How has the current Pandemic changed Board Risk Governance?

How has the current Pandemic changed Board Risk Governance?

July 13, 2020

On June 5th, 2020, Strategic Risk Associates hosted and moderated “Changes in Board Risk Oversight in a Crisis Environment”. This event is part of a continuous educational program of live streamed and webinars designed to educate bank and financial industry professionals from the best source; their peer practitioners. The following is a summary of key points from the event:

Every aspect of society including health, economics, and business has been impacted. It is unfortunate that it takes a crisis to highlight Board governance practices that should be standard in good times as well as bad. Boards must ask and know how this changes the bank’s plans and models. Boards only reach good decisions based upon accurate information. It is the CEO, CRO and managements job to give the give the Board the required information to enhance their knowledge. Boards are starting to move beyond heat maps and risk assessments to risk intelligence.

Times are extraordinary, unpredictable and Boards must address matters early and thoughtfully. Reading reports before meetings,demanding strong independence of CRO’s and Chief Compliance Officers to fearlessly discuss risk opportunities as well as negatives requiring mitigation. Policy management is paramount. What are the metrics? What is the risk tolerance levels? What is our risk escalation policy and procedure?Documentation is critical at every step of the process leading to the Board and the Board meetings themselves. Take meeting minutes seriously.

Often misunderstood is the role of Board members versus the role of management. Boards are not management, Boards provide oversight.Management are not Boards, management manages. Boards must lead from the top.They must provide sufficient budget and resources. Presently, inadequate resources exist. Management is afraid to ask for resources and Boards along with executives, view risk as ‘staff and expense functions’ that decrease productivity. Boards must allow open, candid discussions. They must be informed with comprehendible, concise, and actionable reporting in real time. Quarterly review is no longer sustainable; Boards need to know key metrics, not big reports.Discussion of forward-looking key metrics is where Boards must spend their time in meetings.   Boards must be forward looking. A McKinsey study noted that 70% of Board risk meetings are backward looking. This is untenable and must change. Two questions: What is the information the Board needs and how is it being obtained? Risk categories and responsibilities should be assigned to each Board member.

The most important job of the Board is to ensure the bank avoids failure. A bank can weather bumps, but it cannot come back from being closed. Bank failures and risk related problems arise 60% of the time in the realm of Strategic Risk. It is generally not the case that that trouble arises primarily from operational and financial risk. This reality exists due to the dissociation of bank strategy linkage to risk appetite and capital planning, which are directly intertwined with one another. Risk appetite guides strategic planning, key risk metrics measure performance of appetite achievement in conjunction with strategy. Analysis and understanding of these inform capital and liquidity planning and allocation both opportunistically and to protect and mitigate.

Boards do not like surprises in normal times and bad times.An environment that does not adhere to the above talking points invites surprises which can lead to pain and failure.

Banks must stress test their liquidity, credit losses and capital. It is imperative to perform very severe scenario stress tests compounded to loss rate outcomes. This informs the bank how much capital is needed in worst case scenarios, such as now. Scenario analysis is much more important as a risk management tool today than ever before. Banks cannot rely on stochastic modeling. In the future, banks must set aside a crisis reserve as part of capital planning. Good years at the bank must pay for the bad years. Strong banks that have heeded the counsel of the above talking points will emerge from this crisis. Many opportunities exist for strong banks. Today’s events are not a black swan. They were foretold in an exact analysis five years ago by Bill Gates. Two years ago, interagency discussed and outlined exactly what is happening today. Strategic pandemic plans based on earlier issued guidance have been available for years.

Notable Points:

  • Boards are not management; they provide oversight and credible challenge.
  • Managements job is to inform and educate the Board.
  • Tone at the Top; Boards must create an open environment for candid discussion and provide budget and resources. No lectures at Board meetings, only candid, concise discussion.
  • Avoid group think. Do not wait for trouble, spot it and act.
  • Enterprise Risk Management is not a side function; its true definition is linkage between strategy, appetite, and capital.
  • Strategic planning is to seize opportunities,not just remedy negatives.
  • CEO’s, CRO’s and management must educate and help the Board of Directors; make them smart.

The live stream is available in its entirety at:

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