For many banks 2020 and 2021 had surprising results. Liquidity and capital were strong, loan growth escalated from pent up demand, and income levels were favorable. These positive trends could lead many management teams to sit back and ride the wave, living in the “here and now.”
However, complacency can lead to risk. In its 2022 Bank Supervision Operating Plan, the Office of the Comptroller of the Currency lists guarding against complacency as a top priority for examiners. Complacency, by definition, states that one can become satisfied with their own achievements while unaware of potential danger.
Heeding the OCC’s caution to address the indication or perception of risk on the horizon, we’ve unpacked the message and identified five focus areas for boards and management teams.
- Strategic and operational planning
Evaluate strategic planning in the context of our new environment. Post-pandemic, there are increased opportunities for bank growth including, but not limited to, mergers and acquisitions. The key to strategic planning is to be strategic. Shape your strategic planning sessions to consider new industry opportunities and threats. Approach each opportunity and threat methodically, whether succession planning, mergers or acquisitions, FinTechs, changing demographics, the shift in the regulatory perimeter, or another relevant area for you.
Operational planning is just as critical. A well-established plan to profitably service your bank’s target markets remains a balancing act of priorities. Consider new products and services to meet the needs and expectations of your evolving customer base. Don’t ignore thoughtful evaluation of your bank’s target market, planned growth, enhanced products and services, and investment to maintain profitability. Allow human, technology, and financial resource risk assessments to guide your operational planning process as you ask, “where is my bank growing and am I ready?”
- Credit risk
We continually hear the good news of great credit quality experienced through and thus far in the post-pandemic period. Yet, credit risk remains a critical priority for banks and regulators because COVID relief funds have dramatically changed the financial view for borrowers.
COVID relief funds served the temporary purpose to keep businesses operating at the peak of the pandemic. However, with high levels of inflation and continuing labor and supply chain disruptions, pressures on many small businesses continue and may have a yet-to-be-realized impact on the credit quality within your bank.
Now more than ever, remaining engaged with your borrowers and looking past traditional credit metrics to identify issues could reduce future losses for your financial institution. With interest rates rising, credit risk monitoring tools like stress testing have continued relevancy
- Cybersecurity risk
Cybersecurity risk, like credit risk, is here to stay. Focus attention in this area as presented risks increase. Cyberattack instances are recognized across all industries and reflect a relentless pursuit by cybercriminals to steal data for financial gain. Most recently the Russian State-Sponsored Cyber Threats became a reminder for the industry. As more and more data is gathered and maintained, it’s paramount to have people with appropriate levels of experience as well as protocols for protection of customer data.
As bank management, you should be able to evidence your capability to respond or recover from the destructive cyberattacks that have become routine. The risk assessment process is a critical component of managing cybersecurity risk and should consider any processes or controls that may have changed as result of a new strategic or operational plan.
- Compliance risk
Compliance matters are ever-evolving ― and the regulatory emphasis on compliance applicable laws and regulations is only increasing. The Bank Secrecy Act and anti-money laundering rules, fair lending, Community Reinvestment Act, and overall prioritization of compliance management are not shifting.
Compliance risk management requires a strong internal system. It also requires deep understanding of the various rules and proficiency in identifying, implementing, and auditing the changes timely. Strong independent review systems that account for updated rules and regulations have never been more critical.
- Management and board education
As noted, the operational and strategic landscape in banking is changing. Make sure your management team and board are informed and educated. As you decide how your bank will adjust to this new environment, identify industry-specialized third parties to meet with your management team and board in order to provide a strong foundation to strategic planning.
We see numerous opportunities and areas of focus for banks in 2022. If we’ve learned anything during this time, it’s that we need to look at risk differently in this ever-changing environment. Now is not the time to be complacent.
Susan Sabo is Managing Principal of Industry in the Charlotte, N.C., office of CliftonLarsonAllen. She joined the firm in 2020 with over 20 years of financial services experience.
Erica Crain is a principal in CLA’s St. Louis office and leads its national credit risk review team. She joined the firm in 2017 after more than a decade and a half of experience working at banks and the FDIC.
This article originally appeared on CLA Connect and is reprinted with permission.