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HR in Charge of Stress Testing? Not as Crazy as It Sounds

Can a human resources executive tackle a megabank's stress tests?

That was the query that lit up the phones at Bank of America and the finance crowd on Twitter after the Charlotte, N.C., bank announced a management overhaul on Wednesday.

Andrea Smith, B of A's head of human resources, will eventually take control of its submissions under the Federal Reserve's Comprehensive Capital Analysis and Review program.

Smith was given the newly created job of chief administrative officer and will be responsible for global corporate strategy in addition to other duties. Her elevation to the role overseeing B of A's stress tests has sparked comments about whether a human resources executive can handle a job normally reserved for a chief risk officer or chief financial officer.

"On the face of it, it's a head-scratcher to see an HR person put into that role," said Clifford Rossi, the chief economist at the mortgage insurer Radian, who has held senior risk management jobs at Citigroup, Washington Mutual and Countrywide Financial.

One argument in favor of an HR executive, Rossi said, is that turning the job over to a chief risk officer might be viewed as "pushing down" the risk function on all employees, which could backfire.

"If she's coming from HR, everybody has to own the risk culture," added Rossi, who is also professor-of-the-practice in the finance department at the Robert H. Smith School of Business at the University of Maryland.

Others say it's not such a leap.

Dave Ulrich, the Rensis Likert professor of business at the University of Michigan, said human resource executives are no longer just processing employee benefits or managing a company's 401(k). Rather, they excel at managing others, have broad insight into a firm's talent, and can lead large groups to achieve specific goals.

"People judge HR by what they did 25 years ago," Ulrich said. "HR executives today help leaders articulate goals and set the culture."

Ulrich conducted research with consulting firm Korn Ferry last year that found chief executives have far more in common with high-performing chief human resource officers than they do with chief financial or risk officers.

"If she's a good business person who knows finance, strategy, marketing and operations, and happens to work in HR, then it's a good move," Ulrich said.

B of A declined to weigh in on the debate over its decision. Its press release about the management shake-up Wednesday said Smith has a "deep understanding of the company" and ample management expertise.

Smith, a 27-year B of A veteran, has held many HR jobs including serving as senior human resources executive at the Bank of America Merrill Lynch and Merrill Lynch Wealth Management divisions. In her new role, she will be responsible for global corporate strategy, legacy assets and servicing, and the company's market president and community engagement organization. Smith also will retain some duties she added this year, including heading global corporate services, which manages $5 billion in corporate expenses, 100 million square feet of real estate in 46 countries and thousands of vendor relationships.

Smith was tapped to take over the stress test oversight job from Terry Laughlin, who will be responsible for the resubmission of its 2015 CCAR plan, which is due Sept. 30. Laughlin, who was appointed vice chairman and the new head of global wealth and investment management, will partner with Smith for the 2016 CCAR submission due next spring.

Still, the hullabaloo over an HR executive overseeing the stringent CCAR exam is not surprising given B of A's track record.

The bank received a conditional "nonobjection" to its capital plan in March after having to submit an "adjusted" capital plan a year earlier. Its 2014plan fell short of regulatory capital minimums and included a $4 billion accounting error.

The Federal Reserve, through CCAR, evaluates capital levels to determine if a bank can make dividend payments or stock repurchases while being able to absorb losses like those that occurred in the last financial crisis.

"They have never really gotten a complete full bill of health on CCAR," said Paul Miller, a managing director and head of financial institutions research at FBR Capital Markets.

Yet, with CCAR now in its sixth year, regulators' focus is expected to shift to a bank's risk culture.


(1) Comment



Comments (1)
obviously when you mess up the stress testing (as the former CFO did and this HR executive will) you get fired. who better to fire someone than the head of HR. she'll have a brief conversation with herself then encourage herself to "pursue other opportunities". its all very efficient for BofA; very six sigma. Ken Lewis would be proud.
Posted by CommonCents | Tuesday, July 28 2015 at 1:20PM ET
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