In May, RMA members gathered in Dallas, Texas for the Global Consumer & Small Business Conference, and the Commercial Lending and Credit Risk Conference, RMA’s first in-person events in more than two years. With COVID still posing a challenge for many, RMA also hosted two virtual versions of these events for those who could not attend in person.
The Global Consumer & Small Business and Commercial Lending Conference was geared toward consumer financial professionals responsible for ensuring credit quality while promoting growth, managing portfolios, determining the right analytics and models, setting policy and practices, and governing over risk appetite and oversight.
The companion Commercial Lending and Credit Risk Conference brought together individuals involved in the commercial lending process to strengthen skills for a better understanding of clients and how to effectively communicate with them and grow the relationship.
RMA will host three in-person conferences this fall, including the Annual Risk Management Conference in Washington, D.C., and the Securities Finance & Collateral Management Conference (October 10-13 in Key Biscayne, Florida)—as well as many forums and roundtables.
We hope to see you soon, either in person or virtually.
Here are some key takeaways from Dallas:
What worries CROs? For the opening session in Dallas, a panel of chief risk officers discussed the top risks impacting their financial institutions, including record inflation, rising interest rates, supply chain disruptions, technological transformations, and worker retention. The CROs also discussed how lessons learned during the pandemic could help them embrace continued uncertainty and better navigate today’s business climate.
Carol Severyn, group executive vice president and chief risk officer at Frost Bank, discussed how her bank improved its loan automation processes as employees were forced to work remotely during the pandemic. These new automation systems, she says, are likely to create efficiencies as the bank moves forward. Monica Bowe, EVP, CRO at Busey Bank, said her bank is using remote work as a recruiting tool in a very tight labor market. Meanwhile, Justin Windschitl, chief risk officer, consumer and business banking at U.S. Bank, cautioned about putting the pandemic entirely in the rear-view mirror. Instead, he said U.S. Bank is thinking about the ongoing effects of covid related policies, such as the end of foreclosure moratoriums, and covid related disruptions, like broken supply chains that could have an outsized effect on more capital constrained customers, like small businesses.
Opportunities exist at the intersection of emerging risks.
Crypto currency and cannabis, along with evolving environmental practices, have created both new challenges and new opportunities for banks, as they assess their institution’s risk appetite and approaches to these emerging risks.
During the “Emerging Risks Facing the Industry” panel, Chen Xu, counsel at Debevoise & Plimpton LLP, suggested that one of the biggest legal and regulatory risks to crypto comes from “taxonomic uncertainty,” a term he invented while visiting the Bronx Zoo and looking at animal classifications. The term reflects the fact that lawyers and regulators are unable to precisely define what exactly are crypto assets or agree on basic terms like “custody.” He says this ambiguity makes it difficult to put crypto into existing boxes where certain rules apply and others do not. Until the term crypto is better defined, Chen believes, it may be very difficult for banks to take tangible steps to offer clients the crypto products they increasingly want.
Meanwhile, Ryan Mcinerny, senior manager of compliance at RiskScout, believes now is the time for banks to start seriously thinking about the cannabis market. Right now, only 250 institutions bank cannabis business. For context there are over 4,000 FDIC insured banks in the country. The market currently has about $20 billion in revenues and could grow as much as 30% over the next ten years, he says. That growth should cause banks to pay attention and not shy away because of regularity uncertainties, which include a patchwork of state regulations and the possibility of new federal laws. Another key reason to pay attention: some cannabis purveyors have already turned to crypto for banking and could bypass more traditional financial institutions altogether if banks don’t take the market seriously.
Peter Grant, President & COO, OakNorth, spoke about how it’s increasingly important for banks to not only be aware of their own carbon footprint, but also those of their customers. Moreover, better understanding industry changes driven by environmental concerns will help banks fend off risk from unsustainable and unprofitable companies that could ultimately damage the creditworthiness of banks loan portfolios.
“The worst loans are often made in the best of times.” During the regulatory review panel, there was total agreement between Gerald Williams, risk and operations officer at the Office of the Comptroller of the Currency for the Southern District; Serena Owens, deputy regional director of the Federal Deposit Insurance Commission and Lorenzo Garza, assistant vice president, supervisory risk, Federal Reserve Bank of Dallas: The banking industry is at an inflection point. Lending practices seem sound and liquidity coverage ratios look good for now, but there are also reasons for concern.
The regulators pointed to rising interest rates, the possibility of additional adverse economic impacts from Covid, and high fuel costs as some of the key macroeconomic concerns. They also see lending requirements easing in some areas, which could become problematic if they start seeing this trend in higher concentrations. “The worst loans are often made in the best of times,” said the FDIC’s Owens.
For banks this means two things: stress test and rethink assumptions in lending and interest rate risk models. The Fed’s Garza points out that many models used by banks were designed after the Great Recession and the assumptions behind them may need updating. The OCC’s Williams urged banks to ask two questions: “What happens if our assumptions are wrong” and “How does being off by 30, 40 or 50 basis points on deposit beta assumptions impact profitability?”
As for working with fintech companies, the regulators agreed that banks should follow existing guidance for third party risk management. And in case you are wondering, regulators are people too and are dealing with many of the same issues when it comes to retaining top talent and rethinking office culture.