While most in the financial industry agree that the blame for the recent recession can be laid at the feet of Wall Street, that won’t stop the regulations meant to prevent another recession from landing directly in the executive suite of the community bankers across the country.
There remains great uncertainty among community banks as to how the new regulations will filter down to smaller organizations. Last year, banks were paralyzed into inactivity by the uncertainty, unsure how to proceed and where to focus their compliance attentions. Now it’s time to move forward, but the uncertainty remains.
“Community banks are clearly being hurt, as everybody is being hurt,” said Michael Cohn, director of WolfPAC Integrated Risk Management. “The way they get out of this, and the way they move forward profitably, is different from the way the Wall Street institutions are going to move forward.”
“Enterprise risk management” is a popular phrase these days among community bankers, and with good reason, according to Cohn. Developing an efficient and pragmatic risk management program is the best way for community banks to move forward, both in terms of complying with regulations and keeping pace with the industry.
“Community bankers are realizing that they’re going to have to manage their institutions in a way different from how they managed it before, and the framework that the industry believes will be pushed down and will ultimately be used to evaluate management is an enterprise risk management program,” Cohn said. “ERM is new for many community banks. That doesn’t mean that they weren’t doing any of this work before, but bringing it all underneath the umbrella of a senior executive who will have a very holistic approach, that’s new.”
Wolf & Co., now working with banks in 16 states and one U.S. territory, has a wide-ranging view of the situation, but is hearing the same story across the country.
“The common thread is very similar, whether you’re looking out the window of a Wisconsin bank or a California bank or a Massachusetts bank; the challenges are the same,” said Joseph Romanello, national sales manager for WolfPAC Integrated Risk Management. “The CEO has got to run the bank differently. The executive leadership has to look at things differently.”And that is how a practical enterprise wide risk management framework begins to take form.
Part of running the bank differently means understanding the threats to the organization based on the products and services sold, and being able to address those in a way that’s much more transparent than it was in the past. Hard questions must be asked: what do you do differently? What can you do better? And what are the regulators expectations? Once those questions are asked, the difficult task of answering them must begin.
For that, “you need tools. You need pragmatic, tools that allow you to analyze what’s going on within the institution. And then you can make judgments around what remedies need to be employed to correct deficiencies in the control environment, and the risk that impacts management’s ability to effectively run the business,” Romanello said.
WolfPAC, an integrated risk management program developed by Wolf & Co., comes up with a matrix that lays out the answers: “These are the threats you have, and this is the order of magnitude, across the products and the services you offer,” Cohn said. “Certain things start to pop out as areas of concern.”
ERM, approached from this perspective, saves banks time and money by helping them operate more efficiently, and helps them stay safe and sustainable. It also helps them determine how to meet new regulations, and keeps the board better informed, leading to an ownership of the process that can be as important as the process itself.
“One of the benefits of a good risk management program is arming the board with more information, and hopefully in a way that they can understand it,” Cohn said. “And they need to, to meet their own fiduciary responsibilities to the organizations, and also because the examiners are expecting the boards to be much more fully briefed.”
Banking is a risk business, and banks inherently have risk in their institutions. “You have to have risk to conduct business in our industry. It’s up to the institution to establish its risk appetite and govern that risk appropriately,” Romanello said. “You can’t steal second base unless you take your foot off first; that’s risk-taking. We have tool sets to help you manage how far off first base you ought to take a lead.”
