Effective risk management is an essential element for success in today’s banking environment. Regulators, shareholders, and customers are counting on your team’s ability to implement prudent processes that protect the safety and soundness of the bank.
Although this can seem like an overwhelming responsibility even for the most experienced bank executive, there is good news. Bank risk management software is helping financial institutions of all sizes—even small, rural banks with a handful of employees—elevate compliance and manage unforeseen threats.
In this article, we’ll explore four failures to avoid by leveraging technology. For each risk, I’ll also share a real-world example of how our AccuAccount platform mitigates risk.
1. Failing to Properly Track Lending Policy Exceptions
In Part 365-Real Estate Lending Standards, the FDIC is very clear about the importance of documenting and reviewing lending policy exceptions.
The board of directors is responsible for establishing standards for the review and approval of exception loans. Each institution should establish an appropriate internal process for the review and approval of loans that do not conform to its own internal policy standards. The approval of any such loan should be supported by a written justification that clearly sets forth all of the relevant credit factors that support the underwriting decision. The justification and approval documents for such loans should be maintained as a part of the permanent loan file. Each institution should monitor compliance with its real estate lending policy and individually report exception loans of a significant size to its board of directors.
As the FDIC goes on to point out, efficient loan policy exception reporting is also vital when it comes to exams:
Lending policy exception reports will also be reviewed by examiners during the course of their examinations to determine whether the institutions’ exceptions are adequately documented and appropriate in light of all of the relevant credit considerations.
Surprisingly, more than half of community banks (69%, based on our survey) rely on manual exception tracking processes, such as spreadsheets and desktop ticklers. As a former banker, I can say with certitude that tracking policy exceptions in a spreadsheet is unwise. Spreadsheets are rarely updated in a timely fashion, and they’re also easily overwritten or deleted by mistake. When you’re in a crunch to prepare for an exam, there’s nothing worse than realizing your policy exception spreadsheet is missing key data—or missing altogether.
How AccuAccount Helps: AccuAccount eliminates spreadsheets and manual ticklers, enabling users to simultaneously track, view, and report on policy exceptions (or any other type of exception, for that matter) in a highly intuitive web interface. Data is synchronized nightly from your core banking system, delivering a truly integrated and reliable solution. Automated policy exception reports can be scheduled to show up in users’ inboxes on a daily, weekly, or custom interval—without creating additional work for staff.
2. Failing to Take Precautions to Avoid Information Loss
What would happen if your main branch fell victim to a massive fire, flood, or other catastrophic event? Hopefully this never happens, and, statistically speaking, the chances are slim. That being said, anything is possible. If you’re relying exclusively on paper documents, such an event could be doubly devastating.
Although many financial institutions have made the switch to a paperless ecosystem, a sizable percentage of community banks still use paper loan files. Has your bank taken the right steps to protect its most valuable asset?
How AccuAccount Helps: AccuAccount’s document imaging feature makes it easy to scan, index, and store all of your bank’s loan, credit, deposit, and trust files in a single (electronic) system of record. Customer financials, loan applications, email attachments, driver’s licenses, and other electronic files can be managed in AccuAccount. AccuAccount also simplifies document retention and audit preparation.
3. Failing to Properly Analyze Portfolio Concentration
As we learned during the financial crisis of 2007, lack of portfolio diversification can cause serious issues for financial institutions. Putting all of your eggs (or too many of them) into one basket can jeopardize the health of your bank.
As the Office of the Comptroller of the Currency points out in this article, “A bank’s loan portfolio is typically its largest asset and predominate source of revenue. Consequently, it is also one of the greatest sources of risk, making effective portfolio management a key factor in bank safety and soundness.”
So how can banks avoid overly risky portfolio concentrations? As stated in the OCC’s Loan Portfolio Management Comptroller’s Handbook, banks are to perform careful and routine analysis on their “risk pools”:
Each pool should be evaluated individually — that is, as a discrete pool of risk — and as part of the whole — that is, by how it fits into the portfolio and supports loan portfolio goals. A large exposure to one type of borrower or industry may well be less risky than a small exposure to another. The goal is to achieve the desired balance of risk and return for the portfolio as a whole. Management should have performance standards, risk tolerance levels, and business goals for each concentration, and it should be able to relate these to the overall loan portfolio management strategy.
How AccuAccount Helps: Dynamic Reporting in AccuAccount empowers your bank to perform complex analysis and avoid portfolio overconcentration. AccuAccount integrates to 30+ core banking systems, making it easy to report on and analyze your loan portfolio by loan and collateral type, industry, and other criteria.
4. Failing to Implement Scalable Collateral Monitoring Processes
Collateral tracking is incredibly important from a risk management standpoint, particularly when a customer stops making loan payments. The tricky part about collateral, of course, is that it’s an asset, which changes in value as time progresses.
Commercial equipment rarely increases in value. The value of inventory and receivables can vary greatly from one moment to the next, especially in fast-paced industries. Real estate prices fluctuate based on a variety of economic forces. To properly manage risks associated with collateral, banks must implement scalable processes and systems to ensure collateral is perfected, insured, and consistently monitored for changes in value.
How AccuAccount Helps: The moment a new loan is booked to your core, AccuAccount creates document placeholders to ensure all necessary paperwork is collected, scanned, and linked to the customer’s account. Exceptions are automatically cleared as documents are added to the system. Past due and missing documents appear in automated exception reports that are sent regularly to key stakeholders at the bank, helping your staff react faster and reduce risk.
Reduce Risk with AccuAccount
Ready to see how AccuAccount can help your bank reduce risk and accelerate efficiency? Join our upcoming AccuAccount Live webinar for a free walk-through of our software.