CoreStates Financial Corp. chairman Terrence A. Larsen warned bankers Monday not to trade asset quality for short-term financial gain.
"Companies that sacrifice prudent risk management at the altar of growth today will take their own turn as targets of investor disdain," Mr. Larsen said at a conference sponsored by Robert Morris Associates, the trade group for loan officers.
Rather, he said, bankers should adopt a risk-management strategy to guide growth. "There truly is no challenge that is more fundamental to the long-range success of a financial services company than managing the balance between strong growth and prudent risk-taking," he said. "The importance of this challenge is only intensified in today's environment of high business risk and strong market pressure for growth."
To limit losses, Mr. Larsen recommended that banks create a risk- management culture, hold credit officers responsible for the riskiness of their loans, maintain a clear strategic objective for growth, and react quickly when the risks of an investment change.
"Risk management tends to boil down to being prepared, being alert, and doing the blocking and tackling needed to execute our strategies effectively," he said.
A risk-management culture must go beyond rules, he said. Employees should know how much risk the institution is willing to incur, then act accordingly. For instance, he said, CoreStates manages interest rate risk by imposing prepayment penalties on mortgages, though this is not required by any specific policy.
"No rule was needed because our lenders and our credit officers not only knew that prepayment penalties were our practice but also understood why and could explain it to our customers," he said.
CoreStates also holds loan officers responsible for the quality of their portfolios in order to encourage lenders to consult beforehand with risk managers, he said.
"The line is expected to involve risk officers in new initiatives or major deals from the outset," he said. "The risk officers' role is expected to be constructive, not obstructive."
Haphazard growth can be catastrophic, Mr. Larsen said, noting that Maryland National Bank collapsed in the 1980s shortly after loading up on real estate loans.
"We also need to have, and to heed, good internal information to help us spot developing trends in our portfolios early so we can take corrective action," he said.
