To the Editor:

American Banker was too negative in its Dec. 16 story "Study: Small Banks Faulty on Managing Credit Risk." In fact, a number of community banks already use best practices in risk management.

Robert Morris Associates in 1996 began discussing ways to help the industry maintain quality earnings throughout the credit cycle. Having issued a number of warnings about deteriorating underwriting standards, RMA conducted extensive research on the risk management tools available to the industry before the next economic downturn. RMA partnered with First Manhattan Consulting Group and produced "Winning the Cycle Credit Game," a comprehensive study that has been widely received as a cutting-edge analysis of what the biggest banks commonly do in managing risk in their loan portfolios.

"Beating the Odds: A Community Banker's Guide to Risk Management" surveyed and analyzed the risk management practices of 126 community banks (defined as institutions with assets less than $1.5 billion). The 43-page survey contained 165 multipart questions and was designed to provide community bankers with a method for benchmarking current risk management practices. The study also highlights "best practices" by identifying high- performing institutions and examining the risk management techniques employed by those institutions.

The study focused primarily on credit risk and reviewed five principal areas: risk grading systems, credit approval processes, pricing for risk, portfolio risk management practices, and market risk.

The study also included a number of implementation options that allow community bankers to adopt the best practices outlined by the study to their respective institutions. The implementation options are broken down into two categories, complex and noncomplex, in order to let institutions choose practices depending on the perceived complexity their risk and business profiles.

The study found a significant number of institutions are already employing what RMA would consider "best practices" standards. While there is no magic solution for successful risk management, a number of useful, and cost-effective techniques exist that community banks can use to complement and enhance their existing processes, and they were highlighted in the report.

"Beating the Odds" is intended to offer community banks guidance and serve as an industry benchmark for the nation's community banks. Community banks have natural strengths over their competition, including the fact that local decisions are made by people well known in the communities in which they conduct business. These strengths, coupled with newly available risk management tools, should serve community bank institutions well as the industry moves into a more challenging economic environment.

"Winning the Credit Cycle Game" demonstrated that institutions that have adopted "best practices" portfolio management techniques have delivered higher returns over a prolonged period of time. The study also found that had stronger risk management practices been in place in the late 1980s and early 1990s, industry losses would have been significantly lower.

As the leading trade group responsible for guarding credit quality and promoting risk management, RMA is committed to offering the industry guidance and tools it can use to sustain earnings and promote economic growth. "Beating the Odds" was developed for this purpose.

Allen W. Sanborn

President and CEORobert Morris AssociatesPhiladelphia

Lee B. Murphey

ChairmanRobert Morris AssociatesExecutive vice presidentFirst Liberty BankMacon, Ga.

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