Advice from Summit speakers: 3 Ways to mitigate risk
Bankers in today’s environment face a number of challenges, including understanding and complying with ongoing regulatory changes, developing and conducting adequate stress testing methods, and justifying or defending changes in their allowance reserves.
But there are many things bankers can do to mitigate risk in those areas, according to several industry experts participating in the 2nd Annual Sageworks Risk Management Summit next month. The Summit will feature presentations and panel discussions on ALLL, stress testing and capital planning best practices. Institutions ranging in size from $50 million to over $80 billion in assets are already registered to attend.
Here are three pieces of advice:
1. Don’t be afraid to uncover vulnerabilities. RMPI Consulting partner Jay Gallo, who will discuss “Integrating Risk Appetite, Stress Testing and Capital Planning,” says stress testing is positive in that it enables financial institutions to gauge their potential vulnerability to exceptional but plausible adverse events. “Stress testing should assess and quantify your institution’s vulnerabilities under multiple unfavorable scenarios,” he says. “Once the potential downside is understood, you can take steps to reduce or mitigate those risks, or you can ensure you have sufficient capital to manage those risks.”
2. Develop a successful stress testing framework with three “knows.” Jack Gregory and Dave Keever, senior stress testing and credit experts for Crowe Horwath, say financial institutions looking to prepare and manage stress test forecasts need to know three key things:
• The institution’s portfolio
• The scenarios and their impact on the bank’s capital and liquidity
• The forecasts including what they show and why
Gregory and Keever’s presentation will also outline three lines of defense all institutions need for stress-test production.
3. Document the rationale for loan upgrades. Linda Keith CPA, whose firm trains business lenders in credit analysis, says bankers should be careful to document the thinking behind their judgment that a loan should be upgraded for purposes of the allowance for loan and lease losses (ALLL). “It’s important to eliminate regulator guesswork,” she says. It’s also important, she says, for financial institutions to verify that guidelines for analyzing a potential upgrade are “clear, clearly communicated to, and consistently followed.” Keith will help lead a presentation on deciding and defending upgraded loans for the ALLL at the Dec. 5-6 Summit.
For more information on the Risk Management Summit, visit the event page.