Steps Outlined For Improving Risk Management
ANAHEIM, Calif.-Managing risk became something of a lost art in the last decade, when loan controls and caution were tossed aside, which is a big reason why so many financial institutions are in trouble today.
Now those same institutions-including credit unions-are going to have to perform additional risk measures as a result.
That was the message from Toby Lawrence, partner in Milwaukee-based consultancy Clifton Gunderson LLP. Lawrence said several common themes are evident as he and his fellow consultants evaluate the wreckage at many FIs, including a heavy concentration in commercial real estate loans and/or construction loans, weak loan underwriting and credit administration practices, and inadequate oversight by boards of directors.
In some cases, loan review functions failed to identify underwriting problems simply because procedures were ignored. Lawrence cited one institution where loan officers were forbidden to downgrade a loan on orders from a manager-who booked a commission for each loan completed. "This is not the most fun time to be a consultant, because financial institutions want to hear good news," he said. "But the reality is, examiners are going to be more critical."
Taking Required Steps
CUs should expect to be asked to perform a number of precautions that may have been winked at during the drive to build loan business from 2004-2008, he continued. Among the steps that may be required:
- Asset liability policies with monthly cash flow projections for borrowers.
- Contingency funding plans with information on what triggers liquidity problems,
- Segmentation information on any concentration in a loan portfolio.
- For participation loans, independent site inspection and analysis of borrower and guarantor cash flows.
Overall, Lawrence said the theme is expect independence and quality in risk management programs, with boards heavily involved in the process. He noted examiners have assessed monetary penalties against board members at failed banks.
"Just as examiners are putting criticism on credit union executives, they are receiving criticism," he added. "If an institution was making money, the examiner would look the other way on certain things."
For CUs under Prompt Corrective Action (PCA), Lawrence said management will have to provide a detailed action plan on how it will shrink the credit union, including layoffs. "Saying, 'We are going to grow our way out of this' is not going to work."
Even CUs not under PCA should prepare a comprehensive analysis of their risk profile, Lawrence advised. He said this includes details such as a narrative of exactly how transactions are processed, who performs each one, what approvals are needed and what controls are in place.
His advice: "Don't minimize what can go wrong."
Over the next two years, CUs should expect annual compliance exams from a new government regulator. Lawrence said every area of the credit union is assigned a risk rating, and part of risk management is checking for compliance in all areas. He said not to forget IT, which is a "big area right now with examiners."