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PCBB Banc Investment Daily January 20, 2015
Banc Investment Daily
January 20, 2015

An ERM Survival Guide

What can community bank CEOs learn from a hoodie-wearing football coach about managing risk? Plenty if that person is Bill Belichick, coach of the New England Patriots (by far the most successful NFL coach of the past 15Ys). During his tenure, Belichick has been to 7 Super Bowls - 2 with the NY Giants and 5 with the NE Patriots and has earned a champion's ring 5 times. This past weekend, the Patriots secured another trip to the Super Bowl, so the legacy continues. In succeeding on the gridiron, Belichick has unlocked the Holy Grail for football coaches and bank presidents everywhere, removing risk from a highly risk-laden activity.
For bank executives, risk management is a primary topic of discussion. Discussion occurs in board and management meetings, at the water cooler or even while watching Monday Night Football. Most community bankers have even rolled out enterprise risk management (ERM) strategies, but sometimes it seems like banks fail on basic blocking and tackling.
Certainly, bankers aren't retreating on ERM initiatives. If anything, they're more determined than ever to get it right, because failure isn't a reasonable option. According to the 2013 Community Banking Industry Outlook Survey by KPMG, ERM is viewed as the second most significant barrier to growth. A full 27% of respondents said so vs. 22% in 2012, so its importance is also increasing.
To get the ball rolling, here are some actionable steps to take to mitigate risk at your financial institution:
Keep it real and keep it positive - Bankers have been managing risk since the dawn of time, but what is changing is the nature of the risks banks manage and the speed of change due to factors like technology, regulations, customer and market conditions. Focus on areas of greatest concern with these elements in mind.
Start small and aim for steady growth - Experiment with pilot programs and small steps to see what works best and then do more of the same.
Speak with one voice - Senior management should always lead from the top down, but it's also best to appoint one leader, like a chief credit or risk officer to be that one voice. Community banks do a great deal of collective decision making, but with ERM it's best to present a consistent message.
Build a 3Y plan - Begin with a strong business plan for the coming 3Ys and apply the bank's risk measurements to that plan. Then the bank's ERM follows the same path as the overall road map for the bank.
Measure key indicators - The best community bank ERM programs have a dynamic model and framework that doesn't focus only on risk assessment. Risk assessments are a part of ERM but not the whole and they work best when they are linked to key performance indicators.
Perhaps the main goal of any initiative is to identify key risk areas early in the game. Identify areas of sensitivity and test them again and again, using varying assumptions and multiple scenarios. Above all, don't take ERM for granted. In an era of tighter credit, tougher competition and strict regulation, a good, enterprise-wise ERM strategy isn't a luxury. Like football, your bank's ERM plan needs to adapt with the times in order to keep on winning.