An 86-year-old organization that has helped banks cope with lending risk is expanding its scope after changing its name this summer.
RMA, the national association of bank loan and credit officers, was known as Robert Morris Associates until June. Now it has new territory to patrol as its 1,650 member companies buy or enter partnerships with insurance companies, securities firms, and mutual funds, said Allen W. Sanborn, president and chief executive officer of the Philadelphia-based trade association.
The organizations goal has been trying to reduce loan losses for banks by 1% a year, said William C. Scholl, the groups new chairman. To that end, it has kept an eye on business cycles and loan-quality trends and has tried to discourage members from concentrating loans in risky sectors.
Now it is adding publications on the risks of investment products, insurance, and other business lines that banks are entering as they take advantage of the financial reform law passed last year. RMAs membership includes a handful of insurance companies and investment banks, which face new risks as they enter traditional banking businesses, said Pamela Martin, the trade groups director of regulatory relations.
With squeezing spreads, the inclination of banks is to take more risks, Mr. Scholl said.
If a bank is unable to adequately gauge both the potential profits and the actual risks of new businesses such as homeowners and auto insurance the institution is unlikely to allocate the proper amount of capital to that business, he said. Such an imbalance could become acute if the new products expose the bank to sectors of the economy in recession, Mr. Scholl said.
Banks that sell insurance, annuities, or mutual funds also face unfamiliar regulation a new source of risk that has moved onto RMAs radar screen.
Community banks face larger risks as they sell new investment products because many small banks lack experience outside traditional banking services, said Mr. Scholl, who is president and chief operating officer of the $270 million-asset Pulaski Bank in Little Rock. (The RMA chairmans term is one year.)
Community banks lending profit margins have shrunk as larger banks have moved in to compete for deposits and loans. Smaller banks have been forced to look into new businesses to make money, he added.
Many community banks will need to enter niche businesses in order to survive, Mr. Scholl said. Pulaski, for example, recently bought the largest title insurer in Arkansas to compensate for shrinking loan spreads, he said.
Other topics on RMAs agenda are international currency risk, operational risk, enterprise risk, and fraud, Mr. Scholl said.
The trade group intends to write best-practices papers on some of these topics within the next year, he said. RMA does most of its research through discussions with members who have already ventured into these businesses, Mr. Scholl said.
Fraud is posing new problems for banks because technological advances have simplified the work for talented crooks, said Mr. Sanborn. More sophisticated printers, for example, help forgers create convincing fake checks, he said.
RMAs member bank holding companies, most of them domestic, account for about 85% of North American bank assets, Mr. Scholl said.