Eight Predictions For What's Ahead For Financials
ORLANDO-Eugene Ludwig, former U.S. controller of the currency and a financial services veteran, has some predictions when it comes to managing risk in the years ahead.
Ludwig, who is now founder and CEO of Promontory Financial Group, told SourceMedia's Best Practices in Retail Financial Services Symposium, that risk management down to the teller level is going to be imperative. He also offered this forecast:
1. More Scrutiny. Institutions are going to need "ever more elaborate and enterprise wide risk management systems and committees." In addition, he said the degree of independence of the board of directors is "going to be scrutinized by every regulator. Also, here's one idea: have the risk manager report directly to the risk management committee of the board, with a dotted line to the CEO."
2. More Capital. Speaking of banks, he said, "We are going to see serious increases in capital requirements in two ways. First, high levels of leveraged capital with an emphasis on quality of capital. I think 6% to7% TCE (tangible common), and 8% Tier One. This will be the floor to be well capitalized."
3. More Plans. "In capital and strategic planning, regulators are going to want to see real, complex plans. A lot of us view that kind of exercise with a jaundiced eye. But... it's going to be part of the future."
4. More Education. "You would think that during this time when safety and soundness is such a big deal, there would be an easing off, but there are going to be serious changes in the consumer area and the compliance responsibilities are going to get tougher, particularly in Fair Lending and the Suitability areas. There is going to be more pressure on better internal audit, and board governance is going to be the word of the day. Nobody really has an idea of what better board governance means, but people who have experience, greater degrees of independence, and greater degrees of board education."
5. More Linkage. "Regulators are going to require compensation that is risk-based to go way down into the organization, so that almost everybody in the 'system,' has taken into account risk."
6. More Stress. "Finally, there is going to be an increasing emphasis on stress testing and quantification. Get ready."
7. More Safety. "Beyond the checking of regulatory boxes, post-crisis management is going to require practices that are more effective than in the past. The world isn't going to be less competitive. Whether you are a CAMEL 1 or CAMEL 2 is going to be one thing that matters, but the second thing that matters is 'are you safe?'"
8. More Understanding. Management will need to understand risk and take it seriously. "At the end of the day the key line of defense is the first line of defense. Most risk analysis focuses on the second line of defense. But the first line-the people approving the loans-that line of defense often is not emphasized in the regulatory literature. A good first line of defense means three things: 1), who the people are-are they quality people, and that's tough for regulators; 2), whether the culture of the bank reinforces risk-focused behaviors, and 3) training-even the best bank staffers need training."