4 Emerging risk management best practices
As the first half of 2014 comes to a close, many bankers continue to face challenges to grow their loan portfolios and comply with ongoing regulatory changes. But there are ways bankers can reduce risk and examiner criticism, according to four industry experts participating in the 3rd Annual Risk Management Summit Sept. 24-26. Here are four best practices:
1. Build a formalized “challenge” aspect to your stress test process. Examiners are emphasizing qualitative aspects of the stress testing process, according to Liz Williams, managing director at CEIS Review, who will discuss “Stress Testing – What Examiners Expect and Emerging Best Practices” at the summit. These qualitative aspects include governance and management “ownership” of the process. Building in a formalized process to periodically review and question, or challenge, the framework, assumptions, data, process and results of the stress test is increasingly seen as a best practice.
2. Understand the key requirements of loan-level risk rating systems under Basel III. Crowe Horwath’s Dave Keever and Jack Gregory note that Basel III will have a significant impact on loan-level risk rating systems. Best practice is for systems to incorporate four key requirements:
• A single rating grade for each obligor
• Relevant historical data for Probability of Default (PD), Loss Given Default (LGD) and Exposure at Default (EAD) estimation
• Consistency with internal risk management processes
• Regular review and update of ratings
Keever and Gregory will lead a session on preparing for Basel III at the summit, where they will also cover best practices for model development and model deployment platforms.
3. Periodically identify your continuing ALLL challenges to learn from best practices of your peers. Linda Keith CPA, whose firm trains business lenders in credit analysis, recommends taking time out in a structured way to target what is working and what needs improvement in your ALLL process. She collaborated with risk management professionals across the country to create a list of the ‘Ten Essentials of the ALLL’ to use as a check-up. Using tools like this to identify your areas of strength and continuing challenges allows you to gain more from targeted conversations with colleagues. Keith will use the ‘Ten Essentials’ to lead an interactive session at the Sept. 24-26 summit.
4. Document, document and document your ALLL decisions. When determining the right measure of loss for your institution, Sageworks’ Garrett Morris notes three critical items to remember:
• Document, document and document your decision
• Understand the selected loss measure and loss horizon should be unique to your bank and its experiences
• Re-evaluate loss methods and loss horizons periodically
Morris will lead a session at the summit on how to determine the right measure of loss in your ALLL.
To learn more, or to register, visit the 3rd Annual Risk Management Summit page.