Tuesday, December 30, 2014

A Gift for the New Year:

New Year 2

"Let us not look back in anger, nor forward in fear, but around in awareness."        - James Thurber*

One December holiday season gift I always look forward to is the public release of the OCC Semiannual Risk Perspective by the Office of the Comptroller of the Currency.

I like it because bank examiners are in the unique position of seeing the operational insides of every bank they visit, and collectively, they scrutinize the entrails of every bank in the nation.  It's a privilege denied to those of us on the outside, who peer from the public galleries or only know the inner workings of the bank in which one works.  This privilege allows bank examiners to accurately gauge the range and variations of banking practices in the industry and to compare notes on risk-taking behaviors horizontally, both within and across banking markets.

It's not that I don't trust the instincts of the business and trade press.  In fact, I would argue that there were many times when the investigative reporters from the Wall Street Journal,  New York Times, Washington Post, Bloomberg News, or the American Banker bested the examiner corps at their own game by unearthing significant banking issues that the then-chagrined regulators were later obliged to address.

No, what gives me pause and what makes it difficult to digest the relentless media "chatter" at face value, is the composition of the analysis stream within the business and trade press.  The pieces written by consultants, politicians, and spokespeople for special interests who have a tendency to raise conjecture, philosophical tilt, or even nonsense to the level of conventional industry wisdom.

Such as the "yelling fire in the theater" pieces that implicitly (or even shamelessly) (and, of course, conveniently) call for the specialized services of the author or his/her professional services firm.  Or the predictable flurry of subject-specific think pieces that precede any major subject-specific banking conference that, I guess, are written to help channel interest towards the author's booth in the grand exhibition hall or to gin up an attentive audience for a panel discussion at said banking conference.

So, occasionally, it's nice to take a break from the "spin" machines.  As the great actor Walter Brennan used to say when referring to his Old West gun-slinging prowess:  "No brag, just fact."  That's (refreshingly) what you get with the OCC's Semiannual Risk Perspective.

[Most of you are probably not old enough to remember Walter Brennan (sigh), so here's the bit captured on YouTube.]

I encourage you to read the entire document.  It's a well-organized, well-developed, and well-presented 41 pages.  In these times of Dodd-Frank Act massive missives, it's a comparatively quick read.

Too busy or can't handle reading it on the screen of your mobile device?  Here's the "Reader's Digest" version:

The OCC Semiannual Risk Perspective explores three key risk themes and provides the following guidance to bank management and boards of directors:

1)  Strategic risk remains high for many banks as management teams search for sustainable ways to generate target rates of return or struggle to implement their strategic plans effectively.

"Banks’ boards of directors and senior managers should ensure that strategic planning and product approval processes appropriately consider expertise, management information systems, and risk controls for the banks’ business lines and activities.  Banks also should incorporate management succession and retention of key personnel into their strategic planning process.
Compliance programs should keep pace with the volume and complexity of regulatory changes, as well as the changing nature of bank customers and transactions."

2)  Operational risk is high as banks adapt business models, transform technology and business processes, and respond to increasing cyber threats. 

"Bankers should maintain heightened awareness and appropriate resources to identify and mitigate cyber threats and vulnerabilities, and should incorporate cyber-resilience planning and controls into their business continuity planning and testing.
Bankers should also ensure that risk management of third-party relationships is commensurate with the breadth, complexity, and criticality of these arrangements as outlined in OCC Bulletin 2013-29.   As banks experience increased system and process interconnectedness, as well as increased concentration risk when vendors consolidate, they need to identify and monitor risks of third-party relationships and ensure resilience against business disruption.
 Banks also should identify and assess cross-channel payment, operational, and compliance risks, and ensure their ability to measure, monitor, and control risks associated with new activities."

3)  Competitive pressures, the need for revenue growth, and the ongoing low interest rate environment continue to complicate bank risk management.

"Banks’ boards of directors and senior managers need to monitor elevated [loan and investment] policy exceptions to established underwriting standards and be alert to the product terms that layer on additional risks.  ALLL [Allowance for Loan and Lease Losses] processes should be reviewed to determine whether additional qualitative adjustments are needed to reflect the increased risk in loan portfolios.
Banks with significant concentrations in longer term assets should assess their vulnerability to a sudden rise in interest rates.  Banks also need to assess how nonmaturity deposits (NMD) react to rising rates and consider the uncertainty of depositor behavior in their model assumptions and resulting risk exposure.
Banks should ensure investment decisions meet their fiduciary customers’ investment objectives, needs, and risk tolerances.  It is also important to ensure that the oversight of the retail nondeposit investment sales program includes an assessment of the product platform’s appropriateness for the bank’s client base. "

*Thanks to the Financial Services Roundtable SmartBrief for the introductory quotation.

Have a safe, sound, and prosperous New Year everyone! 

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