When most bankers think of “operational risk,” they think of day-to-day operations like internal or external fraud, reconciliation failures, and the like. The Comptroller of the Currency recently reminded banks, however, the process of setting and implementing new strategies can also create risks, and those risks must be identified and managed just like other operational risks. Regulators are encouraging of innovation, but not at the expense of sound risk management.
The mismatch between risk management and strategic planning occurs most frequently at small banks. The OCC says that this is due to the following factors at small banks:
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Inadequate business models for new strategies;
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Inadequate board and management succession; and
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Lack of breadth or depth in staff expertise to develop and implement new strategies.
For banks of all sizes, strategic risk is rising due to:
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Pressure to relax credit standards in order to target new businesses as part of a new strategy;
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Pressure to build concentrations in areas that have been problematic in the past (e.g. commercial real estate);
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Pressure to do mergers and acquisitions as part of a new strategy;
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Pressure from competitors that are new to a bank as a result of a new strategy, such as financial technology firms;
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Pressure to reach for yield on the bank’s own assets, by extending duration, due to the ongoing low interest rate environment; and
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Pressure to reach for yield on client assets, due to the ongoing low interest rate environment
A best practice in bank strategic planning is to include both the internal “Weaknesses” and external “Opportunities” in a “SWOT” analysis of new products and services, document those for your banking supervisors, and explain how you plan to manage them.
