by John Shain, President of AFS
The business of banking hasn't changed much over time. Or has it? Sure, the basics have remained the same. Deposits and other borrowings still fund loans and other investments. Revenues are recognized and netted against expenses, with excess retained to capital and paid out to shareholders.
The finer points of the game, however, are changing the profitability equation and challenging the ability of banks to compete and win. Increased regulatory scrutiny and changes in accounting rules continue to increase costs and put pressure on banks. This pressure stems in large part from the need to be more risk aware than ever before in accounting for loan portfolios. Provisioning methodologies for loan loss reserves are being reformulated and capital level expectations are being raised as a result.
This requires a significant investment in technology and staffing plus a focus and discipline that will unavoidably require a change in both culture and strategy. It can feel like an individual journey and banks are at varying points along the daunting learning curve for grappling with these complex issues. All institutions, in some way, will need to address their own data infrastructure and management, especially through to modifications in reserve modeling and on to the continuous loop of stress testing as a feedback mechanism in the process.
Further, specifically in reaction to the Current Expected Credit Losses (CECL ) pronouncement, institutions will need to identify relevant historical data, define appropriate risk drivers, accurately forecasting cash flow attributes and behavior, and effectively take into account the impact of CECL implementation on capital planning.
Banks of all shapes and sizes, in time, can be expected to feel the current pain of the largest banks and to “measure up” in terms of data quality and risk management in the eyes of regulators. Managing to higher data quality and more prudent risk management will affect the bottom line and day-to-day operations, as well as longer-term strategy in both front and back office. To a bank's stakeholders— board of directors, regulators, shareholders, et al.—taking the appropriate steps to be prepared and to be safeguarded will be a critical priority.
For more information and discussion on this topic, join AFS on Monday, November 14 at 12:15 p.m. for the Lunch Innovation Session: CECL, Capital Planning and Stress Testing, at this year’s Annual Risk Management Conference in Dallas, Texas. John Shain, President of AFS will be joined by Sabbeth Siddique, Chief of Regulatory Affairs & Capital Adequacy of M&T Bank, to discuss M&T’s experience with navigating the choppy waters of infrastructure and management changes, stress testing, data quality, risk management, forecasting, and capital planning.
Use promo code PARTNER100 when registering for the conference and save $700 dollars