Tapping the Source of Strength

Critical Success Factor in Performance and Risk Management: Tapping the Source of Strength

In an environment where making a residential loan is a regulatory challenge—cyber hackers are on the prowl 24/7—and political unrest a continent away can impact the cost of capital overnight—how can a financial services firm effectively and transparently assess and manage the complexity and velocity of performance and risk?

It’s my experience that success in this environment comes from harnessing all available firm-wide financial and managerial resources, including the time and experience of the Board of Directors. All reasonable and actionable performance standards and risks should be examined; not just to satisfy a regulatory requirement, but rather as part of a flexible business approach designed to achieve desired results. A rich and healthy flow of relevant performance and risk information is critical—and communication between “owners” or lines of business, risk takers, risk officers, executive management, and the Board—will then optimize performance and risk management as a source of strength, always at the ready.

Responsibility & Accountability

Recent high-profile actions by financial regulators have put risk management failure and accountability squarely on the shoulders of the Board of Directors. The regulatory expectation and direction is crystal clear; controls and reporting protocols must be in place to prevent a surprise—lack of knowledge is not an option or an excuse. Now more than ever, in the C-Suite and board room, what you don’t know can really hurt you, and hurt you personally.

The requirements of today’s firm-wide performance and risk ecosystem resemble my experience working for a troubled New Jersey regional bank in the early 1990s. With problem assets approaching $2 billion on a $27 billion balance sheet, the bank was in a fight for survival; the velocity of risk profile changes was extreme. Large credit relationships were seeking bankruptcy protection weekly, internal management changes were a constant, legacy operational issues consistently surfaced at the least-opportune time, and the level of regulatory scrutiny was intense.

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Implementing “Actionable” Solutions

Along with a new management team, a credit culture mandate to fix the asset quality problem was put in place by the Board. Four core solutions were immediately implemented with military-like precision:

1. A standardized credit risk rating system for all types of credit risk;
2. A disciplined and standardized problem asset management system;
3. Measurable forward-looking indicators for problem assets, losses and expenses; and,
4. An Independent Credit Audit function that included a management evaluation.

These credit risk management tools were all supported by MIS and credit data to ensure they were repeatable and scalable. With these tools in place, a common credit risk vocabulary was created to facilitate reporting, communication and decision-making across products, business lines and legal entities. As a result, performance and risk management were turned into a source of strength. The bank was able to raise capital and the credit portfolio immediately began to heal, creating immense value for all employees and shareholders.

The SRA Solution

At Strategic Risk Associates, we encourage our clients to use very similar core elements—and military like precision—as the foundation of firm-wide risk management. Once implemented, an aggregation engine can scale and standardize risk and performance intelligence by category to capture, rate, and rank all key firm-wide KRIs and KPIs. Strategic-, reputation-, credit-, operational-, compliance-, funding-, and cyber risk, as well as, the quality of risk management and other firm specific categories, can then be customized and directly managed in accordance with a firm’s evolving strategy, risk appetite and performance goals. Existing and new forward-looking risk indicators and key performance indicators can now easily and routinely be reported to management and the Board, leading to accountability and independent oversight with actionable and timely solutions implemented successfully. The financial and managerial resources of the firm are then transparently and collaboratively harnessed as a Source of Strength.
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