Published on November 03, 2014
Written by The Servion Group
Expanding government regulation is putting financial institutions in a precarious position where risk management is concerned. Lenders must do more to protect themselves, yet determining how best to accomplish this while also balancing revenue growth can be easier said than done.
While it can be tempting to put greater emphasis on risks associated with mortgage portfolio construction in the face of issues like the Consumer Financial Protection Bureau's ability-to-repay/qualified mortgage rules, it's vital for institutions not to let other risk factors fall by the wayside.
As the National Credit Union Association helpfully points out, there are seven risk factors examiners are on the hunt for when analyzing an insitution's health. These include:
This gives financial institutions a roadmap to use when overhauling their risk management procedures. Obviously greater focus on borrowers' ability to repay is called for, but this is far from the only hazard organiztion's face today.
"Interest-rate risk is the most significant risk the industry faces right now," the NCUA stated in a letter to credit unions at the beginning of 2014. "As rates have risen above record lows, many credit unions' unrealized gains have swung to unrealized losses. These unrealized losses may foreshadow the actual losses credit unions will face if continuing rate increases result in more compression of net interest margins."
With risk management becoming more essential in the marketplace, some financial institutions are faced with the decision of whether to turn to outside help. Determining whether hiring inside or outside to beef up risk management systems is necessary should be done on a case-by-case basis. However, one strategy every institution can benefit from is taking stock of their specific strengths and weaknesses.
While some financial institutions may be well-positioned when it comes to interest-rate risk, they could be vulnerable where it concerns credit or compliance. There's no doubt that sometimes a fresh pair of objective eyes can be ideal for identifying these risks. What steps a financial institution takes to rectify them, and whether that involves further outside help, will depend on a number of factors.
Balancing risk with revenue
Reducing risk is smart business, but there is such a thing as going too far. If risk management begins to eat into revenue, it may be time for credit unions to step back and determine if their safeguards are doing more harm than good.
The key thing to remember is that increased vigilance doesn't have to mean a loss of opportunities. Every risk management strategy should make harmony between caution and revenue a primary goal.