In their analysis of the root causes of the financial crisis, banking regulators determined that one of the main problems was the fact that many banks had not appropriately defined their risk appetite.<\/p>\n
As a result, regulators are engaging an increased emphasis today on portfolio credit risk management.<\/p>\n
They expect community banks to create a risk appetite framework that sets a forward-looking view of the bank\u2019s desired risk profile in different scenarios while establishing processes for achieving this profile. The framework will clearly define roles and responsibilities in the areas of monitoring and appraisal while setting up the practices that link the board\u2019s objectives with management actions to ensure that the risk profile remains within the defined limits.<\/p>\n
Community banks should draft a risk appetite statement that explains the aggregate level and types of risk the bank is willing to assume within its risk capacity. This statement should include both qualitative and quantitative measures expressed relative to earnings, regulatory capital, risk measures and liquidity needs, among other factors.<\/p>\n
A Vigorous Risk Management Program<\/strong><\/p>\n The risk appetite framework and statement form the foundation of a robust risk management program that should be closely integrated with your bank\u2019s overall strategy. This will become the basis for establishing a risk culture that should permeate the entire bank \u2014 sensitizing all employees to their role in managing credit risk while holding them accountable for the results.<\/p>\n According to Enhancements to the Basel II Framework<\/em>:<\/p>\n \u201cIt is the responsibility of the board of directors and senior management to define the institution\u2019s risk appetite and to ensure that the bank\u2019s risk management framework includes detailed policies that set specific firm-wide prudential limits on the bank\u2019s activities which are consistent with its risk taking appetite and capacity.\u201d<\/p><\/blockquote>\n Your risk appetite statement should energize strategic and day-to-day business decisions and be consulted whenever you\u2019re considering to introduce a new product or service, expand existing product or service lines, or enter new markets. To be effective, the statement should:<\/p>\n Questions to Request<\/strong><\/p>\n In determining your bank\u2019s appetite for risk and level of risk tolerance, you should ask yourself several important questions:<\/p>\n 1. How will we know when we should slow down growth to avoid overextension? Once you\u2019ve answered these questions, you can regulate your strategies to echo current market conditions. For example, in an expanding economy, you could employ a more aggressive risk strategy by implementing lower debt service requirements, higher loan-to-value ratios, longer terms and slower amortizations. In a slowing economy, meanwhile, you might lessen your risk appetite by raising debt service requirements, lowering loan-to-value ratios, shortening terms and speeding up amortizations.<\/p>\n In the 2013 release of Guidance on Supervisory Interaction with Financial Institutions on Risk Culture<\/em>, the Financial Accounting Standards Board (FASB) specified the following indicators of a sound risk culture:<\/p>\n Share Your Statement Organization Wide<\/strong><\/p>\n It\u2019s serious that your risk appetite framework and statement be shared throughout the organization, but especially with your line lenders. Otherwise, lenders may simply default to behaviors that result in the highest compensation for themselves \u2014 regardless of whether or not these behaviors agree with your risk and credit culture.<\/p>\n To talk further about managing portfolio credit risk, please give The Whitlock Company a call at 417-881-0145.<\/p>\n","protected":false},"excerpt":{"rendered":" In their analysis of the root causes of the financial crisis, banking regulators determined that one of the main problems was the fact that many banks had not appropriately defined their risk appetite. As a result, regulators are engaging an increased emphasis today on portfolio credit risk management. They expect community banks to create a […]<\/p>\n","protected":false},"author":9,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"content-type":"","footnotes":""},"categories":[30],"tags":[37,63,562,38,65,66],"acf":[],"yoast_head":"\n\n
\n2. How important is growth and expansion in the current market environment?
\n3. What is our pain threshold, or the dollar amount of a material transaction?
\n4. In what areas (e.g., industries, markets, types of borrowers) does growth and expansion make the most sense for us?<\/p>\n\n