The dictionary defines "preparation" as "the action or process of making something ready for use or service or of getting ready for some occasion, test, or duty." There is no argument that community bankers are tested all the time, however next year looks like it will be a year we have not seen in at least a decade. That is why we are providing some tips for bankers to help increase preparation.
The first step in getting a handle on things is to create a compliance calendar. Since most duties are performed on a monthly, quarterly or annual basis, doing so will make sure nothing falls through the cracks (while keeping management and the board informed of upcoming examinations or audits). Finally, beyond providing written proof to auditors that the bank is aware of such activities, a compliance calendar also helps make sure regulatory awareness is continually maintained.
In addition to the regulatory and audit calendar, bankers should consider putting together an issue tracking report. This report can be broken into categories such as current and past due to help raise awareness. This is nothing more than a spreadsheet that could include such items as audit findings, risk level, recommended action, management response, person responsible, expected resolution date and current status. Banks should also consider including an additional "past due" report. This report is an added "hot sheet" designed to help raise board awareness and ensure management is completing outstanding issues raised by auditors.
An enterprise risk assessment should also be considered. Doing so provides a holistic approach to risk management, while giving management and the board valuable information. Such assessments should identify, categorize and evaluate risks that might prevent the bank from achieving its objectives; review approaches and processes to make sure they capture risks; assess the degree of risk in the bank and highlight any factors that could help mitigate risk or improve response. Ranking such risks and breaking them down by area (such as consequence and likelihood), can help management mitigate higher risk areas given inherently-limited resources.
In this time of extreme volatility, it is very important for bankers to revisit their liquidity processes and procedures. Community bankers should carry out and document liquidity needs under various stress scenarios, put in place contingency funding plans, document the liquidity risk management policies/procedures and increase employee training in same. Doing so ensures the bank not only has additional liquidity pools in the event of crisis, but is aware of which ones to tap in which order, given various possible crisis that could occur.
Bankers should also perform loan portfolio stress testing, concentration analysis and improve risk management in this area. Given the stresses already apparent in the mortgage sector and beginning to appear in CRE, regulators are looking very closely at the work being done to identify and monitor risk in this area. Understanding and quantifying loan sub-sectors that could erode under stress and applying such erosion to earnings, reserves and capital are critical to understand. Doing so also gives management and the board extra insight, a template for taking action and improves risk management practices.
We will provide even more information, ideas and suggestions in coming weeks to help community bankers not only prepare for their next regulatory audit, but also increase shareholder value during a difficult economic period. "Risk" is something that creates or suggests a hazard, so being prepared is critical.