Contributed by: David Daukus
As the economy is starting to finally turn around albeit with hiccups and demand for new credit picking up, creditors are loosening their lending criteria to grab market share. However, it is important for lenders to keep lessons from the past to avoid the same mistakes. With multiple government agencies such as the CFPB, OCC, FDIC and NCUA and new regulations, banking compliance is more complex than ever. That said, there are certain foundational elements, which hold true.
One such important aspect is keeping a consistent and well-balanced risk management approach. Another key aspect is around concentration risk. This is where a significant amount of risk is focused in certain portfolios across specific regions, risk tiers, etc. (Think back to 2007/2008 where some financial institutions focused on making stated-income mortgages and other riskier loans.)
In 2011, the Federal Reserve Board of Governors released a study outlining the key reasons for bank failures. This review focused mainly on 20 bank failures from June 29, 2009 thru June 30, 2011 where more in-depth reporting and analysis had been completed after each failure.
According to the Federal Reserve Board of Governors, here are the four key reasons for the failed banks:
(1) Management pursuing robust growth objectives and making strategic choices that proved to be poor decisions;
(2) Rapid loan portfolio growth exceeding the bank’s risk management capabilities and/or internal controls;
(3) Asset concentrations tied to commercial real estate or construction, land, and land development (CLD) loans;
(4) Management failing to have sufficient capital to cushion mounting losses.
So, what should be done?
Besides adherence to new regulations, which have been sprouting up to save us all from another financial catastrophe, diversification of risk maybe the name of the game.
The right mix of the following is needed for a successful risk management approach including the following steps:
- Analyze portfolios and needs
- Predict high risk accounts
- Create comprehensive credit policies
- Decision for risk and retention
- Refresh scores/attributes and policies
So, now is a great time to renew your focus.