Highlights of the RMA Risk Management Conference

RMA Journal, The, Nov, 2003

In a more indirect way, risk management may well contribute value to the enterprise by ensuring that sound corporate governance policies are in place and adhered to. As many financial institutions have discovered to their chagrin, problems arising from governance can translate into costly fines and legal bills as well as significant damage to their reputation. Five years ago such a problem would barely have made our radar screen.

Showing the way. The heads of business lines spend much of their time understanding the markets they are in, worrying about market share, developing new products, and thinking up new strategies. As risk managers, our only job is risk; if we use our information well, we can provide a different perspective to the business head.

During a conversation with my counterpart in retail banking, I suggested that his lending products were not meeting hurdle rate and therefore destroying shareholder value. Naturally, this was heresy to a retail banker. As a result of our conversation, however, he agreed to proceed with the exercise of actually calculating the ROE on his products. In the process, we discovered that although his business was extremely successful, his lending products were actually destroying shareholder value. Furthermore, he had no idea whether or not individual relationships were profitable or if good clients were subsidizing higher-risk clients.

We worked together to rebuild our scoring models, and the business unit reworked its client relationship models so that those questions could be answered. As a result, the business increased overall profitability and learned to better price for risk.

Regulatory Update on ALLL Methodologies

This summer, Accounting Standards Executive Committee (AcSEC) of the American Institute of Certified Public Accountants (AICPA) issued a proposed Statement of Position (SOP) on the Allowance for Credit Losses after more than three years of intensive review. The FDIC's Chief Accountant, Robert Storch (far right), outlined the requirements of the proposed SOP, and the OCC's Deputy Comptroller for Credit Risk, Barbara Grunkemeyer (near right), reviewed a number of concerns raised by the bank regulatory agencies as the agencies themselves were issuing a joint letter strongly opposing the SOP and recommending that it be abandoned. The "draft" proposal is not in effect but has generated much confusion within the industry, The interagency letter stated that, "In addition to being fundamentally flawed, the proposed SOP is not clearly written, which no doubt has contributed to its pervasive misinterpretation throughout the financial community." RMA has been engaged in the ongoing policy dispute regarding the ALLL. All of our work in addition to the interagency letter and the proposed SOP can be found on our Web site, Rmahq.org/reg_relations/loan_loss_reserves.html.

James Gertie, EVP, Provident Bank, and John Drew, EVP and chief credit and risk officer, captivated a standing-room-only crowd in their discussion of enterprise risk at their institutions. A focused risk culture can be achieved through proactive management, risk and control mapping, and gap analysis. The result is a constant evaluation of risk/return on various business lines through capital allocation. Applications of enterprise risk management for Sabanes-Oxley compliance, FDICIA compliance, and disaster recovery plans were detailed.