Magazine article The RMA Journal

How Hungry Are We?

Magazine article The RMA Journal

How Hungry Are We?

Article excerpt

PIGS GET FAT, hogs get slaughtered. That old adage describes well the risk appetite of many banking institutions before the recent financial crisis. Markets, boards, and managements all seemed convinced that the industry's craving for risk needed to be satisfied. Pressure to build the balance sheet and increase earnings at unprecedented rates became as expected as a well-stocked buffet.

Today we realize that the single greatest challenge for large and small banks over the coming months is being able to assess a risk appetite appropriate to ensure their survival.

The new "norm" is not yet clear, but the industry's recent performance must not be repeated. As we move from a defensive position of asset protection to an offensive posture of asset generation, quality must triumph over quantity Our institutions must establish appropriate and well-defined risk appetites.

A risk appetite policy enhances how the marketplace views an institution. In that sense, the evolution of risk appetite is not so different from the advent of management by objectives and mission/vision statements. All represent changes in corporate governance and all started as internal philosophies that found their way as performance barometers into the information flow of regulators, analysts, and the marketplace.

While risk appetite models can be complex, the basic formula for determining acceptable risk is simple. The franchise footprint and the natural attributes of business activities in the institution's market offer a framework within which leadership can decide which risks are acceptable. A word of caution here: There is no greater threat to an organization than employees without the proper training or skills being given responsibility for areas of the balance sheet. Acceptable risks are certain to become unacceptable if managed improperly.

Competition from banks and nonbanks influences the degree of risk that institutions are willing to accept. …

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