2014 Community banking best practices: Defining your bank’s risk appetite
In last week’s post that continued the 2014 community bank best practices series, we discussed the importance of investing in project management training to better incorporate your employees in your strategic initiatives.
This post will explore the reasons why you should, if you haven’t already, define your bank’s risk appetite.
“I like Five Guys [Burgers and Fries], so when I look at my calendar for February I can eat Five Guys, but I can’t eat it every day. I can only eat Five Guys maybe three times in February. I have to augment. I have to supplement. I have to diversify my risks.”
What Cooley meant is that while your firm can take on some risky loans (eating Five Guys), it must counteract those risks with more stable, consistent loans (eating vegetables to balance out the burgers).
Just as many people make New Year’s resolutions to eat a more balanced diet, your institution should plan to diversify risks.
To learn more about properly weighting risks so that you’re sufficiently compensated, read the whitepaper Risk-Weighted Assets: 4 “Risky” Questions Regulators Want You to Ask.