Difficult Times Continue for Risk Managers: Increased Regulation, Slow Loan Growth, and a Sluggish Economy Are Part of the Gloomy Mix That Institutions Face in Coming Months. A Focus on Strong Risk Management Grounded in a Strong Culture Is the Way Forward, According to Presenters at RMA's Annual Risk Management Conference

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These are difficult times for risk managers. Today's economic, competitive, and regulatory issues challenge even the most experienced lenders. That message, delivered by many speakers at RMA's Annual Risk Management Conference, was hardly news to the 650 attendees in Dallas back in October.

"I doubt there's been a more difficult time for a bank risk manager in a good many years--certainly not in my lifetime," said Comptroller of the Currency Thomas J. Curry.

Curry urged caution on reducing loan loss provisions prematurely. "While reserves remain at a high level industry-wide, quarterly provisions are smaller than charge-offs," he said. "In fact, if provisioning continues at current levels and charge-offs remain constant, the allowance as a share of noncurrent loans could return to historical lows in just a few years."

Expressing the opposite view was opening keynote speaker Sean Rowles, executive vice president and chief risk architect, Citizens Financial Group. He believes the industry is safer and well capitalized, thanks to regulation, but said that "now is the time to think about driving profitability again. The danger is that the industry gets lost for the next 20 years. As an economy, we just can't afford that."

The economy is not going to get better soon, according to the dreary forecast of Wells Fargo's chief economist, John Silvia. "You need to adapt to an economy in which 2% annual GDP growth is the new standard," he said, explaining that middle-income Americans are being squeezed as after-tax income declines year to year. Caution is the watchword in the consumer market as spending continues at a slow pace. Similarly, optimism is lagging among small business owners. Large businesses are experiencing a post-recession recovery, but growth is slowing again.

Frost Bank Chairman and CEO Dick Evans called for more clarity from Washington, saying uncertainty and over-regulation are "job killers for businesses of any size." He said burdensome regulations decrease management's flexibility and choice in running their business. "Companies can adjust their business models accordingly, but only when they know the rules," he said. "It's impossible to develop an effective business strategy when the rules are continually changing." (Evans's full presentation can be found on page 42.)

Bumpy was the forecast of regulatory panelists Todd Vermilyea of the Federal Reserve, Janice McQuary of the OCC, and Joe Meade of the FDIC. They pointed to lower-than-desired earnings that many institutions continue to experience and to the European crisis and a slowdown in the Chinese economy as reasons for concern.

The regulators are wary that banks seeking new revenues and higher profitability could weaken risk management standards or cut core risk functions. Long-term, low-interest loans, whether fixed or variable rate, could create risks when interest rates rise. The regulators said they recognize that the cost and uncertainty of regulatory compliance are a continuing burden to banks. Meade cited the discontinuation of the FDIC's Transaction Account Guarantee (TAG) program at the end of the year as a particular risk to banks benefiting from the TAG.

The regulators also pointed to a few bright spots: improved credit quality, stabilization in the housing market, and a reduction in mortgage defaults and foreclosures, as well as high liquidity and improved profitability


Collective Actions Weigh Heavily

RMA Chair M. Robert Rose reminded bankers that their actions collectively weigh heavily on the economy. "If one bank makes poor lending decisions, it will eventually get into trouble in its limited circle of relations," he said. "But if a large segment of the industry cuts corners, makes bad loans, or plows into a sector and thereby bloats asset values, the community at large is hurt and the entire industry gets a bad rep. …