Magazine article The RMA Journal

A Reminder about What You Already Know

Magazine article The RMA Journal

A Reminder about What You Already Know

Article excerpt

REVENUE GROWTH IS particularly challenging in a struggling economy. Net interest margins are compressed, and competition is fierce for the few good loans out there. But you already know that, of course.

You also know that, in times like these, institutions are likely to take on inappropriate levels of risk as they search for profitability. So my letter this month is to remind you of what you already know--to stay within the bounds of your bank's risk appetite and maintain your credit underwriting standards. Don't approve covenants today that could become a Spilled Milk article in some future issue of the Journal.

Comptroller of the Currency Thomas J. Curry recently said that examiners are seeing a slippage in underwriting standards, particularly with leveraged lending and C&I loans. As institutions seek to diversify beyond commercial real estate, some are venturing into new products or new geographic areas, which is a good strategy as long as it's based on sound business decisions. However, it's critical for institutions to have staff who understand the new business and can manage its inherent risks.

Controls and sound risk management practices must be established around the new business. The bank needs to understand the borrower's collateral. Strong monitoring systems must be in place, and they should be supported by robust policies and procedures.

Certainly the low-interest-rate environment is impacting balance sheets and turning up the pressure on net interest margins as older assets mature and are replaced by assets with lower yields. …

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