Widening Your Risk View: How Eight Banks Adapt to Increased Pressure for Formalized ERM

[ILLUSTRATION OMITTED] In banking, as in life, people have two ways of learning. One comes from making mistakes learning to change to avoid them. other comes from seeing what's happening to other banks taking preventive proactive measures. Enterprise risk management fits this scenario perfectly. Sometimes direct, personal lessons come out of left field. During a recent roundtable discussion about ERM among selected members of ABA's Community Bankers Council, all participants reported increasing emphasis from federal regulators. this didn't always surface during a safety soundness exam. Two bankers got their wake-up calls through compliance exam process. We had a compliance examiner who just hammered us big time, we got slammed into risk analysis through that exam, says Mike Marhenke of IAB Financial Bank. For $942.6 million-assets bank, based in Fort Wayne, Ind., planets had lined up. It lost its compliance officer around same time as exam hired a consultant to help it through exam. exam results, advice from consultant, got bank moving on ERM. We're kidding ourselves if we don't think examiners are going to start pushing on ERM, says Marhenke, president CEO. equate it to ALCO process back in early 1980s. Back then, Marhenke says, as individual banks began moving deeper into ALCO on their own, examiners took what they were seeing there looked for it in other banks. The more they saw, he recalls, the more they expected other banks to have policies procedures in place. And then they wanted to know what you were actually doing with it. IAB has gotten ERM religion, at both board staff level. board now has an ERM committee--in addition to loan audit committees. audit committee concentrates on financial risk, loan committee focuses on credit issues, leaving other risks to ERM. On some issues, committees meet jointly. IAB maintains an officer risk committee internally that comprises both senior middle managers. A key task is periodic risk profiling. Marhenke says this can be a frustrating process, though educational. more internal committee digs, more it finds there is to see. But I think that's what examiners want you to do, says Marhenke. Because more you talk about it, more things begin to materialize. ERM demands management attention because, clearly, it will be on regulators' radar more as industry continues to move forward beyond post-crisis atmosphere, says Jim Cornelsen, president CEO at Old Line Bancshares, Bowie, Md. Credit continues to improve, it won't be an uber-focused area for examiners, Cornelsen explains, and so they are going to concentrate somewhere else--they always do. ERM may be an area where they gravitate to. Building new adding on Roundtable bankers broadly agreed that regulatory expectations will evolve as examiners have opportunity to see more more institutions move forward on ERM. Four or five years ago, examiners asked if we had an ERM process in place, I asked them for an example. They still haven't given me an answer, says Bryan Luke, executive vice-president at $621 million-assets Hawaii National Bank, Honolulu. But they have been asking more risk-based questions. As a result, bank established a staff risk committee, choosing not to appoint a chief risk officer because management wants to be sure everyone gets risk issue. We've definitely formalized things more because of regulators' increasing attention, Luke says. Merger acquisition activity ushered in increased risk management emphasis at $1 billion-assets Inland Bank & Trust, Oakbrook, Ill. We've done three deals in five years, says Howard Jaffe, president CEO. …