On February 25, 2015, I sat among a crowd of risk managers, bankers, consultants, technology vendors, and academics at the Global Association of Risk Processionals (GARP) 16th Annual Risk Management Conference in New York. Darrin Benhart, Deputy Comptroller for Supervision Risk Management, Office of the Comptroller of the Currency, U.S. Department of the Treasury, provided some risk perspectives, summarized below:
- Healthy risk cultures in financial institution help to guard against excessive risk taking
- Operational and compliance risks have become a larger concern due to rapidly evolving cyber threats. This requires heightened awareness and appropriate controls to mitigate the risk. Additionally, money laundering has evolved
- Banks are seeking new ways of increasing returns which raises strategic risk concerns as banks look at new, potentially more risky, products
- Darrin focused on three key risk mgmt topics:
- Concentration risk management – can introduce variety of risks (credit, liquidity, operational risks). All banks are exposed to some level of concentration risk (may be caused by M&A or just business-as-usual). Banks need to have effective processes and adequate capital commensurate with the level concentration risk. A question was asked around which metrics the OCC looks at to quantify the risks of concentration. Darrin answered by stating that smaller institutions have a legal lending limit to mitigate concentration. He provided a number of 25% of capital as a rule of thumb for banks to have a trigger to begin monitoring the risk. He noted that people must understand the volatility of the asset class that has high concentration risk to assess the risk level and determine if it requires mitigation action
- Correlation risk management – He spoke about an example of oil prices and the correlated services industry, e.g. exposure to commercial real estate, residential real estate, and commercial loan exposures, considering the impacts of oil prices. Actively monitor these exposures, reach out to borrowers to proactively mitigate risks otherwise the problems can become larger
- Tendency for over reliance on historical data – the past provides useful information but does not predict the future. For example, the auto lending industry has changed significantly over last few years, however, the justification to expand this product line in banks is usually due to analysis of historical data. Lenders have extended auto loan periods, and tools used by banks to qualify borrowers have changed (e.g. credit ratings now downplay medical debt). Bankers should understand what these changes mean and should utilize additional tools to get a comprehensive picture of risks
- The OCC is establishing an analytics team and dedicated leadership team to enhance risk management focusing on both existing and emerging risks.
GARP 16th Annual Risk Management Conference, 2/25/2015 – http://www.garp.org/
KSENIYA (KATE) STRACHNYI is an advisory consultant focused on risk management, governance, and regulatory response solutions for financial services institutions. Areas of expertise include governance frameworks, enterprise risk management programs, ICAAP, compliance risk management, operational risk management, Foreign Enhanced Prudential Standards, Basel II/III, and the Dodd-Frank Act.