist, banks must execute. 

Let’s start with high level facts and viewpoints.

Viewpoints: Economists are usually wrong. Recessions are declared months after they arrive (September 2007, declared January 2008). There are wild swings in sentiment and mixed reviews on when a recession is coming. Academics and think tanks have been calling for the end of the current expansion cycle for the past three years. If you Google “Recession Anxiety,” you will get an ocean of results. These are viewpoints. Facts are used to encourage, support, or disagree with viewpoints. 

Debt levels across every lending segment are at all-time highs. Government, corporate, and consumer debt is at its highest historical level and getting higher. At the same time debt service ratios are stable; losses are at an all-time low. The U.S. economy has reached a level of annual GDP that no other country or empire in world history has ever come close to in todays’ dollars. There are unresolved trade disputes (wars if you prefer), global supply chain re-orientations, political gridlock, structural changes in consumer-retail behaviors, etc. There are thirty countries with negative interest rates. Equity markets are at record highs while fixed income is simultaneously bullish with safe-haven bond purchases and falling yields. Unemployment is at historical lows.  Brexit is still unresolved, populist-socialist movements abound, pent up demand for simplicity and automation are everywhere. 

What control over any of these viewpoints and facts do we as individuals and as institutions have?
None. However, as individuals, we control our own destiny as to how this array of possibilities can and will affect us. I mentioned a few, but there are many more.

Think about these points discussed at the conference. Unemployment is the leading indicator of economic downturn. Every first Friday of the month, the employment number comes out. The first month it turns negative, it is likely we are in a recession. The second month it is negative, there is statistically an 85% likelihood that we are in recession. Consumer confidence and spending are more volatile and not good leading indicators. Look at the activity in the real estate markets and in contractor/sub-contractor markets across the economy. What are the locations, property types, and trade skills/jobs that support them? Kick the tires on these. 

Preparing for the Future.
Winter is coming! This phrase is being thrown around all over the banking industry. Ok, but where is winter coming? Is it Miami, North Dakota, or somewhere in the middle? Nobody knows but everyone better have a backpack ready to go for every possible destination. These are good times. However, it is not the time to be behind the curve. Now, during the good times, banks must assess determination of loss across the bank when times are not good. If the circumstances become this, what will the bank look like, what will happen? What are the loss optics in the peak year of credit deterioration? What areas of the bank would be affected by a downturn? Examine multiple scenarios of where and when winter comes.

What does poor leadership look like and how does it relate to the health of the banking industry?

If you are an executive or board member do a self-assessed litmus test
. Are you determined? Are you learning as fast as change is taking place around you? Do you know if the people working in roles at the bank who are responsible for getting you the information you need to run the bank live in fear? Fear of asking questions, fear of calling out important dysfunction and deficiencies, fear of retribution, fear of losing their jobs. Ask yourself, “Am I and are our people working not to lose or are they playing to win?” There is a difference. Do you as leaders possess a spirit of re-imagination? Are you open minded to necessary transitions that your bank must understand and execute to be viable in an ever expanding digital world? You cannot manage bank risk, strategic imperative performance, and adequate capital levels from an ivory tower. You need the open, unafraid support from the citizenry.

This word was the topic of bank operations technology and enterprise risk practices. Spoken from the people that are on the first and second lines of defense at banks, this is their sentiment. Until individual executives show that they are living by agile, it is meaningless and goes nowhere. Until management committees and boards of directors’ fight scope creep, fire drills, and endless backlogs, this goes nowhere. There will be no improvement without understanding, buy in, and actionable support from the top. 

In many instances, bank leadership views risk management as a staff function (non-revenue producing) box-checking regulatory compliance exercise, not worthy of serious consideration, spend, and resources. If you think that way, you are incorrect. Don’t ask me. I write what people on the first, second, and third lines tell me and include facts from my research which spans the U.S. The lack of a single unified framework of what is happening throughout the organization makes the jobs of risk practitioners at best very difficult, at worst impossible. The result, executives and boards do not get the information required to best run and manage their banks. 

ERM vision.
Clear vision that is clearly reported and understood by executives and boards of directors is of top importance. Are the executives and the boards comfortable with the bank’s activities? They can only be comfortable if they if they have a clear vision of the full enterprise. Clouded visions are black holes of diversion that are explained by their front lines and include never ending fire drills that focus on but are not limited to regulatory compliance. Disengaged executives that lack foresight and open minds contribute to cultures dominated by distraction. A question many in positions beneath executives and boards ask is how do you get these people that have been doing the same thing for twenty to thirty years to change? (If someone can answer this one, please call me) It is the equal responsibility of the top level to provide vision to the subsequent levels.

Regulatory Comments

What does the OCC expect from the 1,500 banks it is responsible for examining?
The OCC exists not to protect individual banks but to ensure the stability of the federal banking system. They look at a bank’s exposures and vulnerabilities. As risk managers, you are responsible for understanding where risks are being created and their unintended consequences. You must understand changes internally (micro) within your organizations, and externally (macro) through the markets. As executives and board members you must know and understand how these risks impact your strategic, capital, and liquidity plans. Bottom line: Is there enough capital and liquidity for the institution to withstand an economic downturn? Forward thinking boards will not only survive but prosper. Boards that do not perform their duties, that do not understand the relationships between strategic, capital planning, and risk, will suffer or fail. Executives and boards that are overly aggressive, allowing their credit policies and underwriting to slip and become too risky, should prepare to fail in the next downturn. 

What areas are the OCC and other regulatory agencies focused on?
They are focused on:

  • Strong risk culture.  
  • Strong underwriting. 
  • Strong capital position.
  • Concentrations of credit.
  • Internal stress testing.  
  • Loan policy exception tracking. 
  • Problem loan identification.  
  • Strength of credit culture.

Additional areas of focus.

  • Special Assets Groups: times are good, but do you have a Special Assets Group ready to go when times are not good?
  • Risk-based BSA.
  • CECL, delayed for Community Banks. Do not delay, CECL is high on their radar.
  • Corporate debt.
  • Consumer Debt.
  • Student Loan Debt.
  • Liquidity.
  • Strategic Innovation.
  • Cyber, operational.
  • Libor Transition: In 2020 they will not be examining the transition rather they will be asking: Have you named a project manager to handle the Libor transition? How many phases of operational change will be involved? Have you engaged compliance regarding this matter? Have you engaged legal? What if there is client litigation around the transition? Overall. How is the bank handling, preparing for the transition?

If this gives you a headache, give me a call. I welcome discussion on these and other viewpoints.

Marc Caccavale, managing director, Education, Conferences / Strategic Risk Associates. He can be reached at mcaccavale@srabank.com or 908-875-3602.

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