RMA's new Chair Richard L. Harbaugh believes in RMA's mission

RMA Journal, The, Oct, 2004 by Pam Martin, Kathleen M. Beans

RMA Chair Rick Harbaugh believes strongly in RMA's mission to advance sound enterprise-wide risk management principles throughout the financial services industry. A community bank CEO, Rick also believes that our members' diversity in asset size and geographic location is a great benefit in accomplishing that mission. His main goal as RMA's 2004-05 chair is to promote the initiatives of operational and market risk globally without losing sight of the need to be relevant to all RMA constituents.

RMAJ: How would you describe RMA's mission?

RH: RMA lives its mission statement. It is a member--driven member-focused professional association consisting of both institutional and individual members. It advances the use of sound enterprise-wide risk management principles in the financial services industry. That's pretty simple, but that's our mission in a nutshell.

RMAJ: RMA is unique in that its membership includes institutions of all sizes, and its Board is made up of people with very, very diverse backgrounds.

RH: I agree. RMA serves a very diverse constituency with very large banks on one end of the scale and very, very small banks on the other end. Another group of banks is clustered in the middle. We also have geographic diversity, which is well reflected on our Board. RMA offers a forum where a banker from a $150 million community bank can sit around a table with individuals representing the nation's and the world's largest financial institutions to discuss issues of mutual concern.

RMAJ: Your chairmanship this year underscores that diversity. Our outgoing chair is Suzanne Labarge, vice chair of RBC Financial in Toronto, and you are from Equitable Federal Savings Bank in Grand Island, Nebraska.

RH: Absolutely. We represent RMA's diversity in both institution size and geography.

RMAJ: RMA's focus on enterprise-wide risk management began a number of years ago. Many larger institutions are now establishing a chief risk officer position. In fact, Suzanne Labarge is the chief risk officer at RBC and, as the CEO at Equitable, you are the chief risk officer; too.

RH: Exactly. By virtue of our size, we can't afford to have a chief risk officer, so that's another hat I wear. I get a lot of help from senior officers in my bank, but at many smaller community banks the final responsibility for risk rests with the CEO.

RMAJ: Enterprise-wide risk management is a concept that many community banks are adopting. It's not something that only the big banks are doing.

RH: Enterprise-wide risk management is the new focus of RMA. We're celebrating our 90th anniversary this year, and for the majority of those 90 years, RMA was the thought leader in credit risk management issues. With the decision to expand our focus into the areas of operational risk and market risk, RMA has widened its concept of risk management to enterprise-wide risk management.

RMAJ: As you know, every spring the Community Bank Council meets with the regulatory agencies in Washington to discuss issues of mutual concern. Our role with the regulator's is unique since we don't lobby, and we have a similar stake in maintaining credit quality. One of the primary focuses at the meeting last May was the rising interest rate environment. Are bankers ready to handle a rising interest rate environment?

RH: That's a good question, and it was on the front burner for all the regulators. We can expect examiners to focus strongly on how rising rates would affect banks' portfolios in terms of the impact on consumers and on interest rate risk. It's important to understand that the way a rising interest rate environment affects banks is as different as the composition of the balance sheet of each institution.

If a bank is liability sensitive, the initial impact of increasing interest rates will probably negatively impact its earnings. If it were asset sensitive, the short-term impact on earnings would probably be positive.

Banks can take steps to mitigate the long-term impact of rising rates. Since the industry measures its profitability in basis points, it's extremely important to have a very good understanding of the effect of rising interest rates on the bank's portfolio.

Many community banks have a history of lending long and borrowing short, and this practice could have a serious impact on their portfolios. Large money center banks, which have access to different funding sources and to different capital markets, will not see their portfolios affected as dramatically.

Community banks have done a pretty good job of mitigating the risk of rising rates by taking advantage of longer-term, lower-rate advances from the Federal Home Loan Bank. We've gone through a period where we have seen historically 50-year-low rates. As a result, the advance rates by the Federal Home Loan Bank have presented opportunities to create some longer-term, lower fixed-rate lending. Banks that have been able to originate and sell off some of their longer-term assets have been able to mitigate some of the impact of rising rates.