At our core, banks are risk-adverse. It’s a good thing too, as we are all more leveraged than the average hedge fund such that each decision is amplified. Every time the sun comes up it is a roll of the dice as the market forces of credit, interest rate, liquidity and a dozen of other risks assault a bank. What separates success from failure is a bank’s ability to understand what risks to avoid, what risks to broker, and what risks to exploit. Effective risk management is not only having a working knowledge of the risks in your bank, but also having a grasp of both the known and unknown. How can you “grasp the unknown” you ask? The answer lies in sharpening your senses, knowing what to look for, and peering deeper into the future. By the end of this article, it is highly likely that you will be safer for the invested time and have a competitive advantage against those that decided not to click on today’s article.
Today, in partnership with Credit Risk Management, LLC, we introduce banks to our Executive Risk Management Analytics (“ERMA”). ERMA is the start of our new enterprise risk functionality found HERE on our website within the Resource Center. ERMA starts off with a “briefing book” of key economic indicators such as GDP, Labor, rates and inflation. While these indicators are widely available, we have gathered them all together and added forecasts and “volatility cones” so banks can not only put current indicators in historic context, but can see trends and the future scenarios. This set of indicators can be easily printed and used to distribute to your customers, to your board or to your shareholders.
Figure 1: Macroeconomic factors and forecasts
In addition to key economic indicators, ERMA also contains a variety of bank and industry performance metrics designed to benchmark your bank and give your management instant insight into important trends—including standard call report ratios. Not only are the standard call report metrics displayed in an interactive format, but rarely seen metrics such as loan origination spreads, probabilities of default, credit stress, loan review benchmarks and much more. These data sets will quickly give you the “story” behind the headline numbers. By looking at these interactive charts and graphs, banks can quickly spot trends before they become issues.
Figure 2: Mapped probabilities of default by loan sector
Figure 3: Loan Review performance visualization
Figure 4: Loan Stress Test Mapping
The flagship functionality of this new risk tool is called the “ERMA Dashboard”, and it is the first time banks will see all their risks mapped in relative fashion. Stoplight colors alert you to problem areas while industry benchmarks quantify your bank’s performance. More than just a black box, banks can hover over their chosen metric and get a list of strengths and weaknesses that compose their risk score so that they can quantitatively and transparently see what composes their risk palette.
Figure 5: Enterprise Risk Management Stoplight
After you review your Stoplight, banks can then see each risk charted by the potential impact and likelihood on both an inherent and residual basis. Here, you can see how interest rate risk compares to Dodd-Frank related regulatory risk or how IT operations risk compares to credit or strategic risk. The graph gives a starting framework to be able to have that conversation about the complete risk picture that should serve to more efficiently drive the allocation of resources.
Figure 6: Risk Impact-Likelihood Map
One key element in risk management is the ability to see farther into the future. While some risks cannot be reasonably foreseen, some dangers can be avoided by spotting changing conditions and mitigating risk through planning and execution. ERMA is the first step to building a comprehensive framework so every material risk can be quantified and presented in a clear and homogenous fashion. Soon banks will be able to connect their ERMA functionality with other CenterState Bank data such as bond accounting or international services. In this manner, risk can be more accurately monitored and compared on a “risk-adjusted dollar” basis.
In time, CenterState and Credit Risk Management hope to bring banks a variety of new data sets, predictive alerts and functionality that keep banks on top of our ever more complex industry.
If you are a community bank, go into our Resource Center and click the Risk icon (or click HERE) to see your bank’s latest 3Q data for ERMA and take a self-tour through all the features. The functionality is currently free and able to be viewed on a variety of devices including mobile and tablet. On Thursday, we will announce a series of webinars that will quickly teach banks how to interpret, use and get the most actionable information out of the data. While banks are risk averse, ERMA should give banks a better handle on risk and provide a compelling roadmap on how bank managers can move forward into new areas of profitability while keeping risk within the Board’s tolerance level. Go today to see the next evolution and promise of risk management.
Submitted by Chris Nichols on November 18, 2014