Faces of the 2004 RMA Annual Conference Anaheim, California

The RMA Journal, December 2004 | Go to article overview

Faces of the 2004 RMA Annual Conference Anaheim, California


Richard L. Harbaugh President and CEO, Equitable Federal Savings Bank

After introducing RMA past presidents and chairs in attendance, Rick Harbaugh, RMA's current chair, lauded RMA's chapters and thanked the conference sponsors and He then introduced the RMA-Credit Risk Certified credential. Following are excerpts from the remainder of his address.

In today's more broad and complex marketplace, institutions of all sizes need to manage risks across the enterprise. That means they must be able to measure and manage their market and operational risk as well as their credit risk.

Market risk has assumed increasing importance in recent years as the industry recognizes that it affects all institutions. You don't need a trading desk to be exposed to market risk. It's also about asset and liability management.

We are all aware of the increasing importance of managing operational risks. Identity theft and Internet-based fraud issues such as phishing are occupying more of our time. We need to train our staff to recognize fraud and be vigilant in looking for it. At my bank, the staff recently thwarted two fraud attempts, saving us from significant losses.

Banks used to define operational risk as all risks other than credit risk or market risk. Today the industry is moving toward the Basel definition: Operational risk is the risk of direct or indirect loss resulting from inadequate or failed internal processes, people, and systems or from external events.

While the Basel definition is helpful, you need to create a definition of operational risk that is meaningful for your own institution. You may, for instance, want to include business risk and reputational risk as part of your definition.

We must understand the interdependencies between risk factors: and we need to understand that we can positively or negatively impact these other areas of risk in how we carry out our day-to-day jobs. Recently, a senior credit officer at a major bank told mc that he is spending more time today on risks other than credit. In fact, his bank has changed the functional title of its credit officers to risk officers. One risk interdependency is between loan documentation-an operational risk--and credit losses. You might discover \our loan documentation is not good when you sustain a high number of defaults. Or you max find the severity of your losses would be much greater if you didn't have the right loan documentation. We can control some of these risks.

Another example is the interdependency between operational risk and interest-rate risk. Banks that rely on asset liability management models to measure and manage their interest-rate risk could be subject to great: interest-rate risk losses if their spreadsheets are wrong or data and assumptions are wrong. Again, how we do our jobs can impact these areas of risk.

In this current environment of rising interest rates, interest-rate risk is something we all need to consider carefully. The regulators have put it on their front burner.

Examiners will focus carefully on how rising rates would affect banks portfolios in terms of the impact on consumers and on interest-rate risk. It's important to understand that the way a rising interest rate environment affects banks is as different as the composition of the balance sheet of each institution. If a bank is liability sensitive, the initial impact of increasing interest rates will probably negatively impact its earnings. If it is asset sensitive, the short-term impact on canings would more than likely be positive. Banks can take steps to mitigate the long-term impact of rising rates. Since the industry measures its profitability in basis points, it's extremely important to have a very good understanding of the effect of rising interest rates on. the bank's portfolio. Many community banks have a history of lending long and borrowing short, and tills practice could have a serious impact on their portfolios. …

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