Garnet Capital Advisors Blog

The Bank Director's 2014 Risk Practices Survey recently provided some insight into the risk management challenges that lending institutions are facing.

Report explores bank risk governance
This report, which was sponsored by FIS, culled over 100 responses from senior bank executives and independent directors working for banks with more than $1 billion in assets under management.

When creating this document, Bank Director explored the methods that lending institutions use to govern existing risk. In addition, the magazine looked into how leveraging best practices can help improve financial performance.

U.S. banks have been coping with various new regulations. For example, the Dodd-Frank Act mandated that financial institutions with more than $10 billion in assets under management set up a risk committee on the board of directors. Alternatively, banks that have more than $50 billion in AUM need to hire and install a chief risk officer.

Report findings
This document contained several findings on the progress that banks are making, as well as the challenges they are facing. The key findings include:

Lending institutions are having a hard time complying with the existing framework of rules and regulations, according to BankDirector.com. Of those who took part in the poll, 55 percent said that these sharp adjustments were the factor most likely to create errors in evaluating risk at the bank.

The overwhelming majority of respondents, or 97 percent, stated their financial institution had a chief risk officer on staff, or a person with similar responsibilities. In addition, 63 percent of individuals said that their board of directors has a separate risk committee to govern risk. Companies with this particular infrastructure reported both a higher return on equity and return on assets than firms without this setup.

It is worth noting that the report identified many resources that are not fully utilized. For example, 57 percent of directors provided their opinion that their company's board could benefit from having more training on new regulations and how they affect banks, the media outlet reported.

In addition, the report noted that 36 percent of banks that have a separate risk committee on their board do not currently go over the bank's risk mitigation strategies and strategic plan. Many participants noted shortcomings in their risk appetite statement.

Of those who took part in the poll, 33 percent said that this particular resource outlines all risks that a bank faces. Alternatively, only 13 percent take this statement and assess the impact it has on corporate financial performance.

Financial institutions interested in loan sales might benefit from knowing about the results of this report. Banks have traditionally purchased loan portfolios to increase their income-generating assets, and have sold them in an effort to both manage risk and also create some revenue.

In the new regulatory environment, government agencies are scrutinizing these transactions after they have happened. Financial institutions must ensure all their loan sales are done in a compliant manner.