Posted on November 12, 2016 Published by

I had the privilege to attend the Risk Management Association’s annual Risk Management Conference, held in Dallas, TX, from November 13-15. The conference included 1½ days of presentations plus additional opportunities to extend the learning with pre-conference and post-conference events. The conference provided three primary tracks of learning: credit risk, ERM/ORM, and retail/community banking. Attendees were free to mix-and-match the various track offerings to best suit their interest and needs.

I spent much of my time in the credit risk track and heard the repeated themes of credit concentrations, credit underwriting, and current expected credit loss (CECL) as current issues in banking. Concentrations are receiving additional scrutiny in the current cycle, and banks were encouraged to review and revisit how they define a concentration, the reporting and transparency of concentrations, and the additional risk management associated with managing a concentration. This not only applied to the real estate guidance regarding concentrations but all concentrations that begin to approach or exceed 25% of Tier I capital.

In addition, underwriting was consistent theme. A significant number of competitors are chasing few deals and, thus, banks are relaxing terms to grow their portfolios. Examiners are wary of loosened structures particularly when appropriate mitigating factors are not included as a part of the decision making process. The key take-away regarding CECL is that it is coming and the time to begin to plan and capture the relevant data is now.
Judging by the attendance at the regulatory panel, it wasn’t only of interest to me but to many others. The panel included Darrin Benhart, Deputy Comptroller of Supervision Risk Management, OCC; Kevin Bertsch, Associate Director of the Division of Banking Supervision and Regulation, FRB; and Mark Moylan, Deputy Director for Operational Risk, FDIC. Cyber security was clearly the largest concern of the panel followed by banking innovations and growth in loan portfolios.

The panel discussed the challenges of the limited investment in cyber security by many community banks, which has not allowed banks to keep up with technologies and has created additional risk to the institution and its customers. Banking innovations, largely brought by marketplace lenders and alternative currencies, are current risks and challenges for the industry. Growth in loan portfolios is an increasing regulatory concern regarding underwriting, portfolio management, and commercial real estate. The panel concurred that competition is driving underwriting standards and creating incremental risk in the portfolios as covenants are relaxed, longer amortizations are implemented, a lack of justification for policy exceptions, and risk layering that is occurring now. Many banks are growing their portfolios and approaching thresholds for concentrations or existing concentration levels are increasing. Agricultural lending is also of specific concern as ag portfolios are growing and the ag economy has largely experienced prosperity since 1989. The current cycle of reduced commodity pricing will create challenges for the industry.

Finally, the economic presentation presented by Cris De Ritis of Moody’s Analytics provided an interesting insight into the near future and why we should likely anticipate more of the same. The presidential election has provided a near-term lift to the financial markets and has raised key questions regarding the policies for infrastructure, taxation, regulation (ACA, Dodd Frank), immigration, and trade (NAFTA, TPP). Specific policies for these items are not yet known but may become critical influencers for revisions to the economic outlook. Strengths for the economy now include a strong labor market with low unemployment for those that remain in the job force. The housing market is showing strength with low vacancy rates and rising prices. Finally, household debt is at record lows providing for capacity for increased consumer spending. The challenges identified include global interest rates, the impact of Brexit on Europe, the significant increase in debt over the last five years by China, the shadow financial system with unregulated marketplace lending and mortgage originations largely taking place outside of the traditional banking environment, and finally, the slump in non-farm domestic productivity hovering around 1%.

The conference was a great opportunity to hear from others in the industry regarding their views, challenges and opportunities for the near future for the banking community. In summary, although the explicit credit risk measured by past-dues and non-accruals is down from recent elevated levels, bank management must remain focused on loan portfolio risk management. Policies and procedures should be in place to effectively manage growth across the various categories within the loan portfolio. Portfolios should be stratified and reporting across segments should be performed to challenge management in the various unique and sometimes imperceptible ways risk can affect the quality of the portfolio.


Enlighten Financial is a specialized consulting firm that focuses on loan review and risk management services to community banks and credit unions. Enlighten Financial has made it our business to shed light on the complex financial landscape, and lead clients in the right direction. We work with financial institutions and other providers to mitigate risk. To talk to us directly, please call: (920) 445-8881.

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